Outside Economics

The New Cold War

Posted by Wendell Brock, MBA, ChFC on Wed, Sep 03, 2014

Economic WarfareThe Economic Cold War or Financial Cold War has begun slowly over the past several years and the current administration has added fuel to the fire. China and Russia both know it would be extremely difficult to win a ground war against the United States, but a financial war? Maybe not so hard, with our excessive national debt and endless printing of money by the Federal Reserve, they have a real shot at giving the US a serious black eye and maybe even a few broken bones. How will they do this? By knocking out the dollar as the world’s reserve currency. Here is a sharp hit:

Beginning Last week, Russia’s started selling oil in both Rubles and Yuan, which have great ramifications to the United States. In a new announcement from the Russian business media source, Kommersant, Gazprom has conducted the first sale of oil in a currency other than the dollar, and will henceforth open their purchase window to accept both Rubles and Yuan for the exchange of oil and gas products.

Although this is not the first real transaction for oil done outside the petro-dollar, as this occurred covertly by Iran for gold during the days of economic sanctions, it is the first official global offering by a major oil producer and will likely bring an end to the solitary system of nations being forced to buy dollars first before buying oil from producers such as OPEC and Russia. According to the Kommersant,

“The Russian government and several of the country’s largest exporters have widely discussed the possibility of accepting payments in rubles for oil exports. Last week, Russia began to ship oil from the Novoportovskoye field to Europe by sea. Two oil tankers are expected to arrive in Europe in September. The payment for these shipments will be received in rubles.

Gazprom Neft will not only accept payments in rubles; subsequent transfers via the ESPO may be paid for in yuan, the newspaper reported. The change in currency was made because of the Western sanctions against Russia. As a protective measure, Russia decided to avoid making its payments in US dollars, which can be tracked and controlled by the United States government. - Ria Novosti”

Russia and China had already long been in the works to supply one another with oil, energy, and other trade goods outside the dollar through a historic energy agreement made in late May of this year. However, the irony in all of this is that the move to enlarge this method of payment for oil to accommodate global transactions was only accelerated because of U.S. imposed sanctions, which were done in an attempt to isolate Russia, and tear down their economy.

There is over $17 trillion in U.S. dollars afloat and in nations outside the U.S. kept on reserve for the primary purpose of buying oil and natural gas. As more and more countries migrate to the East and find it far more inexpensive and efficient to no longer use the dollar and SWIFT systems to supply their energy needs, then these dollars will soon come crashing back to American shores, and the inflation America has exported offshore for decades will come rudely back and suddenly hit U.S. consumers and our financial system.

Money manager Peter Schiff has foreseen the day when the US dollar no longer is the world's reserve currency. On this subject he has said, “I am already prepared, and what I am trying to prepare…for is the day when the dollar is no longer the reserve currency. . . . From an investor’s perspective, we are engaging Russia, not in another hot war, but in a financial cold war. That simply accelerates this process because I think that we are really unarmed to have this battle. America depends on countries like Russia hoarding dollars, accumulating dollar reserves, invoicing their customers in dollars and supplying products that we pay for with the dollars that we print. When we anger countries like Russia or other countries that may be sympathetic with Russia...(then we are) accelerating this day of reckoning.”

Schiff's insights on gold are worth contemplating. He contends that the main reason the price of gold is not much higher is not because the price is being suppressed, and maybe it is to some extent, but that it has more to do with financial ignorance. The vast majority of people who should be buying gold don’t understand that they need to be buying it now. 

“There is not a lot of understanding among the big players who manage trillions of dollars, and they are making foolish investments based on a lack of understanding of what’s happening. I think when it dawns on more investors exactly the predicament the Fed is in, that this recovery in the U.S. is a mirage. It is not real, and rather than the Fed ending QE and raising rates, it will be launching a whole new round of QE. It will be even bigger than the last one. When investors get their arms around that, they will be buying gold and they will be paying much higher prices. Then, nobody will be talking about manipulation because the price is going to be skyrocketing.”

The move made by Russia last week will have significant effects in the long term. The cold war we are now engaged in will not be easy to overcome, given the flawed financial policies the Fed has engaged in as well as the astronomical debt our government has laden us with. It is quickly becoming the perfect storm. What are you doing to prepare yourself for the times to come?

Topics: Gold, Economic Cold War, Financial Cold War, Oil


Wendell W. Brock, MBA, ChFC

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