How recent bank defaults have set nerves jangling across the West

Recent bank failures have unnerved the West – and rightly so.

First it was Silicon Valley Bank, which specialized in financing the technology industry, supposedly the engine of future American prosperity.

Then, headquartered across the coast, it was Signature Bank’s turn to collapse. Both fell victim to the current economic turbulence.

Rising interest rates caused a collapse in the value of their bond holdings, so when depositors demanded the right to withdraw their money…

As far as we know – as is the government’s immediate response, which is to quickly print $300 billion dollars to prevent the spread of contagion and a run on the banks across the country.

Crisis averted in the short term, but sadly no further, for at least two disturbing reasons.

The first is that wild swings in economic weather show no signs of abating.

They represent a trend that has been developing since the early 1970s, fueled by the increasing difficulty of securing the cheap energy demanded by Western lifestyles, plus the (concomitant) expansion of debt financing to a level that no country, not even the US, can guarantee it. , can control.

Rest assured there will be implications for the £300bn disbursed by the Fed – implications for inflation, for America’s fiscal reputation and, most importantly, for confidence in our economic future.

In fact, the rescue operation is even more blood in the water for the sharks now circling the US and the once mighty greenback.

China, its client states and other emerging powers are more than willing to take advantage of America’s current economic woes.

These forces are challenging the dollar in hopes of establishing China’s renminbi or perhaps another currency as an alternative “reserve currency” for world trade.

For generations, the dollar has supported the global economy, the hardest of the hard currencies, accepted and traded everywhere.

As a result, America, the only superpower (in fact, the only superpower, even when the corrosive Soviet Union was supposedly at its peak) could print money with impunity.

Many people have tried to bet against the U.S. economy, but they’ve failed time and time again (as investor-cum-sage Warren Buffett likes to point out).

Still, the chances have become smaller, certainly seen through Chinese eyes.

The emerging powers in the East are chafed by Washington’s influence over world policy through its economic power, a power they say is grossly exaggerated.

The emerging BRICS – Brazil, Russia, India, China and South Africa – are reportedly drawing up plans to print their own new currency.

Saudi Arabia, increasingly determined to plow its own plow (rejecting repeated US demands to lower world oil prices), is nestling against the Shanghai Cooperation Organization, a Eurasian political and security union, including China, India and Russia, as a ‘dialogue partner’.

China recently signed a deal with Opec+ (the oil cartel plus Russia) to buy more oil and gas from the Gulf states, calling on producers to accept Chinese yuan instead of US dollars.

Russia, which has its own reasons for challenging Washington, has agreed.

Within America itself, there is ample support for Chinese aspirations. Apple CEO Tim Cook and senior colleagues have been to China to give what CNN called a “show of support” to the Chinese manufacturing base, which of course produces Apple’s products.

(Question: Could Apple realistically break away from China and move its factories back to California? Answer: No.)

It was reported this week that the renminbi’s share of “trade finance” (the credit granted to facilitate the cross-border movement of goods) has doubled since the start of the war in Ukraine.

The dollar is still by far the dominant player in these and other measures. But it is an important step for China.

This sense of America’s weakness has already destabilized the post-war consensus.

As I wrote in my 2020 book GameChanger, the emerging countries, the turkeys, Indias, Brazil and South Africans, will look to China and Russia, believing they can get a better deal from a new world order.

And if that means pegging their economies to the renminbi instead of the dollar, so what?

We have already seen this happen through the policy of the Russian invasion of Ukraine and the resistance of the West. Emerging countries have refused to follow the American line. They have other things to think about, for example the immediate needs of their own population.

If America does not wake up, it could lose its status as the dominant superpower within a decade.

What started with a banking crisis in California could turn into a real estate and stock crisis as early as the third quarter of this year, one that will fully reveal its effects as the new year rolls around – just in time for the 2024 presidential campaign to to start.

According to some projections, this could become the third-biggest economic crisis in United States history.

The Republican-controlled Congress will certainly use that as part of its strategy to get the White House back.

Yet I suspect that the solutions to this – if there are any – are well beyond the reach of Congress, whoever controls it, or the Chinese Communist Party or the Zurich leprechauns, for that matter.

China, Japan, Switzerland – they all have mountains of US debt and when interest rates rise, their assets fall in value. Exactly as Silicon Valley Bank found.

Beijing isn’t just dealing with decades of humiliation (as it sees it) at the hands of the West; it is concerned about the very immediate prospects of a global economic crash.

We have already seen Credit Suisse collapse. What about Deutsche Bank and Societee Agricole?

We shall see.