August 29, 2023 – FS Insider speaks with banking and derivatives expert Satyajit Das, named by Bloomberg as one of the most influential thinkers in finance, to discuss the longer-term geopolitical forces driving both deglobalization and dedollarization. Das and FS Insider host Cris Sheridan explain the various strategic self-interests underpinning both the BRICS nations and the US, particularly in light of US-China great power competition, and how this is likely to play out in the years ahead.
Mentioned in today's show:
- Satyajit Das: A Disordered World – Part 1: Fracture
- Satyajit Das: A Disordered World – Part 2: Susceptibilities
- A Disordered World – Part 3: Pathways
00:00:00: Introduction and Description of Guest Satyajit Das
00:00:19: Discussing Das's Series: A Disordered World
00:00:42: Importance of Geopolitical Events in Informing Financial Decisions
00:01:31: Role of Foreign Sales and Influence of Geopolitics on Companies
00:03:19: Limited Attention Paid to Geopolitics by Investors and Financial Market People
00:03:47: Examining the Nature of GeoPolitical Changes
00:04:54: The Turning Point for Globalization in 2008
00:05:26: Impact of Limited Growth on Economic and Social Dynamics
00:06:02: Highlighting Financial Imbalances Post-Great Recession
00:07:32: Debt Tolerance and Current Account Deficits in Anglosphere
00:08:14: Constraints on National Sovereignty due to Globalization
00:09:41: Supply Chain Shocks Post-2008 and Their Impact
00:10:37: Impacts of COVID-19 and Growing Rift Between China and U.S
00:11:02: Change in Political Narrative and Rise of Populism
00:11:48: Psychological Break in Trust Post- 2008, and its Global Impact.
00:13:09: Global Capital and Its Effect on Safe Investments
00:13:34: The Ukraine War's Impact on Global Economy
00:14:01: The Misinformation and Disconnect in War
00:15:11: The Ineffectiveness of Weapon Aid
00:16:02: The Determinants of War Outcomes
00:17:44: The Disparity of Economies in the Ukraine Conflict
00:18:04: Resolution of Wars and Danger of Regime Change
00:20:18: The Escalation Risk and Proxy War
00:20:55: The Long Term Impact of Sanctions
00:22:14: The Extraterritorial Application of Sanctions
00:23:02: The Financial and Human Cost of the War
00:24:07: The Economic Loss of Ukraine
00:24:38: The Psychological Cost and Its Impact on Integration
00:25:00: The Engagement of China, Russia and India with Western Agenda
00:26:00: The Misalignment of Western Powers' Perception and Reality
00:26:37: The Fear of Western Interference in Domestic Politics
00:27:04: US Vs China in a more deglobalized world
00:28:47: Shifts in Middle East alliance
00:29:46: US economic vulnerabilities and dependencies
00:31:05: US dependence on external manufacturing
00:32:18: Concern about talent migration and societal challenges
00:33:41: US political and societal challenges
00:34:56: Takeaways from the current BRICS meeting
00:35:14: The split between the Anglosphere and other nations
00:37:02: Legacy of colonialism and other grievances of BRICS nations
00:38:12: The world's potential fragmentation into different blocs
00:39:25: China's role in global foreign policy and power shifts in the Middle East
00:39:45: The symbolic significance of the BRICS meeting
00:39:58: Discussion on Dollarization and Global Reserve Currency
00:41:55: The Trilemma and the Mundell Fleming Model
00:42:24: Trifin Dilemma - Problems in the International Monetary System
00:43:31: Risk of Confiscation and Reduction of Dollar Use in Reserves
00:46:01: Possible Gradual Shift Away from the Dollar
00:46:40: US Debt Position and the Impact of Monetary Policy
00:48:44: Reflections on Cold War Spending and Current US-China Relations
00:50:07: Increase in Global Defense Spending
00:51:07: Challenges in US Competing with China
00:52:17: Historical Collapse of Soviet Union and its Impacts
00:52:58: Discussion on Global Competition
00:55:00: End of Empire and Deglobalized World
00:57:37: Decline of UK's Economy
00:59:19: Similarities between UK and US
01:01:42: Rising Geopolitics Influencing Markets and Economies
01:02:23: Impact on Investments and Decision Making Process
01:04:09: Evaluating Supply Chains and Business Locations
01:05:06: Importance of Government Subsidies and Military Industrial Complex
01:05:39: The importance of historical knowledge
01:05:56: Advice on required knowledge
01:06:07: Advice for investors
01:06:16: Das's recent written piece and its discussion
01:06:25: Das's unique perspective
Cris Sheridan: Joining us on the show today is Satyajit Das. He was named by Bloomberg as one of the most influential financial thinkers in the world. He's also the author of several books, including Traders, Guns and Money, Extreme Money, which is one of the best history books on the modern financial age and The Banquet of Consequences reloaded. Today we're going to discuss Das's series of articles titled A Disordered World. It's broken into to three parts, which we'll have links to where this interview is posted on Financial Sense, looking at the geopolitical outlook unfolding ahead of us.
Cris Sheridan: Das, thank you for joining us on the show again.
Satyajit Das: It's my pleasure.
Cris Sheridan: So, Das, you are clearly increasingly focused now on the geopolitical situation. Can you explain why the events that we're seeing are so important in informing financial decisions today?
Satyajit Das: Well, I think the world has enjoyed a period of relative stability since probably the late 1980s. And I think overall, while there have been ruckuses because there have been fairly major events, the geopolitical situation has been very, very much an ordered world built around, obviously, the dominance of the United States after the collapse of the Soviet Union and the opening up of countries like China and India to more market economies. And people often don't focus on the impact of geopolitics, on what financiers focus on. And I'll give you a couple of small examples of that. For instance, if you look at foreign sales and you look at the S and P 500 companies, roughly 40% of their sales come from overseas.
Satyajit Das: As you know, Nvidia now is very much in the news as a provider of chips for artificial intelligence applications. People forget that round about 20% to 25% of their sales come from China and Boeing, for instance, I think it's about 10% of their sales are overseas. But interestingly enough, Boeing also benefits from military expenditures because round about a third of their revenues are military. And all of those things that we're talking about are affected by the ability to trade, by the ability to get raw materials, and particularly rare raw materials like rare earths and so forth. And also, all these companies, supply chains nowadays aren't domestic.
Satyajit Das: They're often involved very complex and very, very long links through a chain of foreign suppliers. Then there's issues like subsidies and trade restrictions. We're seeing, for instance, a massive reshaping of energy and metals. And there's subsidies which in the US. Under the Inflation Reduction Act and the Chips Act have been put in place.
Satyajit Das: And all of that actually affects companies and the macroeconomic environment. And of course, there is the other side, which is the darker side of that, which is there's costs of wars and conflict. So all of these dynamics, which is trade supplies, currency values, how capital flows, how skills flow, are affected by geopolitics. And one of the things is I've now spent nearly 50 years working in financial markets, and what I've always found to be kind of curious is that investors and financial market people often don't pay a lot of attention to geopolitics. And I don't think they often understand it because it requires a different skill set, if you like.
Satyajit Das: It requires an understanding of history, of a lot of things that they don't generally concern themselves with. I think the best way to examine this is actually something which is a phrase that apparently Lenin used, but nobody can actually attribute it to Lenin, is that there are decades where nothing happens and there are weeks when decades happen. And I think it encapsulates periods when certain ways things are organized are challenged and sometimes overturned, sometimes very violently. So the question that's troubling me is whether we are entering one of those periods.
Cris Sheridan: So, as you noted, large American companies derive a significant portion of their revenues from overseas. Not to mention the fact that many of their supply chains are highly dependent upon China and other countries where they hold critical resources and materials that are necessary for the building of a lot of the products or even the services that Americans use. But as well as the globe as a whole, geopolitics in the past may have not played as large of a role because we were in an era of globalization. But now, as this is starting to reverse, it means that geopolitical concerns are coming to the fore, and we're obviously seeing that right now. Today.
Cris Sheridan: In your recent piece, you discuss how 2008 was really a significant turning point for globalization. Why was that?
Satyajit Das: 2008 was part of a progression. I think these concerns have been there for a long time. But what happened in 2008 with the Great Recession was the actual growth trajectory of the world shifted down. And one of the key things about that is growth is the panacea of everything in the modern world in terms of both economics and society. And when the pie stops getting bigger and bigger, if people make demands on that pie, then it's a question of not taking a part of the incremental growth, but it's taking something away from somebody else.
Satyajit Das: So what the Great Recession did was focus attention on a whole raft of things. I think one of the first was who got the biggest share of the pie, the relative prospects of individual people, the share of earnings in supply chains. But I think the critical part which it exposed was the financial imbalances in the world. And I think there were two sort of elements to that. One is China and the US.
Satyajit Das: And I'm using China here as a generic phrase for really East Asia and also intraeuropean, which is effectively how countries like Germany were funding the peripheries of the European Union. And suddenly what the crisis in 2008 exposed was the security of those Asian and European savings. And what people started to then look at was the strange world where a certain part of the world saved and that money was then lent to another part of the world. And the classic example people give is China and the US. China saved exported their savings through purchase of US securities to the United States who was almost the world's consumer of last resort.
Satyajit Das: And they basically then bought goods from China. And the same thing was going on between the southern Eurozone and Germany, for instance. And I think what the world at that point showed was there was a cleavage and the cleavage was what I loosely call the Anglosphere, which is countries like the UK, lesser extent Canada, the United States, Australia and New Zealand. These are countries which have much greater tolerance for debt peculiar way and they didn't save enough. So these people had current account deficits which were financed by basically saving countries.
Satyajit Das: And what 2008 did was underscored the risk of this strategy for savers. And I think I remember a phrase that the then Chinese premier Wen Zhaobao used that he was very concerned about the safety and security of Chinese capital and that went for Germany as well. And I think part of that also flowed into broader economic policy and that was that people were now concerned about okay, we've had this crisis, how do we get out of it? And they found that globalization had undermined really national sovereignty and the ability to determine your own destiny with your own policies. So things like fiscal policy, tax policy, currency values were not within your control.
Satyajit Das: I'll give you a very good example, not from 2008, but more recently during the Pandemic when countries were inflating their balance sheets by basically taking on debt and transferring that for spending. I used to joke that I live in Australia and in Australia the more money the government pumped in, the more it was evident that it didn't benefit Australia. Because if the person who the money went to bought anything, the money went to China. If they bought cars, it went to Japan, Korea. And if they bought or drove more then basically the money went to the petrostates of the Middle East and elsewhere.
Satyajit Das: So that whole issue of leakage became very much more important and national sovereignty became important. And I think also the policies that people around the world adopted I would call beggar thy neighbor policies because they were trying to emphasize their own priorities. Which is understandable because after all foreigners don't vote in your election. But at the same time it started to put pressure on globalization. And part of that also was I think a whole series of parallel events which don't have much to do with 2008 specifically.
Satyajit Das: But after 2008 there was a series of supply chain shocks. People forget that in 2011 when the Fukushima nuclear plant suffered damage from the tsunami in Japan, it disrupted a lot of supply of lots of goods. Then there were the same year there were floods in Thailand and subsequently, there have been a lot of extreme weather events, which has disrupted transport. At the moment, we're having one of those because there's a drought in Panama and it's disrupting travel across the Panama Canal. So there was a series of things which were starting to show that these long supply chains were actually kind of unstable under certain conditions.
Satyajit Das: And then we had, after 2016, the growing rift between China and the US. And then the COVID-19 in 2020. And the Ukraine conflict, which is currently in focus, really started in 2014. And there were sanctions put on Russia then. And parallel to that is a political dimension to this, which is, I think, politicians, basically, I think of politicians as ambulance chases.
Satyajit Das: So once this happened, they started to try to tap into dissatisfaction. And there was all this populism of galvanizing actions against elites, the famous Davos Man, and the need to drain the swamp, which became a catch cry in the United States. And this opposition to foreigners, to immigration, and the whole game became one of trying to trap your opponent into a position which was untenable, to gain political advantage, and also to deflect the fact that you couldn't do as. A politician, you couldn't actually do much about many of these things. But you wanted to externalize the problems and deflect to gain political advantage.
Satyajit Das: And also geopolitically. There was a subtle change after 2008. I think countries like China, Russia and India in different ways, saw the events as signaling the weakness of Western economies and also, in part, validating their different style of government, which is more state controlled, and the politics and the economics of those. It's more centrally determined, and it also, I think, encouraged a distrust of the west generally, and I'm using the word in a very general way, and essentially that put at risk the evolution into more open economies. And so there was much greater resistance to globalization as a result of that.
Cris Sheridan: Yeah, that was one of the key points that really stuck out for me in reading your recent piece, was about how there was a psychological break in trust, where, as you noted earlier, there was so much capital that was gravitating into the US. Particularly to inflate the housing bubble. There was a lot of money going into what was considered, know, guaranteed safe instruments and investments were flowing into there. And then know, that break of trust once clearly the housing bubble burst. And then it was seen that this method of creating this previously thought of safe investment vehicle was not.
Cris Sheridan: And so you had a lot of global capital that was going into including Chinese money. And suddenly it was seen, like you said, well, our capital may not be as safe as we assumed. And so you started to see this cleavage, like you said, between this previously hyperglobalization or hyperglobalized world, where a lot of that credit or investment was being funneled into US shores. And you talk about how currently the way we see this unfolding right now is with the Ukraine War, that this also is serving as this knife that's dividing the world one way or the other. And you show some maps, I mean, just showing where various nations stand on this.
Cris Sheridan: So where do you see the Ukraine War fitting into this?
Satyajit Das: Well, the Ukraine War has created an interesting furtherance of that process. But look, one of the amusing things and war is never amusing, but one of the strange things about the war is everybody is now a military expert. People are talking about High Mars and F 16s as if they actually knew what they were and what they did. Now, I have a confession to make. I am not a military expert, but I would make a few observations.
Satyajit Das: One is the poor reporting on the war. Now generally, if you look around the world, the reporting has been very one sided. And I actually now think much of the western press resembles that famous figure of folklore, comical Ali in the Saddam Hussein regime. And the most famous example of this was when Saddam Hussein's statue in the middle of Baghdad was being pulled down. His famous comment no, it wasn't being pulled down, it was being taken down for cleaning.
Satyajit Das: And there is actually an element of that in the reporting. So I don't think we have a very clear picture. But one of the things that strikes me from the outside looking at the reporting is there's a massive inconsistency and disconnect. For instance, we've been hearing for the last almost 18 months that if you give Ukraine more weapons, things will be sorted out. That hasn't happened.
Satyajit Das: I remember reading constantly over that period that Moscow is running out of munitions. That doesn't seem to be happening either. And most recently we've heard that the offensive is going well. And I actually did a very simple calculation as somebody was reporting how much area Ukraine had regained. According to that, it would take basically the Ukraine Republic to actually recover all the areas that have been occupied by Russia.
Satyajit Das: I think it was like over a hundred years it would take them to get that back. So there's a lot of, I suppose, misinformation going around. But looking at history, there's a couple of things that strike me. One is what determines the outcome of wars? And to a large extent, it's the willingness of the population to accept losses and deprivation.
Satyajit Das: And that's not the only condition of success, but it's pretty important. And the one thing I would say about the Soviet Union is their capacity to take those losses and suffering is quite immense. And people forget that the Soviet Union played a very, very crucial part in the Allied victory in World War II. They lost a staggering 27 million people, including 11 million military personnel. And they lost, I think, just between when Operation Barbarosis started, which was in June of 1941 through to the end of the year, they lost 5 million people.
Satyajit Das: And even in the Eastern Front operations, where the Germans lost around 4 million people, that was a fraction of what the Russians lost. The Russians lost three times that. And there's a very famous phrase by Stalin when he was actually explaining Russia's strategy. He said, Quantity has its own quality. And basically what it means is he was happy to use large numbers of underequipped and very poorly trained soldiers as cannon fodder.
Satyajit Das: So I think this war will be determined by people's capacity to take losses both human, financial, economic and so forth. And the most interesting thing is you've got a huge disparity of sizes of the two economies. The second thing I would say about the Ukraine conflict is we all know that wars, generally speaking, are resolved by negotiation. It's very rare that you get complete victory, particularly since the Second World War, if you take out things like small conflicts like Granada and Panama. They've been negotiated settlements, which means you have to recognize the core interests of the parties and you have to move people away from entrenched positions.
Satyajit Das: But at the moment, there's a complete lack of interest in negotiations and there's some very dangerous underlying things, which is the West's sort of desire for engineering regime change in Russia is dangerous because how do we know that any new regime will be better? And I think the history, most recently the Arab Spring and the Color revolutions shows that all it does is create more dangerous political voids rather than liberalizations. And the last element, I would say, in terms of the war progress is the risk. And it's escalating. And escalations are difficult to calibrate.
Satyajit Das: And essentially it's turning into a proxy war between the US. And the west and Russia. And the problem with war is that it's waged by very highly testosterone and adrenaline driven people who are young, with very dangerous weapons, with nervous figures on fingers on the trigger. And it's very easy for this to escalate out of control because, for instance, I'll give you a very real example is you have the west actually offering weapons which are more and more lethal or aircraft which are more and more lethal. And eventually there's going to be pressure because Ukrainians clearly can't train enough pilots for F 16s in the short run.
Satyajit Das: So what's to stop NATO putting their own pilots in these planes? And there is some evidence that Western Special forces are operating alongside the Ukrainians. And the risk that if, say, Americans or Germans or Polish die in the conflict, the risk of escalation is quite real. As somebody asked me early in the war that whether there was a chance of nuclear engagement, I said, I don't know, but I would think it's nontrivial. Now, when we're talking about things like escalation of wars, nontrivial is not a good phrase to be using so I think there's a lot of things around Ukraine which are there.
Satyajit Das: But in an economic sense I think the worst thing that's actually happened is firstly the West's response in terms of trade restrictions, sanctions and particularly the asset seizures of Russian assets. And I think these will outlive the military actions and prove more damaging. And this actually also marks an escalation of a long standing trend. I mean basically weaponization of trade and finance is modern gunboat diplomacy for me and that's all it is. And sanctions and blockades were used in World War I and people forget that American embargo on oil exports to Japan influenced Japan's entry into the World War II and we saw western embargoes against communist bloc countries during the Cold War and that US sought to isolate the Iranians after the Shah was overthrown.
Satyajit Das: And the problem with all of this is you keep escalating and you back people into corners as we're trying to now do with the US with things like export bans and limits on sales of critical technologies. And to give you an idea of the scale of that, it's actually quite frightening the list of individuals and entities sanctioned by the US. There's a US website, the US Treasury's Office of Foreign Assets Control website, it runs to over 2000 pages and it lists more than 12,000 names. And the problem is this is extraterritorial applications to give you an idea. If the Americans place sanctions on certain Chinese entities and Australia is exporting things like coal, raw materials to China, and these people who are buying are on that sanctioned list, there's a real risk to Australian businesses.
Satyajit Das: Because if the payment is in US dollars, for instance, and it flows through the US payment system, then a nexus is created. And what actually happens is that those companies in Australia who are not subject to sanctions become caught up in the sanctions and subject to enforcement actions. And this extraterritoriality is actually very concerning and I actually think the escalation in the financial sphere is extremely dangerous. And then of course there is a very simple financial sort of geometry which is the cost, I mean the military cost I estimate so far, leaving aside the massive human casualties, there's something like 200,000 dead. The military cost of weapons, et cetera, is $150,000,000,000 plus most of that's from the US.
Satyajit Das: And given the US's rather fragile budgetary position and financial position, there are going to be questions asked about how that actual money could have been spent in Europe. The Ukrainian population were rather around 40 million. There's probably about a quarter of that, say around 10 million people who are displaced. A lot of them are in now in Europe where to be very honest, the initial sort of welcome is sort of wearing a bit thin and it's costing somewhere around five to €8 billion a month to keep them. Then there's going to be the rebuilding costs of Ukraine if it ever happens, which is anywhere I've seen estimates from 500 billion to a trillion.
Satyajit Das: And there's the economic loss. I mean, Ukraine's GDP has fallen by a half. Russia's has fallen by probably five to 10%. The rest of the world has lost 1% of GDP. And foreign investors who had investments in Russia have lost the Russians, obviously, have lost their reserves.
Satyajit Das: So all of this is actually going on. And I think that's the thing about Ukraine is it builds on all the things that we were talking about and that's gradually getting worse. And you're absolutely quite correct about the psychological cost, because I think there was this strange sort of belief that somehow integrating China, Russia and India into the global trading arrangements would somehow bring about change. I think the Germans have a lovely phrase change through trade. But realistically, I think the problem is I never saw and I'm Indian by birth I never saw the Chinese, Russian and Indian engagement with the Western agenda as one of belief and values.
Satyajit Das: And I never saw this as overcoming tribalism or issues of national identity or ideology. And I saw this for the Chinese, Russian and Indian as a matter of economics, which is China was effectively bankrupt when Deng Xiaopian assumed power in the late 1970s. India and Russia were in very, very dire financial situations in the early 1990s. So their embrace of globalization was one of necessity, not about belief in Western values or economic principles. And so, essentially, what has happened is there's a complete misalignment between what Western powers thought was going on and what is actually going on.
Satyajit Das: And to a large extent, as those countries like China, Russia and India have gotten stronger over time, they become less prone to pressure for real change. And also there's now real concern in those countries about external sort of impact on their domestic sort of policy, because all of these countries are essentially very paranoid about Western interference in their domestic political arrangements or their domestic operations. And the political threat, especially for China and Russia, less so for India, has been exemplified by Western orchestration and support for regime change, such as the Arab Spring and the color revolutions that took place in Eastern Europe. And so, essentially, what Ukraine brings to, I suppose, ahead is this vast difference in the way the world is viewed from either side of the fence.
Cris Sheridan: Now, some argue, Peter Zion in particular, that the US Will likely fare much better than other nations. And, I mean, he's quite negative on China. As we move through this more deglobalized world, whatever form that does end up taking. So what would you say us versus China, in terms of faring better in a more deglobalized world?
Satyajit Das: Well, I think the US. Has enormous advantages, but there are three or four problems which they need to actually overcome. One is energy independence, access to critical raw materials. And what I see is that the US is much more vulnerable in many ways to the impact of climate change on things like food and water resources. Let's pick up on some of those, which is kind of interesting.
Satyajit Das: Energy is very, very important because modern world runs on energy. US energy independence is very reliant on shale oil and gas production. And the estimates I've seen of US oil proven reserves is about, give or take, ten years worth based on current consumption. That's very, very tiny compared to, say, Saudi Arabia and other Middle East producers, though the US might be able to overcome that if they can use Canadian Tar sand oil type resources. And also the US has been CosIng up to Venezuela after many years, which has quite a lot of reserves, so it might be able to do that.
Satyajit Das: But my concern is the US will effectively have to deal with its problems of going from an energy exporter, which currently is, to an energy importer once that shale oil boom has run its course. And that's complicated by the fact that the US relationship to countries like Saudi Arabia is now basically changing, because Saudi Arabia was an ally which relied on US protection to basically in return on the other side for supplying oil. I think under the new leadership and under Mohammed bin Salman, that's shifting. And Saudi Arabia is changing the way it looks at the world. And I think the reformation of that Middle East alliance reflects the fact that the major Middle Eastern energy exporters no longer regard the US as a reliable guarantor of security.
Satyajit Das: That's going to be one issue. Food is also interesting, but as the recent droughts and floods have actually illustrated, it's pretty fragile as well. So I think those two things are, firstly, in terms of the resource requirements, going to be problematic. The other thing is the economics. The US displays certain fundamental financial vulnerabilities.
Satyajit Das: Now, if you apply standard metrics of resilience like internal, which is budget and external, current account deficits and debt levels, the US does not come out particularly well relative to places like China and so forth. If you actually look at the budget deficit in the US, plus the current account deficit, you're pushing up towards seven, 8% of GDP. Now, there used to be a rule of thumb, which is still a rule of thumb, which is if a country reaches 10%, you start to worry dreadfully. The other thing is the debt in the US is very high, but other countries have higher debt. But the real issue is a lot of that debt in the United States is held externally.
Satyajit Das: So the US, to some extent is dependent on the kindness of strangers. I think those problems weaken the US position in terms of aligning itself with nobody and becoming kind of independent. But there's also two or three things allied to that, which are causes for concern. One is the US is heavily dependent on external manufacturing on everything from semiconductors to very, very simple goods in day to day use. And that's because of the entire process, which started in the 1990s of outsourcing.
Satyajit Das: That's very, very difficult to reverse, as the US. Is now finding with semiconductors. I did quite a lot of work for semiconductors in the 1990s and the early 2000s in Taiwan, and I know them and I talk to them from time to time. Still, the most interesting thing is their observations in terms of the desire for the US. To actually build its own or rebuild its own semiconductor industry in the United States.
Satyajit Das: They were very skeptical about a the time it would take, b the cost, and c whether it could ever really be done, particularly at the higher end of the spectrum. Part of the problem was, as somebody actually mentioned to me, he said, it's the experience effect. If you've been doing it for 2030 years, it's one thing, but the US. Got out of it. So there's an absolute skills gap realistically to fill that is difficult.
Satyajit Das: But filling the skills gap is also complicated because the west and the United States has benefited hugely from immigrants from Russia, China and India who tend to be much more proficient in Stem, which is science, technology, engineering and mathematics because their education systems are quite differently oriented and they have actually contributed massively to parts of US. Industry. And the assumption is that's going to continue. I'm not so sure that it's going to be at the same levels. And part of that is, I think, the concern about deglobalization, but it's also concerned with the fact that places like Russia are going to prevent and China are going to prevent talented people from leaving.
Satyajit Das: And also these economies are basically at a level when these people don't need to leave to develop their skills or achieve what they want to achieve. So there's a complication in there and underlying all of this is a dysfunctional society and politics. The US. Has significant political and societal challenges going forward, and I think that's going to make it very difficult for the US. To maximizing its advantages.
Satyajit Das: I'll give you two examples of that. I have never ever seen the United States as divided as I do now. I've never ever seen the US. As prone to well funded and vocal special interests. I have never seen in my entire life the lack of consensus and also the political impotence of doing anything about it.
Satyajit Das: Essentially, I guess the best way to describe it is the political sphere has become a mixture of bread and circuses. On the one hand, we throw money at people and as you know, with the current administration, they have spent a lot of money on lots of things and the rest is circus, celebrity circuses. And watching primary debates in the US. Is one of my great amusements. And if you look at that, that's really disheartening.
Satyajit Das: And also this parallel. Institutional decay bureaucracies which once were capable of providing objective independent advice have been decapitated by political appointees. I just don't think those things are compatible with the things that need to be done.
Cris Sheridan: What are some of the important takeaways from the current BRICS meeting when it fits into this deglobalization trend that you would like to leave with our listeners to consider?
Satyajit Das: Well, I think the BRICS meeting is kind of bringing together some of the things we've been talking about and it's quite clear that it sort of shows the two camps. On one side you have the Anglosphere and together with Europe and Japan. But if you look at Europe and Japan their support of some of the Anglosphere policies, et cetera, is fairly lukewarm because essentially if you look at Europe and Japan their benefit from American military protection has been crucial to their economic success because they have had lower defense spending and they've used their resources more productively. And also to a large extent they are geographically in a disadvantageous position because Europe is much closer to Russia and Japan is much closer to China. So essentially they're in a very difficult position.
Satyajit Das: And also don't ever forget that German pan and the West's relationship has deep scars from the Second World War and it's probably useful to remember that the US deployed nuclear weapons against Japan. And so the Western alliance is really the Anglosphere with very tapered support from Europe and Japan. The rest of the world essentially will not, I don't think, side with the west because most of them just want to stay neutral in any conflict between either the United States and Russia or United States and China. And I think there's about four or five reasons for that, probably a few more as well. But one is if we look at the BRICS nations and let's call them the global south or the non west, they don't actually believe that America or the west understands or empathizes with their specific problem.
Satyajit Das: They also have a legacy of colonialism and that matters to them. And as one of the Indian politicians specifically I think it was a foreign minister spelt out, he said Ukraine is mainly about the future of Europe. It's not about the future of the world. They also and as the BRICS have highlighted, the world economy is no longer US or west dominated. There are other options and the BRICS is about those other options.
Satyajit Das: And there are two other sort of things which are very important. One is the so called Western rule based international order lacks complete credibility because it's one rule for one, one rule for the other. I'll give you a very concrete example. The International Court of Criminal Justice for war crimes. The US.
Satyajit Das: Isn't even a signatory and the US will never extradite anybody for any alleged war crimes. So essentially the rules based international order is pretty hollow. And the other thing is, I think there is a general feeling that the Ukraine and the west may not succeed on the battlefield in Russia. And nobody likes backing losers. Nobody likes backing losers.
Satyajit Das: So what will happen is and what the BRICS are showing is that the world is going to fragment into these two very different blocks. But at the same time, you shouldn't overestimate the influence of the BRICS. Look, they're a completely diverse bunch of economies. They have very little in common. India and China are mortal.
Satyajit Das: You know, we saw the expansion overnight of the BRICS numbers, but Brazil, India and South Africa didn't really want the expansion because it diminishes their influence. And look, it's a talking shop. It's pretty much a talking shop. But it is significant as part of several other things. There are a whole bunch of other forums that are there.
Satyajit Das: But I think the most significant thing to me, alongside the BRICS meeting, which is symbolic, is the way China, for instance, has become a much more significant global foreign policy player, particularly its role in the resumption of diplomatic relationships between Iran and Saudi Arabia. And the second element is the growing power of Saudi Arabia and the Gulf state and the fact that they're drifting away from the Anglo American orbit. And all this points to fragmentation and lack of global cooperation. So the BRICS is largely symbolic in that sense, but it is important in that it shows a particular trend towards fragmentation.
Cris Sheridan: Yeah. And I think one of the key views here that we should all understand is that, of course, every country, or even trading union will seek to maximize their own strategic self interests. So the BRICS are attempting to do that. The US is going to obviously try to maximize its own strategic self interest. That's just the way the world so, you know, there's been a lot of talk about this move towards de dollarization, about moving away from the US dollar as a global reserve currency.
Cris Sheridan: There's been some pushback within the BRICS nations. India has pushed back against that, I believe, and some other countries, russia is trying to push in that direction. So there are some divisions of opinion or just how quickly something like that would emerge. What is your view on whether or not the US dollar is at risk of suffering any sort of imminent loss of reserve currency status?
Satyajit Das: I've been hearing about de dollarization for the last 30 years. I always find opinion writers, when they don't have anything to write about, always talk about de dollarization. But I think the reality is it plays a very important role. Half of international trade is invoiced in dollars at the moment. That's significant because US trade is only about ten to 15% in foreign exchange.
Satyajit Das: Market dollars are involved as one side of 90% of transactions. 60% of reserves are US dollars, bulk in US treasuries, which has been very important to financing the US government, of course. And I think it's very difficult to switch away from dollars because you need an alternative highly liquid and large currency and money market. And the problem is there are economic issues in anybody else stepping up to take over that role. And this is what we call the Trilemma, also known as the Mundell Fleming model, because what they said was that there's a trade off between three policy options, which is setting a fixed exchange rate, allowing free capital movements, and having an independent monetary policies.
Satyajit Das: And you can't have all of them simultaneously. So what that means is, for instance, if you think China and Russia would want their currency, god forbid, to basically be a global reserve currency, they would have to essentially not manipulate their exchange rate. They'd have to allow capital to flow freely and they would lose some control over their monetary policy, none of which that they're going to actually be willing to do. And there's another economic problem known as the Trifin dilemma. Robert Triffin, a Belgian economist, testified to Congress and he said there's a fundamental problem in the international monetary system, and that is if the United States stops running balance of payment deficits, the international community loses the stock of dollars that it needs.
Satyajit Das: So whoever wants to take over this role would have to solve those problems. And I don't think, I don't see anybody as rushing into that role. In fact, while it helps finance the US. Because of the dollar's role as a reserve currency, it's also an albatross around the US neck. And I think what's going to happen is that part of the fragmentation will be countries will move away in terms of settling trade through dollars into other currencies like ruble.
Satyajit Das: And one, they have already set up alternatives to the Swift system, which is a payment system for US. Dollars usually used or the general payment systems used globally. So what will happen is you will start to see more of that. The other thing that you will see, and this is where the risk to the US. Is greatest, is the confiscation risk after the events around Russian foreign assets is that investment of reserves in dollar is going to decline and central banks and sovereign wealth funds have shifted away to other currencies or real assets to reduce its exposure to confiscation.
Satyajit Das: And the most tangible evidence of that is that China has been moving away, as you mentioned, from US. Treasuries for some time. Its holdings are basically now about under 9% or under a trillion US. Dollars. That's a twelve year low.
Satyajit Das: And basically it's about $300 billion down from its peak in November 2013. And that's underway. That's not going to basically change anytime soon. And what that means for the US. Is very important because you have an additional factor now to the higher interest rates, the quantitative tightening and the restrictive monetary conditions.
Satyajit Das: It means there's going to be a tightening of liquidity in the west and in the US and it's going to make it very difficult to refinance maturing obligations or borrow to meet future needs. And so effectively that is the bigger problem. So de dollarization to my mind is kind of, I suppose Trojan horse. I think the lack of use of US dollars of foreign reserves is a much more real policy and that is something that I actually worry about. So I think that's going to actually be what is going to be important.
Satyajit Das: And there's a couple of other reasons outside of the things we've talked about. One is for the US as well, the use of the US dollar as this sort of clearing mechanism for global payments is a problem because essentially it's pushed the US dollar up on a trade weighted index basis to highs, which obviously makes certain businesses actually uncompetitive. And also what it does is the strong dollar increases commodity prices which are mainly priced in US dollars. And all of that creates problems and it also creates problems for emerging markets because they borrow in US dollars as the major foreign currency that they borrow in. So all of these things are building up.
Satyajit Das: So I think we're going to see a gradual change. But in terms of effectively a sudden wholesale de dollarization, I don't really see that occurring, at least in the short run.
Cris Sheridan: Yeah, and like you said, I mean, there's really just no alternative out there whether or not it is the Chinese yuan or the Russian ruble or any of the other currencies that are available to handle the amount of capital that needs to be circulated. And the dollar is the cleanest dirty shirt. Right? And so it's kind of what you have to work with. But of course, like you said, there are clear and very real problems with the US's debt position.
Cris Sheridan: I mean, US debt has climbed 50% just over the past four years, particularly after COVID, with all the spending that took place, we see US interest expense also rising very rapidly and the US has lost, I would say, a lot of its productivity. I mean, a lot of what made the US great in decades past. It seems to be run mostly on financialization at this point. And so there are some clear problems that I think the BRICS nations are looking at, and they're saying, well, the only way out of this and this is something that we've discussed in our show many times, but it appears really the only way out of this for the US. Is just to continue printing money and to monetize that debt.
Cris Sheridan: And of course, if it is the global reserve currency, that means that we're going to have to bear the cost of that. Of course, as this money is flowing through the trading system and we're getting cheaper and cheaper dollars. So there's this desire to diversify away from that. I mean, outside of the Ukraine war and outside of all these other geopolitical issues. I mean, that seems to be just a very clear focus of, hey, we need to do something about this.
Satyajit Das: Oh, I think you're absolutely right. And one of the things that I think is actually kind of unusual because the US. Dollar as the sole sort of reserve currency, it's not the sole one, but it's so dominant, was set up by the Brett Onwards agreement after the Second World War. But if you go back through history, it's a kind of an unusual arrangement because previous to that, there was always several currencies which formed part of the sort of reserve currency basket. So I think that's where we are heading in terms of the way the world will reorganize.
Satyajit Das: But the main point is the fragmentation and the stresses it's going to put on the US. And on countries which have high levels of foreign external debt is going to be hugely problematic.
Cris Sheridan: Yeah, I would agree. Now, when we're talking about all this US. Spending, I hearken back to what we saw in the first Cold War between US. And Russia. Where the US.
Cris Sheridan: Had outspent Russia on its own economy, on its own war machine, and Russia obviously lost out. And it seems like we're seeing another instance of this again. Of course, there is a lot of talk about a Cold War 2.0 between US. And China, particularly over technologies, semiconductors, quantum computing, AI. As the recent Biden Executive order was targeting outbound investment into these areas.
Cris Sheridan: But I wonder if we need to be thinking about this level of U. S. Spending as in some way as a repeat of what we saw in the first Cold War, where the US. Is attempting to outspend China as a way of strategically outcompeting their main competitor rival, if you would. And so if that's the mean I would garner to say that we're probably looking at a long term trend of continued spending by the US.
Cris Sheridan: As it attempts to decouple away from China. What are your thoughts on that?
Satyajit Das: Well, I think the interesting thing about that process is it's already underway because this year defense spending or defense budgets around the world are going to be $500 billion more. So half a trillion dollars. So that's about half a percent of GDP, because almost every country in the world is now starting to bring up the actual level of defense spending to around 2%, which seems to be like a global norm now. And that's a big diversion of money away from what I would consider to be perhaps more productive uses of money. And that's obviously going to strain budget, it's going to strain balance sheet, it's going to strain debt levels.
Satyajit Das: That's the first thing that's going to happen. The second thing is, and you alluded to this earlier, is that's fine, but it also points to a fundamental weakness, which is that we can't actually compete, that the US. Is finding it difficult to compete with China on an economic or technological basis. And as you correctly pointed out that there are now long term weaknesses in the US. Which makes it very, very difficult for them to compete.
Satyajit Das: So the fact that they're having to resort to sanctions to actually win this strategic competition is actually worrying to me. And to some extent this talk about rules based orders and liberal democracies is a mask for the fact that we can't really compete as a country. So that's the worrying part. And the other worrying part about this is that if you actually look back through history, one of the most interesting things is the collapse of the Soviet Union was really, if you like, one way to think about that was their economy couldn't actually support, I suppose, the level of expenditure that was being called for to match the United States. And you will remember Paul Kennedy wrote a very famous book about the rise and fall of nations and powers.
Satyajit Das: And what he pointed out to, and I think it's a very, very interesting argument is that effectively, once countries cannot sustain the level of defense spending, it leads to an inevitable decline. And that's what may be playing out. The only good thing is that with the global economy weak, china, Russia, everybody has innate weaknesses. So the US. Is not on its lonesome in this process.
Satyajit Das: But I think you're absolutely right that competition is going to take place and it leads to certain absurd decisions like Australia, for instance, is going to get nuclear submarines, not nuclear armed ones, but nuclear propelled ones, which it has no capacity to build. So basically it's going to come from the US. And the UK. We can't maintain them, we can't provide the fuel, we can't crew. You know, some people in Australia, and I'm one of them, sitting here scratching our heads going exactly how does this make us more secure?
Satyajit Das: And to some extent, I think peace is a much better form of security than building up defense capabilities, in my view. So anyway but that's just my minority view. So you're absolutely correct. This strategic competition and whether or not you call it a Cold war or not, I don't think is really germane. I think it's a major problem and I don't think people are focusing enough on it.
Cris Sheridan: Yeah, and I think the thing is, many people have said that after large amounts of spending, which we saw post 2020 by nations around the world not just us, of course, but globally, in light of the fact that we saw global lockdowns, there was a massive reduction in tax revenues combined with fiscal spending to try to prop up the economies. But now, because of this deglobalization trend and some of what we discussed today also with beefing up defense spending, the Ukraine war, some of these rifts that are taking place, my fear is that this spending is going to be continuing in this arms race as we see the BRIC countries on the one hand led by China and then the US. On the other hand really trying to outspend out compete one another with the Ukraine War sort of being the battleground in which a lot of this spending is being seen for funding the ongoing war. In your recent know, you talk about the end of empire and you talk about this deglobalized world that we're moving into, and you also point to the UK as a model for where the US could eventually end up. Can you explain a little bit where the UK fits into this?
Satyajit Das: Well, I think the interesting thing is, I suppose from a historical perspective, the UK predated the US as the predominant empire of the world. So it's always interesting to go back and say, well, how did that empire end? Or what was its problems? The most important thing is empires don't end quickly, because the British Empire ended probably six decades ago at the end of the Second World War, and probably it's been in decline for well beyond that. And central to that was essentially in a strange way, of victory, which was its victory in the First World War, with obviously help from other countries, including the United States.
Satyajit Das: But that country left it bankrupt and essentially that's a starting point. So I started to look back and say, OK, what happened? Of course, there's a nice sidebar to that, which is the UK has this special relationship, quote unquote, with the US, which I've always thought is little more than the UK trying to sponge off American economic and military strength to prop up its pretensions of global influence. But leave that to one side. But if you look at the UK and what's happened in recent times, the UK's economy was dependent on three things which are very striking.
Satyajit Das: The first is basically they relied on Nazi oil, the second, the membership of the European Union. And they were a haven for flight capital. And let's just elaborate on some of that is if you look at particularly the membership of the European Union, it provided them with cheap labor, mainly from the east and south of Europe and also from some Commonwealth countries. And it gave them enormous trade opportunities in financial services, which is, I think from memory, around about one 10th of British economic output. And the last element, the flood capital, is very interesting.
Satyajit Das: It's monetary inflows of, let's be polite and say, uncertain origins from Russia, the Middle East, China and other not terribly salubrious jurisdictions. And that actually funded the property boom in the US and even things like the national health system. And this was Tony Blair's famous Cool Britannia. But today, if you actually go back through that, nazi oil production and its energy security are in decline. Their decision about Brexit has equated to worker shortages, loss of trade, and effectively, London's role as the center for European financial markets has diminished.
Satyajit Das: It hasn't gone away completely, but it's diminished. And essentially the war in Ukraine has meant, obviously, the inflow of capital, particularly after the asset seizures have diminished. And that all came to a head in this wonderful episode last year, which you couldn't make up, which is when Boris Johnson was replaced by the very short lived Conservative leader Liz Trust, who announced tax cuts, substantial subsidies, which were going to be funded by public borrowing. And it was designed to please her Conservative ideological supporters. But effectively, the fiscally incontinent and economically disastrous plan created a predictable crisis of confidence, which led to effectively her being displaced.
Satyajit Das: But central to that was that investors savagely sold off the pound and the UK government bonds. In fact, one commentator very humorously said that the markets were demanding a moron risk premium. And what actually has happened subsequently, of course, is that there's been some level to effectively reverse those policies. But I think the UK's problems are terminal. It's not going to reverse in any shape or form, they're just going to bumble along.
Satyajit Das: But when you look at those factors and you look at the position the United States finds itself in, there are some similar economic susceptibilities, including high debt, decayed infrastructure and hollowed out industries. There are problems of deep inequality. The problems of government and institutions are basically not entirely dissimilar. And there's also a psychological element to that. The UK revels in the past.
Satyajit Das: They just love the, you know, as you saw with the death of Queen Elizabeth and the coronation of King Charles. They love these expensive, meaningless pageantry and nostalgia because, to be honest, they don't have much else to celebrate in some senses. But what is worrying to me is the United States to some degree, I suppose, is involved in a similar fantasy without looking at the politics of it. But things like Make America Great again and again is kind of a fantastical premise of a return to a simpler, more prosperous and hopeful time without actually acknowledging the present problems and the present context. Underlying this is the vast majority of the population is essentially embracing entitlement expectations, the magic of the media and most often celebrity politics effectively, that undermines your society, your economy and your sovereignty, ultimately.
Satyajit Das: And I think that's what worries me. And I've encouraged everybody I know in the last few years to go and reread Paul Kennedy because it's not entirely accurate. It's obviously looking at the past as a way of informing the future, but it tells you what happens. And I suppose in some senses it's all self inflicted. I think the historian Arnold Tonney once said that all great civilizations commit suicide.
Satyajit Das: And the problem is we may be seeing that occur with the United States as well as other great powers.
Cris Sheridan: So to us, as we've been discussing, and as you highlight in your recent know, we are moving into a more deglobalized, disordered world. Geopolitics are rising to the fore once again as having a much greater influence over markets and economies. Investors obviously need to be aware of these changes that are taking place. I mean, just in recent weeks, there was another executive order signed by Biden targeting outbound investment into China in areas of semiconductors, quantum computing, AI, and there's a number of companies that are either greatly benefited by this and being hurt as well. There are real investment implications from whether or not you want to call it a cold war or not, but the amount of spending that we're seeing into various areas and sectors.
Cris Sheridan: How would you incorporate some of these developments along the lines of what we discussed today into investors decision making process?
Satyajit Das: Well, for a start, I would start to try to get a very clear understanding of the issues and the likely trajectories. That means probably extending your reading to things outside of the Financial Times and The Wall Street Journal and trying to understand some of the history and some of the forces that are underlying the developments we've been talking about and using that to inform your investment approach. And I think there are some simple filters that I now use. If I look at investments, one is I try to understand how global trade changes are going to affect that company or that business or that sector. Are they markets international?
Satyajit Das: Are they domestic? Where do they get their stuff from? I'll give you a very concrete example. I do some work for a healthcare company and actually this happened not currently, but it was during the pandemic. They said to me, look, what should we be looking at?
Satyajit Das: And I said, well, firstly, I'd be looking at your supply chains to see where you get your chemicals and everything else. And they came back to me and said, it's all fine. They all come from a couple of European suppliers. I said, Hang on, where do the European suppliers get the raw chemicals they use? Where do they get the plastic jars that they put the stuff in?
Satyajit Das: Who manages the shipping? Who provides the actual transportation and logistics? And of course, what we found when we actually went through the lengthy supply chains is there a lot of people and it led, not surprisingly, on certain things back to China which were very badly affected by COVID. And so essentially, looking at the first layer doesn't give you the complete answer, is my point. So I'd be looking at all these supply chains and how those supply chains are going to have to be changed, are likely to change.
Satyajit Das: And one of the big priorities I have is I look at locations of industries and markets. I'm much more domestically focused than I used to be. I am not terribly excited by multinational businesses because I know their capacity to find new markets, their capacity to source things are going to be affected over time. And also if companies are very reliant on external capital, and particularly that capital comes from elsewhere. That becomes a problem and you need to work it out.
Satyajit Das: None of that's negative, but you need to understand that and say, well, how are change is going to affect that? And the last and most important rule that I now have is follow the money, which is I've never been averse to government subsidies as long as they go into the companies that I invest in, I'm worried if they are subsidizing other people, particularly their competitors. But I always like subsidies because obviously that has huge financial implications at an investment level, at a personal level, it means it's coming out of your and my taxpayers dollars. But the other thing also is the areas that people are going to spend in. And one of the key areas is the military industrial complex, which is going to do very well out of just the defense spending that's going to go on.
Satyajit Das: And so all of those things you have to think about and look at, these are like extra filters that you pass your decisions through. But it requires an informed understanding of history and context, which is something that I think is very, very important. I used to work for a guy who once gave me probably the best advice he ever gave me in all my life. We were talking about what you need to know. He said, well, you need to know everything about one thing and something about everything.
Satyajit Das: And that's actually the advice that I would give investors.
Cris Sheridan: Well, again, we're going to have links out to the recent piece that Das has written at Naked Capitalism. It's a three part piece discussing the geopolitical developments underway and how this fits into the longer term outlook, much of which we did discuss today. So Das, as always, it's a pleasure to get your nuanced outside of the US. View, which takes into account multiple different perspectives. And so I always appreciate you providing that for our audience here at Financial Sense and we definitely look forward to speaking with you in the future.
Cris Sheridan: Well, as we close out today's show, please remember to spread the word about Financial Sense NewsHour with your friends and family. As always, today's podcast is brought to you by Financial Sense Wealth Management, which has been named as one of the top investment advisory firms in the US. By the Financial Times. If you have any questions about our asset management or our financial planning services, feel free to click where it says contact us on FinancialSense.com or you can also call us directly at 888 486-3939. For FS insider, I'm Chris Sheridan. Thanks for listening