Fire up the printing presses, we’re going to war

“But what about the pension funds?” the man across the table asked me.

We were having dinner in a restaurant overlooking the Thames, a view tarnished only by the scaffolding cocooning Westminster.

I had just outlined my theory that as Cold War II intensifies and China’s threat to the US becomes ever more significant, the US government will turn to the printing presses. In order to outspend China on defence and remain the world’s only superpower while already tens of trillions of pounds in debt, the Federal Reserve will be forced to directly finance the US government.

This, in my view would lead to extensive increases in inflation, which would indirectly solve the US government’s massive debt problem. At the same time, domestic discontent (or “populism”) would be quenched by the fear of a foreign enemy and by the boom in employment in the domestic defence industry which the printed money would be poured into.

But the gentleman across the table, a former hedge fund manager, had a point. How would the US government deal with the crisis this would create for pension funds? They own huge amounts of bonds which have a fixed income – the roaring inflation would destroy their returns. In the classic “60% bonds, 40% stocks” model, pensioners would take a serious hit to the largest portion of their retirement savings, and then what would the retiring generation have to live on? And how would the ruling administration in the US remain in power without subsidising them?

I didn’t have much of an answer to his question, other than that Cold War II will have few winners and somebody will have to pick up the tab once it’s over. Maybe it’ll be the retiring boomers; the millennials (soon to become a dominating force at the ballot box and in government) sure as hell won’t want to pay for it.

But in my view, someone will – and it’s coming…

Sino-German Cyberwar

We wrote yesterday of how China has been following the British Empire’s playbook, seeking to control international shipping lanes to control global trade, and thus the world. Its expansion is not limited to the physical ocean however, but to the digital ocean too.

The internet is an ocean of data, across which valuable information, or “goods” are transferred. The infrastructure, or “shipping lanes” of this ocean is the internet’s infrastructure, laid and controlled by telecoms companies. The strategic significance of these “digital shipping lanes” is only recently being appreciated, and now Germany is looking to defend its own from China. From the Financial Times:

Germany has joined its US and British allies in moving to prevent Huawei from supplying its next-generation mobile phone network, bowing to pressure from Washington to block the Chinese maker of telecoms equipment over espionage fears…

A statement from the German economics ministry said security of the future 5G network and the safety of products offered by telecoms suppliers was “highly relevant”. The government would be “guided” by such concerns in its buildout of the network…

Huawei equipment is already largely banned from US government systems and contractors. In November the UK, which is the Chinese group’s oldest European market, demanded fixes the company must make to operate in the country…

China’s ambassador to Canada warned on Thursday that there would “certainly be repercussions” if Huawei was blocked from participating in building the country’s 5G network…

The EU is also increasingly concerned about Huawei. Andrus Ansip, the top Brussels official on tech policy, recently warned that Chinese groups could be ordered by Beijing’s intelligence services to build back doors into their systems…

Germany’s alignment in Cold War II will be further revealed when it decides which fighter planes it’ll buy to replace its ageing Tornado fleet. Will it turn to the US for the pricey F-35 or will it go for the Eurofighter to keep Europe’s defence industry flush with cash? The eurozone industrial base could certainly use the money right now… but then, if it goes for the cheaper Eurofighter it’ll only strengthen Donald Trump’s convictions that the European countries aren’t pulling their weight when it comes to defence spending. Let’s watch.

As the evening drew to a close, and having shared my thesis for what the future holds, I asked my dinner guest, who with decades of experience in finance has a great eye for spotting risk.

When I get to his age, he assured me, “You know what you don’t know”, and he gave no description of how future events would unfold. He only highlighted the dangers he sees on the horizon and commented that there’s only one thing he knows and trusts today – gold bars.

Have a great weekend,

Boaz Shoshan
Editor, Capital & Conflict

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