Biden’s Last Throw Of Geopolitical Dice

Authored by Alasdair Macleod via GoldMoney.com,

In a continuing cold war, America is already on the back foot. We have yet to see how long it will be before the Biden administration realises its few victories will be unaffordably Pyrrhic, and by merely not responding to American provocation the Chinese/Russian partnership will emerge as the victors.

Halford Mackinder’s century-old vision of a Eurasian superstate, based between the Volga and the Yangtse, is becoming reality. Commentators usually fail to understand why; it is not due to military superiority, but down to simple economics. While the US economy suffers a post-lockdown inflationary outcome and an existential crisis for the dollar, China’s economy will boom on the back of increasing domestic consumption, which is an official government objective; and increasing exports, the consequence of America’s stimulation of consumer demand and a soaring budget deficit.

The Chinese-Russian partnership already dominates or controls Mackinder’s World Island, defined as Eurasia and all Africa. South-east Asian nations notionally in the US’s sphere of influence are firmly tied to the partnership’s economy, and the overland and sea silk roads similarly bind the EU and the Indian and Western Pacific Oceans’ states respectively. It amounts to over half the world’s population no longer sharing the economic and currency interests of 328 million Americans.

This article summarises the background to the geopolitical situation facing the Biden administration before concluding that in the current cold war against the combined power of Russia and China, America will fail in its political objectives, not through lack of military power, but due to economic forces.

Introduction

Now that the Biden administration has settled in, it is time to reassess American policy towards Russia, China and the wider Asian scene. Is it going to be a continuation of the Trump administration’s policies, or is there something new going on? Given the continued tenure of staffers at the Pentagon from before the Trump presidency, it seems unlikely there will be much in the way of détente: it is game-on for the cold war to continue.

Before delving into geopolitics, we must be careful to define a neutral position from which to observe developments. You cannot be objective in these matters if you justify an uninvited invasion of a foreign territory to take out a proclaimed public enemy, as America did with Osama Bin Laden and then condemn Russia for attempting to murder an ex-KGB officer living in Salisbury, or for that matter the dismembering of a journalist in the Saudi Embassy in Turkey. You must be aware that it is an established part of what Kipling called The Great Game, and always has been.

Acts of this type are the product of states and their agents acting above any laws and are therefore permitted to ignore them. We must dismiss from our minds the concept that there are good and bad guys — when it comes to foreign operations, they all behave the same way. We must dismiss nationalistic justifications. Nor can we believe propaganda from any state when it comes to geopolitics, and particularly in a cold war. Know that our news is carefully managed for us. As far as possible we must work from facts and use reasoned deduction.

We are now equipped to ask an important question: the US status quo, with its dollar hegemony is seen by the new Biden administration as an unchallengeable right, and its position as the world’s hegemon is vital for… what? The benefit of the world, or the benefit of the US at the world’s expense? To answer this, we must consider it from the point of view of the US military and intelligence complex.

The problem facing us is that the Pentagon became fully institutionalised in managing America’s external security following the second world war. When the Soviets extended their sphere of influence into the three great undeveloped continents, Asia, Africa and South America, there was a case for defending capitalism and freedom — or at least freedom in an American sense by keeping minor nations on side. This was done by fair means and often foul for expediency’s sake.

But the fall of the Berlin Wall and the death of Mao Zedong made the American military and intelligence functions largely superfluous, other than matters more directly related to national defence. But it is in the nature of government departments and their private sector contractors to do everything in their power to retain both influence and budgets, and the argument that new threats will arise is always hard for politicians to resist. And what do the statists in a government department do when they have secured their survival? Their retention of power without real purpose descends into alternative military objectives. And from the first Bush president, they were all firmly on-message.

President Trump was the first president for some time not to start military engaements abroad. His attempts to wind down foreign operations were strongly resisted by defence and intelligence services. And his efforts to obtain a détente with North Korea were met with disdain — even horror at Langley.

Whatever the truth in these matters, it is highly unlikely that the power conferred by the ability to initiate unchallengeable cover-ups, information management, subversion of foreign states and secret intelligence operations is not abused. The proliferation and traction of conspiracy theories, attributed in their origin to Russian cyber-attacks and disinformation, is a consequence of one’s own government continually bending the truth to the point where large sections of the population begin to believe it is its own government’s propaganda.

This brings us to the change in administration. As a senator, Biden had interests in foreign affairs dating back to the late 1970s and was on the Senate Foreign Relations Committee from 1997 and subsequently became its chairman. As such a long-standing politician in this field it is almost certain that the Pentagon establishment regards Biden as a safe pair of hands; in other words, a president who is likely to support Langley’s role in setting geopolitical and defence priorities. Surely, for them this is a welcome change from the off-message President Trump.

Policies to contain the Russian threat

Despite the Navalny affair, Putin is still unchallengeable as Russian leader, having emerged from the post-Soviet turmoil where chaos and organised crime were the order of the day. No western leader has had such a tough political background and Putin is a survivor, a strongman firmly in control. This matters for America and NATO with respect to policies in Ukraine, the Caucasus, Syria, Iran and Turkey. Any attempt by America to complete unfinished business in Ukraine (a triparty scrap involving Russia, Germany/EU and the US over the Nord Stream pipelines depriving Ukraine of transition revenues is already brewing) is likely to lead to confrontations with Russia on the ground. And Russia signed a military cooperation pact with Iran in 2015. Like a cat with a mouse, Putin is playing with Turkey, interested in laying pipelines to southern Europe, and getting it to drift out of NATO. Russia’s interest in Syria is to keep it out of America’s sphere of influence, which with Turkey’s help it has managed to do.

For some time, military analysts have been telling us that we are now in a cyber war with Russia, accusing it of interfering in elections and promoting conspiracy theories — the US presidential election last November being the most recent assertion. As with all these allegations there is no proof offered, just statements from government sources which have a track record of being economical with the truth. Whatever the truth may be, cyber wars are closely intertwined with propaganda.

Attacks on Russia since the millennium have been by disrupting dollar payments, and less importantly, by sanctioning individuals close to Putin. The monetary threat was originally justified by Russia’s invasion of Ukraine in 2014, leading to the collapse of the rouble and a hike in interest rates. The new cold war had taken a financial turn. Russia’s response was to reduce the economy’s dependence on dollars as much as possible, with the central bank selling dollar reserves and adding gold in their place. It also set up a new payments system to reduce its dependence on the SWIFT interbank payments system.

Russia has survived all financial attacks and is now better insulated against them for the future. One-nil to the Russians. But the cost has been hidden, with western investment restricted to being mainly from the EU (particularly directed at the oil and gas industries). With the nation being fundamentally a kleptocracy, economic progress is severely constrained. Furthermore, with Russia being the world’s largest energy exporter, the west’s policy of decarbonisation is a medium to long term threat, leading to the demise of Russia’s USP. For these and other reasons Russia has turned to China as both a partner and an economic protector. In return, Russia is resource-rich, an energy provider, and therefore of great value to China.

Russia’s history of assassinating leading dissidents on foreign soil has been its greatest mistake. It took years after the Litvinenko assassination for diplomatic relations with the UK to be fully restored. The deaths of several Russian oligarchs in recent years on British soil were thought to be the actions of organised crime and not attributed to the Russian state. But the clumsy assassination attempt on Sergei Skripal in Salisbury by GRU officers three years ago is unlikely to lead to a rapprochement anytime soon.

The Russian and Chinese geopolitical partnership

One of the first persons to identify the geopolitical importance of Russia’s resources was Halford Mackinder in a paper for the Royal Geographical Society in 1904. He later developed it into his Heartland theory. Mackinder argued that control of the Heartland, which stretched from the Volga to the Yangtze, would control the “World-Island”, which was his term for all Europe, Asia and Africa. Over a century later, Mackinder’s theory resonates with the two leading nations behind the Shanghai Cooperation Organisation (SCO).

The underlying point is that North and South America, Britain, Japan and Australasia in the final analysis are peripheral and less important than Mackinder’s World-Island. There was a time when British and then American primacy outweighed its importance, but this may no longer be true. If Mackinder’s vision is valid about the overriding importance of undeveloped resources, Russia is positioned to become with China the most powerful national partnership on earth.

The SCO is the greatest challenge yet mounted to American economic power and technological supremacy. And Russia and China are clearly determined to ditch the dollar. We don’t yet know what will replace it. However, the fact that the Russian central bank and nearly all the other central banks and governments in the SCO have been increasing their gold reserves for some time could be an important clue as to how the representatives of three billion Euro-Asians — almost half the world’s population — see the future of trans-Asian money.

In terms of GDP per capita the United States is a long way ahead of the field. But it is also the most indebted at the national level. The difference with the SCO is at the purchasing power parity level, making market prices of secondary importance. While prices regionally vary considerably the costs of goods in the SCO are as an average considerably less than in the US and EU, so that on a PPP basis the SCO’s GDP is significantly greater than that of the US or the EU.

The inclusion of the EU in Figure 1 is a post-Brexit nod to the fact that the EU can no longer be automatically regarded as being in the US sphere of influence. The commercial ties to the SCO, with both energy reliance from Russia and silk road rail terminals in various EU states are clearly the trade future for the EU. The EU is advanced in its plans to bring national forces under its combined flag, which by giving them an EU identity can only loosen NATO ties with America. While not an active threat to America’s power, one can envisage the EU sitting on the fence in an intensifying cold war.

The SCO started life in 2001 as a security partnership between Russia and China, incorporating the ‘stans to the east of the Caspian Sea. Born out an earlier organisation, the Shanghai Five Group, it was set up to combat terrorism, separatism and extremism. It is still a platform for joint military exercises, but none have taken place since 2007 and it has morphed into a loose economic partnership instead.

Since the founding Shanghai Five, the SCO now includes India and Pakistan. Observer status includes Afghanistan, Belarus, Iran and Mongolia. These nations can attend SCO conferences, but their participation is very limited. Dialogue partners include Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey. These nations can participate actively in SCO conferences, and this status is seen as a preliminary to full membership. Egypt and Syria have applied for observer status and Israel, Iraq and Saudi Arabia have applied to be dialog partners. Apart from South East Asian nations, which are dominated by a Chinese diaspora anyway, SCO members and their influence covers almost all of Halford Mackinder’s World Island, with the exception of the European Union.

This is the reality that faces American hegemony; there are twenty-one nations across Asia in a non-American alliance, or on the cusp of joining it. All the other European and Asian nations are within the SCO’s sphere of influence through trade, even if not politically affiliated. It is getting more difficult to define the nations definitely in the US pocket, other than its five-eyes partners (Canada, the UK, Australia and New Zealand). This simple fact places severe limitations on US action against China, and to a lesser extent Russia.

It is an exaggeration to suggest that an attack on one member state is an attack on them all. Their cooperation is fundamentally economic rather than military; except, as stated above, the SCO’s original function remains to eliminate terrorism, separatism and extremism. Indeed, India and Pakistan are at loggerheads over Kashmir, and China and India have border disputes in the Himalayas. But attempts, by, say, the US to prize India away from the SCO is bound to generate wider issues, and perhaps a response, from the other members.

Who do you go with?

Other Nations around the world have a choice. Broadly, it is to go with America, to go with China/Russia, or sit on the fence. We have already concluded that the EU’s economic interests in the wake of Brexit are turning it into being a fence-sitter instead of continuing to be in the US sphere of influence. Naturally, all of sub-Saharan Africa and South America started off fence-sitting until they became increasingly indebted to China. They still have leaders who are happy to take money from either of the two major hegemons — America or the Chinese partnership — but in that game the Chinese are ahead in the field. Their seemingly insatiable demand for commodities and energy and infrastructure building means that local politicians have been bought and will stay bought. But if America offers more money, these nations’ politicians will undoubtedly take it. But that is unlikely to lead to their political allegiance changing from being with China.

This form of American diplomacy was at its height in the fifties and sixties, and the US was able to outgun the Soviets and Chinese in providing “aid”, much of which was trousered by politicians. This was particularly true of the oil money recycled by American banks into loans to South American governments in the late seventies. The Chinese are not so careless with money: when they build a bridge on a Caribbean island, they are firmly hands-on providing money, management and some of the labour and local politicians are only rewarded with electoral kudos.

There are, therefore, fundamental differences between attempts to keep a country within a particular sphere of influence sixty years ago and today. And there can be no doubt that the Chinese are winning the game. Overland, across the China Sea and the Indian Ocean, the silk roads and associated projects are having a substantial impact on emerging nations in a way not seen before. China has advanced Mackinder’s World Island concept by embracing most of Africa into its sphere of influence. As well as the SCO’s control over Asia from Vladivostok to the Mediterranean, as the largest oil consumer China’s influence over the Middle East — which supplies little or no oil to the US — binds nations in that region into the SCO.

The contrast with America’s foreign policy under Trump could not have been greater. America became autarkic, determined to repatriate production from abroad. It lacked a strategy to counter China’s rapidly growing spheres of influence. Even the EU integrated major elements of its economy with China and Russia, and now that the US’s only five-eyes representative in the EU has left it, we can expect this integration to increase more rapidly.

Instead, Trump concentrated on attacking China, its technology and Hong Kong. China faced tariffs, prompting her to respond partly in kind. Meng Wanzhou, finance officer for Huawei, was detained in Vancouver on a US extradition request, on the pretext of payments involving Iran. Her arrest was the start of a US campaign to exclude Huawei from G5 mobile contracts in the west, pressure that eventually led the UK to downgrade Huawei’s contracts. It ended up uniting the five-eyes security partnership against China’s technology on a reds-under-the-bed argument: Chinese technology embedded in western communications systems gives them the ability to spy on us. The UK’s GCHQ changed its position from there being no evidence of embedded spyware in Huawei equipment to it being vulnerable to being used for spying by the Chinese government.

Hong Kong

The build-up of riots against Hong Kong’s proposed extradition treaty with the Mainland started in 2019, supported and driven by anti-Chinese propaganda. America finally emerged as China’s adversary, no longer just a trading partner worried by the trade imbalances. And Hong Kong was the pressure point.

This had happened before, in 2014. The Chinese leadership was certain the riots in Hong Kong at that time reflected the work of American intelligence agencies. The following is an extract translated from a speech by Major-General Qiao Liang, a leading strategist for the Peoples’ Liberation Army, addressing the Chinese Communist Party’s Central Committee in 2015:

“Since the Diaoyu Islands conflict and the Huang-yan Island conflict, incidents have kept popping up around China, including the confrontation over China’s 981 oil rigs with Vietnam and Hong Kong’s “Occupy Central” event. Can they still be viewed as simply accidental?

“I accompanied General Liu Yazhou, the Political Commissar of the National Defence University, to visit Hong Kong in May 2014. At that time, we heard that the “Occupy Central” movement was being planned and could take place by end of the month. However, it didn’t happen in May, June, July, or August.

“What happened? What were they waiting for?

“Let’s look at another timetable: the U.S. Federal Reserve’s exit from the Quantitative Easing (QE) policy. The U.S. said it would stop QE at the beginning of 2014. But it stayed with the QE policy in April, May, June, July, and August. As long as it was in QE, it kept overprinting dollars, and the dollar‘s price couldn’t go up. Thus, Hong Kong’s “Occupy Central” should not happen either.

“At the end of September, the Federal Reserve announced the U.S. would exit from QE. The dollar started going up. Then Hong Kong’s “Occupy Central” broke out in early October.

“Actually, the Diaoyu Islands, Huang-yan Island, the 981 rigs, and Hong Kong’s “Occupy Central” movement were all bombs. The successful explosion of any one of them would lead to a regional crisis or a worsened investment environment around China. That would force the withdrawal of a large amount of investment from this region, which would then return to the U.S.”

That America organised discontent anew in Hong Kong is probably still China’s view today. Clearly, the Chinese believed America covertly managed “Occupy Central” and therefore were at it again. Apart from what their spies told them, the protests were too well organised and planned to be spontaneous. This time, the attack appeared to have a better chance of success. The plan was coordinated with American pressure on Hong Kong’s dollar peg in an attempt to destabilise it, principally through the threat to extend tariffs against China to Hong Kong. This second attempt to collapse Hong Kong was therefore more serious.

Hong Kong is critical, because it is the channel for foreign investment portfolio flows into China. This was important to the Americans, because the US Treasury could not afford to see global portfolio flows attracted into China at a time when they were needed to invest in increasing quantities of US Treasury stock. Understand that, and you will have grasped a large part of the urgency behind America’s attempt to destabilise Hong Kong.

Qiao Liang makes this point elsewhere in his aforementioned speech, claiming American tactics are the consequence of the ending of Bretton Woods:

“Without the restriction of gold, the US can print dollars at will. If they keep a large amount of dollars inside the US, it will certainly create inflation. If they export dollars to the world, the whole world is helping the US deal with its inflation. That’s why inflation is not high in the US.”

While one can take some minor issues with his simplistic analysis, that is not the point. What matters is what the Chinese believe. It was after that second attempt by America to destabilise Hong Kong that the Chinese concluded they must take direct control and abandon the treaty whereby it had been returned by Britain to their jurisdiction.

China makes mistakes too

China’s strategy in dealing with America has generally been to be slow to respond, and never to provoke. This accords with Sun Tzu’s The Art of War on tactical dispositions: “To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.”

Generally, China’s strategy has been to refuse to be provoked. A possible exception has been Hong Kong, where it was decided it was more important to secure the island against further attack, overriding the terms of the treaty with the UK. But its greatest mistake was in imposing trade tariffs in a tit-for-tat response to US tariffs. America was simply isolating itself with its tariff policies, and China’s response gave the Trump administration the excuse to escalate the trade war from trade tariffs into an attack on China’s technology, which was overtaking that of America. That led to Meng Wanzhou, finance officer for Huawei, being detained in Vancouver on a US extradition request, still being fought in the BC’s high court this week.

The Uyghur re-education programme is currently being weaponised against China. Given the Chinese are unlikely to turn what was originally a policy of eliminating Muslim terrorism into a more humane approach, they have little option but to ensure no access is given to journalists and to tough it out. Taiwan is similarly regarded as non-negotiable, and with even the British sending a new carrier to the South China Sea, it could become a flashpoint in the coming months.

Economic factors

Before the pandemic and with America targeting Chinese exports, China’s leadership introduced policies to encourage domestic consumption. For this to work required a drop in the savings rate. In fact, it has been falling since 2010, when according to the World Bank it peaked at 51% of GDP, to just under 44% in 2019. It was the difference between Chinese and American savings rates which was the driving factor behind their mutual trade imbalance.

China recognises that it must move on from an export-driven economic model. But while the American and other welfare-driven economies are running mounting budget deficits, China will continue to have a growing trade surplus. While this will continue to be a problem for the Americans, without imported goods from China product shortages would simply fuel higher prices on top of unprecedented monetary expansion. This is the reality behind the cold war for the next few years. Unfortunately, being highly Keynesian the new Biden administration is unlikely to accept the twin deficits argument and will think that it can still call the shots on trade without cutting its own spending. But Figure 1 above showed US government debt to GDP is already over $28 trillion and on Biden’s infrastructure and greening plans alone will likely rise significantly further by this fiscal year.

The combination of increasing consumer demand while exports to America boom gives China a window of economic expansion only enjoyed by its Asian neighbours. The contrast between China’s prospects can hardly be greater than those for America. The economics alone militate strongly against the US pursuing a geopolitical objective other than quietly backing off.

But senior US personel are still acting as if the Chinese should kowtow to America, as evidenced in the proceedings in Alaska last week. The Chinese were robust and will have calculated their position as strong. Sun Tzu again: “Therefore the clever combatant imposes his will on the enemy but does not allow the enemy’s will to be imposed on him”.

Conclusions

The Biden presidency faces significant challenges in the ongoing cold war and America is unlikely to retain its hegemonic status. During Trump’s presidency, attempts to curtail China’s trade and technological development did not succeed, and has only emboldened both China and Russia to stand firm and as much as possible to do without America and its dollar.

Their senior advisors are, or should be, acutely aware of the debt and inflation traps facing the US and also the EU. Following the Fed’s policies of accelerated monetary expansion announced last March, China increased her purchases of commodities and raw materials, in effect signalling she prefers them to dollar liquidity. As a policy, it is likely to be extended further, given China’s existing stockpile of dollars and dollar-denominated debt. Her dilemma is not just the fragile state of the US economy, but that of the EU which on any dispassionate analysis is a state failing economically and politically as well. China will not want to be blamed for triggering a series of events which will get everyone reaching out for their forgotten copy of Hayek’s The Road to Serfdom.

As events take their course, the risk of a dollar collapse and a matching crisis in the euro, though for different reasons, increases. For Mackinder’s heartland theory to be proved and for the Russian and Chinese partnership to be in control of it, a mega-crisis facing the profligate money-printers must happen. All history and a priori economic theory confirm it will happen. The SCO’s Plan B will be a continuance of Plan A, hatched out of the Shanghai Five Group, making the World Island a self-contained unit not dependent on the peripherals — principally, the five eyes. For money, they must give up western ways with unbacked state currencies. Between them they have enough state-owned declared and undeclared gold to back the yuan, and the rouble. Give these two currencies free convertibility into gold, and they will be accepted everywhere, so their old cold war enemies can trade their way back to prosperity. The US has, or says it has, enough gold to put a failing dollar back on a gold standard, but for it to be credible it must radically cut spending, its geopolitical ambitions, and return its budget into balance. With luck, that is how the new cold war ends.