Posts Tagged ‘European Union’

The petrodollar system is being undermined by exponential growth in technology and shifting geopolitics. What comes next is a paradigm shift…

 

In the summer of 1974, Treasury Secretary William Simon traveled to Saudi Arabia and secretly struck a momentous deal with the kingdom. The U.S. agreed to purchase oil from Saudi Arabia, provide weapons, and in essence guarantee the preservation of Saudi oil wells, the monarchy, and the sovereignty of the kingdom. In return, the kingdom agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, basically financing America’s future federal expenditures.

Soon, other members of the Organization of Petroleum Exporting Countries followed suit, and the U.S. dollar became the standard by which oil was to be traded internationally. For Saudi Arabia, the deal made perfect sense, not only by protecting the regime but also by providing a safe, liquid market in which to invest its enormous oil-sale proceeds, known as petrodollars. The U.S. benefited, as well, by neutralizing oil as an economic weapon. The agreement enabled the U.S. to print dollars with little adverse effect on interest rates, thereby facilitating consistent U.S. economic growth over the subsequent decades.

An important consequence was that oil-importing nations would be required to hold large amounts of U.S. dollars in reserve in order to purchase oil, underpinning dollar demand. This essentially guaranteed a strong dollar and low U.S. interest rates for a generation.

[ZH: Still, the underlying concept of how Petrodollar recycling, or as some call it, petrocurrency mercantilism works, leaves some confusion. So in order to alleviate that, here courtesy of Cult State, is a quick and simple primer that should hopefully answer all questions. From CultState:

So what is petrocurrency mercantilism?

It’s when a national bank and an energy producer collude to generate artificial demand for a currency at the expense of the purchasing power of other currencies.

The flowchart below shows how it all works.

Given this backdrop, one can better understand many subsequent U.S. foreign-policy moves involving the Middle East and other oil-producing regions.

Recent developments in technology and geopolitics, however, have already ignited a process to bring an end to the financial system predicated on petrodollars, which will have a profound impact on global financial markets. The 40-year equilibrium of this system is being dismantled by the exponential growth of technology, which will have a bearish impact on both supply and demand of petroleum. Moreover, the system no longer is in the best interest of key participants in the global oil trade. These developments have begun to exert influence on financial markets and will only grow over time. The upheaval of the petrodollar recycling system will trigger a resurgence of volatility and new price trends, which will lead to a renaissance in macro investing.

Let’s examine these developments in more detail.

First, TECHNOLOGY is affecting the energy markets dramatically, and this impact is growing exponentially. The pattern-seeking human mind is built for an observable linear universe, but has cognitive difficulty recognizing and understanding the impact of exponential growth.

Paralleling Moore’s Law, the current growth rate of new technologies roughly doubles every two years. In the transportation sector, the global penetration rate of electric vehicles, or EVs, was 1% at the end of 2016 and is now probably about 1.5%. However, a doubling every two years of this level of usage should lead to an automobile market that primarily consists of EVs in approximately 12 years, reducing gasoline demand and international oil revenue to a degree that today would seem unfathomable to the linear-thinking mind. Yes, the world is changing—rapidly.

Alternative energy sources (solar power, wind, and such) also are well into their exponential growth curves, and are even ahead of EVs in this regard. Based on growth curves of other recent technologies, and due to similar growth rates in battery technology and pricing, it is likely that solar power will supplant petroleum in a vast portion of nontransportation sectors in about a decade. Albert Einstein is rumored to have described compound interest (another form of exponential growth) as the most powerful force in the universe. This is real change.

The growth of U.S. oil production due to new technologies such as hydraulic fracturing and horizontal drilling has both reduced the U.S. need for foreign sources of oil and led to lower global oil prices. With the U.S. economy more self-reliant for its oil consumption, reduced purchases of foreign oil have led to a drop in the revenues of oil-producing nations and by extension, lower international demand for Treasuries and U.S. dollars.

China has agreed with Russia to purchase Russian oil and natural gas in yuan.
◦As an example of China’s newfound power to influence oil exporters, China has persuaded Angola (the world’s second-largest oil exporter to China) to accept the yuan as legal tender, evidence of efforts made by Beijing to speed up internationalization of the yuan. The incredible growth rates of the Chinese economy and its thirst for oil have endowed it with tremendous negotiating strength that has led, and will lead, other countries to cater to China’s needs at the expense of their historical client, the U.S.
◦China is set to launch an oil exchange by the end of the year that is to be settled in yuan. Note that in conjunction with the existing Shanghai Gold Exchange, also denominated in yuan, any country will now be able to trade and hedge oil, circumventing U.S. dollar transactions, with the flexibility to take payment in yuan or gold, or exchange gold into any global currency.
◦As China further forges relationships through its One Belt, One Road initiative, it will surely pull other exporters into its orbit to secure a reliable flow of supplies from multiple sources, while pressuring the terms of the trade to exclude the U.S. dollar.

The world’s second-largest oil exporter, Russia, is currently under sanctions imposed by the U.S. and European Union, and has made clear moves toward circumventing the dollar in oil and international trade. In addition to agreeing to sell oil and natural gas to China in exchange for yuan, Russia recently announced that all financial transactions conducted in Russian seaports will now be made in rubles, replacing dollars, according to Russian state news outlet RT. Clearly, there is a concerted effort from the East to reset the economic world order.

ALL OF THESE DEVELOPMENTS leave global financial markets vulnerable to a paradigm shift that has recently begun. In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

A current generational low in volatility across a wide spectrum of asset classes is another indicator that the market doesn’t see a paradigm shift coming. This suggests that current volatility is expressing a full discounting of stale fundamental inputs and not adequately pricing in the potential of likely disruptive events.

THE FEDERAL RESERVE is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.

I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.

The opportunity is reminiscent of the story told by Stanley Druckenmiller, who was promoted early in his investment career to head equity research at a time when his co-workers had vastly more experience than he did. His director of investments informed him that his promotion owed to the same reason they send 18-year-olds to war; they are too dumb to know not to charge. The “winners” under the paradigm now unfolding will be market participants able to disregard stale, anomalous concepts, and charge.

RELATEDLY, THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.

Ironically, many market players who wrongly anticipated a turn in recent years to a more positive environment for macro and trend-following are throwing in the towel. The key difference is that now there is a clear catalyst to trigger the start of the pendulum swinging back to a fertile macro/trend-following trading environment.

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.

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Confirming, and sending the clearest sign of his previously discussed pivot toward Russia and away from NATO and the West, on Tuesday President Recep Tayyip Erdogan announced that Turkey had signed a deal to purchase a Russian surface-to-air missile system, and paid the first installment. The deal cements Turkey’s recent rapprochement with Russia, despite differences over the war in Syria, the downing of a Russian fighter jet over Turkey in late 2015 and the assassination of a Russian ambassador earlier this year, and comes as Turkey’s ties with the United States and European Union have become strained to the point of breaking.

Although the missile purchase from Russia was made public several months ago, Erdogan’s announcement was the first confirmation that Turkey had transferred money to pay for the S-400 missile system.

“Signatures have been made for the purchase of S-400s from Russia,” Erdogan said in comments published in several newspapers on Tuesday. “A deposit has also been paid as far as I know.”

As the NYT writes, “the purchase of the missile system flies in the face of cooperation within the NATO alliance, which Turkey has belonged to since the early 1950s. NATO does not ban purchases of military hardware from manufacturers outside the American-led alliance, but it does discourage members from buying equipment not compatible with that used by other members.”

According to reports in the Russian media, Turkey is to get four batteries of S-400 launchers complete with targeting radar and control posts. Some aspects of the deal are reportedly to be finalized, but Russian officials said the contract furthers Russia’s geostrategic interests.

* * *

Predictably, the Pentagon promptly reiterated its concerns over the deal, which it said undermines inter-operability of weapons systems among NATO allies. “We have relayed our concerns to Turkish officials regarding the potential purchase of the S-400. A NATO inter-operable missile defense system remains the best option to defend Turkey from the full range of threats in its region,” spokesman Johnny Michael said in a statement.

A NATO official in Brussels where the alliance is headquartered, said that no NATO member currently operates the Russian missile system and that the alliance had not been informed about the details of the purchase by Turkey. “What matters for NATO is that the equipment allies acquire is able to operate together,” the official said, speaking on the condition of anonymity as required by alliance procedures. “Interoperability of allied armed forces is essential to NATO for the conduct of our operations.”

However, on Wednesday Turkish President Recep Tayyip Erdogan slammed the critics of Turkey’s deal with Russia, saying Ankara had no intention of waiting for the protection of its NATO allies.

“They have gone crazy because we made a deal for S-400s,” Erdogan said Wednesday in a speech to the ruling AKP mayors in Ankara, as cited by Hurriyet.

“What do you expect? Should we wait for you? We take care of ourselves in every security point. We are taking precautions and we will continue to do so,” the Turkish leader said.

Erdogan criticized the reluctance of US and Israel to authorize supply of combat drones to Turkey as another example of how Turkish security was sidelined by its allies.

“When they did give [drones], their repair and maintenance put us in a difficult position. Now [Turkey] has come to a point where it can produce its own unmanned, armed air vehicles. And now they are uncomfortable with that,” Erdogan added.

Erdogan also dismissed issues of interoperability, brand loyalties or the geopolitical optics of such a sale. “Nobody has the right to discuss the Turkish republic’s independence principles

or independent decisions about its defense industry,” the daily newspaper Hurriyet reported him as saying.

“We make the decisions about our own independence ourselves,” he said. “We are obliged to take safety and security measures in order to defend our country.”

As the NYT adds, Erdogan’s announcement — made to Turkish journalists aboard his presidential jet as he returned from Kazakhstan — appeared timed as a response to two judicial cases announced last week in the United States. One is against his presidential bodyguards, who are charged with assaulting protesters when Mr. Erdogan visited Washington this year. The other is against a group of Turks, including a former minister, accused of breaking United States sanctions against Iran. Erdogan has angrily criticized both cases.

* * *

The S-400 SAM is designed to detect, track and then destroy aircraft, drones or missiles. It’s Russia’s most advanced integrated air defense system, and can hit targets as far as 250 miles away. Russia has also agreed to sell them to China and India, both nations who are masters at reverse engineering. Most concerning for NATO, however is that the systems delivered to Turkey would not have a friend-or-foe identification system, which means they could be deployed against any threat without restriction.

Turkey has been weighing options for acquiring long-range SAMs for years. In 2013, Ankara surprised other NATO members by announcing that it was going to purchase the FD-2000 system from China, sparking criticism from Washington. Defense observers speculated that Turkey played the China card to put pressure on its allies and get better terms for buying a NATO-compatible SAM system, such as the US-made Patriot PAC-3. The Chinese deal stalled and was eventually scrapped, with Turkey reportedly unhappy over Beijing’s reluctance to hand over the technology behind the advanced system. Last year Ankara announced that it was in talks with Russia over a potential purchase of the S-400.

Turkey has other reasons for the missile purchase. It needs to cultivate good relations with Russia, and it also needs to build its own military defense, said Asli Aydintasbas, a fellow at the European Council on Foreign Relations. “Turkey wants the deal,” she said, “and Russia is only too happy to drive a wedge into the NATO alliance.”

While NATO’s collective defense should have been sufficient for Turkey – NATO deployed Patriot missiles there during a rise of tensions with Syria in the past – Erdogan lost trust in the West since last year’s failed “coup attempt”, which he slammed repeatedly as a Western plot to oust him, and appears determined to secure his own defense.

Furthermore, the transfer of technology from Russia is attractive to Turkey: Erdogan has spoken also of his frustration at having requests to the United States for drones turned down, and of his satisfaction that Turkey developed its own.

Notably, Erdogan’s announcement of the deal with Russia came after Germany said that it was suspending all major arms exports to Turkey because of the deteriorating human rights situation in the country and the increasingly strained ties. “We have put on hold all big requests that Turkey sent to us, and these are really not a few,” the German foreign minister, Sigmar Gabriel, said during a panel discussion in Berlin on Monday, according to Reuters.

While the purchase of Russian missiles will take cooperation between the two nations to a new level, but is not the first time that Turkey has bought military equipment from Russia. It turned to Moscow in the early 1990s to buy military helicopters and armored personnel carriers. Last year, Russia and Turkey reached an agreement to revive a suspended natural-gas pipeline project.

Meanwhile, as the US military-industrial complex has flourished in recent months following a spike in deals with Saudi Arabia, South Korea and other nations courtesy of rising geopolitical tensions, Russia has remained largely squeezed out of the arms market in Western and Eastern Europe, even in countries that once bought nearly all their weapons from the Soviet Union, has looked for years to NATO’S eastern flank as a promising market and the alliance’s weakest link. It has also sold weapons to Greece, another NATO member and to Cyprus, which is not a member of NATO but houses British military bases and effectively serves as an outpost of the alliance.

Meanwhile, as Turkey’s suspicions toward the West have grown, relations with Russia warmed, driven by the personal relationship between Erdogan and Vladimir Putin. Erdogan has expressed personal admiration for Putin, to the consternation of many European and American leaders, if not President Trump. Erdogan has also shown a preference for the Russian model, with its sense of restoring a lost empire, returning Turkey to a more independent place in the world and rejecting Western democracy.

At the same time, the fact that Turkey belongs to NATO has only increased Mr. Putin’s desire to forge strong relations with Mr. Erdogan despite their differences over the conflict in Syria.

Mr. Putin and myself are determined on this issue,” Erdogan told journalists about the missile deal.

The war in Syria is significant in two ways. First, the outcome can reshape the Arab Middle East. Second, and perhaps more important, Syria is not simply about Syrians. The US, Russian, Iranian, Turkish, and French forces are engaged there along with the Islamic State (IS), al-Qaida, and secular Arabs. The Saudis and the rest of the Arab monarchies also exert political and economic influence on Syria.

I have written in the past about how the growing crises in Eurasia are increasingly interacting. Syria is the place where that interaction is the greatest and most violent.

Prior to World War II, there was a civil war in Spain. Nazi Germany and fascist Italy sent troops. The Soviet Union did as well. In addition, leftists from around the world flocked there to fight. The French and British refused to get involved, trying not to be drawn in. The Spanish Civil War was said to be a rehearsal for World War II. The major players of the European war were there—though some weren’t. New weapons were tried out. The civil war ended in April 1939, five months before Germany invaded Poland, which began World War II.

Syria is drawing in major global and regional powers. When, for example, the US and Russia are engaged in a country – with very different goals and supporting hostile factions – it is certainly not something to dismiss out of hand. On the contrary, Syria matters a great deal. If nothing else, it has become a test of the strength of powers with interests far beyond Syria.

The Origins of the Syrian Conflict

There is a class of conflicts whose importance to us diminishes over time. These conflicts involve intense slaughter and suffering and generate endless conferences, meetings, and wringing of hands by global statesman. But these wars seem never-ending. Their origins are lost in the mists of time, the situations on the battlefield are hard to grasp, and they appear to have little consequence to the rest of the world. The relief workers do a heroic job and try to shame us into caring and giving, but in the end, each conflict seems to be just another war in a faraway place having little to do with our own lives.

But Syria is far more than that.

The current regime was founded by Hafez al-Assad, an air force general, in a military coup. He was an Alawite, part of the Shiite sect of Islam. He was also a secularist. Gamal Abdel Nasser, an Egyptian military officer, had staged a coup in Egypt in 1952 and wanted to create a state based on three principles: secularism, socialism, and Pan-Arabism. His vision was the creation not of a caliphate, but of a secular, socialist, unified Arab world, based on military rule. Many regimes were patterned on this, including Assad’s regime in Syria.

But ideology aside, Assad represented the Alawite faction, and what he created was a state built around his faction. Other factions were excluded, oppressed, and not infrequently, killed. However, Alawites are only around 12% of the Syrian population, which was why he relied heavily on the minorities (Christians, mainstream Shiites, Ismailis, Kurds, and Druze) that together constitute 40% of the population. More important, he also relied on many Sunnis. Even today, the regime is alive because a lot of Sunnis have not rebelled against the state. Nevertheless, Assad kept Syria from fragmenting by suppressing any challenge to him. After he died, his son, Bashar al-Assad, kept running the family business.

The Arab Spring in 2011 generated a challenge to his regime. The problem was that the opposition was deeply split. They spent as much time fighting each other as they spent fighting Assad. Democracy had little to do with it. The Alawite-Sunni split had a great deal to do with it. But the Assad regime had a lot of support.

One of the misunderstandings of US foreign policy has been that tyrants rule only through the threat of violence. That is true, but in order to have a credible threat of violence, you have to have people who are prepared to carry that violence out. And they need to be loyal to you, or they may turn the violence against you. Tyrants do not live alone in isolated palaces. If they did, they wouldn’t live very long.

The Alawites had done extremely well under the Assads. They dominated the military, trade, smuggling, and internal business. They were hated by many Sunnis, especially the more religiously inclined. The Alawites knew that if Assad fell, their position would collapse, and they would become the target. They, therefore, had to resist the uprising, and since they controlled the military, they believed they would not be defeated. Assad was not going to be overthrown by a wildly fragmented and poorly armed and trained opposition.

Enter the Americans

The Assads had been a problem for the United States in many ways. They sent weapons and supplies into Iraq during the US occupation from 2003 to 2011. They helped destabilize Lebanon. They fought multiple wars with Israel. And above all, they were closely aligned with the Iranians, fellow Shiites. Hezbollah in Lebanon, also an ally of Iran and Syria, represented a terrorist threat for the US (even in 2011 when the Sunnis were the main enemy). When the Syrian war began, the US saw a chance to crack Assad, dramatically reduce Iranian influence in the region, and break Hezbollah.

The problem was that the US didn’t want to get directly involved in the war, at least not excessively. Since most Sunni groups were jihadist, the US had to find groups that were anti-jihadist, anti-Iranian, and anti-Assad… and that were motivated to fight. The US was looking for secularists not aligned with Assad. It was, to say the least, difficult to find such a group. It was also hard to be certain that they would stay that kind of group, and that they wouldn’t sell the weapons they were given. Still, the US felt it had enough to gain to keep trying.

At this point, IS emerged, seizing control of parts of Iraq and Syria. This put the US in a fix. If it brought Assad down, IS might extend its power. If it attacked IS, it would give Assad breathing room and alienate some of the opposition (some of which wanted an all-out attack on Assad while others didn’t want IS hindered). The US found itself “Waist Deep in the Big Muddy,” as the song about the Vietnam War went, and it had yet to create an effective opposition to Assad anyway.

More Global Powers Get Involved

Then, the Russians became involved militarily. Russian intelligence had been close to the Assads since they took over in Syria. Russia did not want him to fall. But it had far greater problems than Assad. First, it suffered a strategic setback in a crucial buffer state, Ukraine, when a pro-Russian government was replaced by a pro-Western one. Attempts to foment an uprising in the east failed, and all Russia could claim was control over Crimea, where by treaty it had already based major force.

Second, the collapse of oil prices had a massive impact on the economy that was going to pyramid. At the very least, President Vladimir Putin needed to demonstrate that, barring Ukraine, Russia was a major power.

The military importance of his decision to deploy a relatively small number of aircraft and special forces in Syria was massively inflated by the Russians, who wanted to appear stronger than they were, and by the Americans, who wanted to make Russia out as an aggressor. Both approaches helped cement Russia’s role. Then, having deployed aircraft and troops, Russia confronted the same problem as the Americans. The Russians could not reshape the Syrian landscape, especially with US resistance.

The US, Russia, and Iran were all active in Syria and unable to end the conflict. That left the Turks. The Turks hated the Assad regime, and when the Russians first intervened, the Turks shot down a Russian plane, causing a serious confrontation. Then, there was an attempted coup in Turkey, and the Turks turned against the Americans (who they partly blamed for the failed coup) and got closer to the Russians. Realizing that the Russians were inflexible on Assad, the Turks shifted back toward the Americans and were prepared to fight IS, but only if the US understood that the Turks had a simultaneous war underway with the Kurds.

Syria did not simply draw players in. It sent huge numbers of migrants to Europe as well. This triggered a huge crisis in the European Union, dividing countries that wanted to block migration from those that would encourage it. This compounded already existing tensions in Europe over the economy. It is reasonable to say that Syrian migrants shaped the Brexit vote, encouraged the rise of radical nationalist groups throughout Europe, and redefined the underlying issues.

The Paris terrorist attacks had another effect. The French sent an aircraft carrier to carry out airstrikes in Syria in cooperation with the United States. The Syrian migrants and the inability of European forces to block them, or to take effective unilateral action against IS after the attacks on Paris and other cities, generated not only greater military involvement in Syria, but long-term planning to manage the fallout from the conflict.

Syria as a Testing Ground

Syria is a battleground in which the United States, Russia, Turkey, and Iran are increasingly involved. Watching barely on the sidelines are the Israelis and the Saudis, while Lebanon is constantly uncertain. Iraq is heavily influenced by what is happening in Syria, while the Kurds, facing IS in Iraq, are now facing Turkish forces in Turkey and Syria. And the Europeans are coping with a wave of terrorism and contemplating rearmament. All of this is driven by Syria, a country that seems gridlocked in a permanent and insoluble war. But it is a country that has brought together friends, enemies, and contenders for power in a small place. It reminds me of nothing as much as Spain in the 1930s.

For the first time since the 1940s, all of Eurasia is unstable. Syria is not the pivot of this instability, but it is the showcase. Most major powers are there or nearby, except the Chinese.

My eyes glaze over when I hear about Syria, yet they shouldn’t. I have to force myself to see the increasing importance of this test war.

The signs are ominous, the rhetoric constant. Whichever way you look at it, the world is slowly descending into an ever greater spiral of conflict. We all know that the current wars raging in the Middle East have the potential to go catastrophically wrong and pull the super-powers into something much bigger.

You also know things are not good when the so-called ‘conspiracy theories’ from alternative media outlets eventually goes mainstream, and there’s no shortage:

To confirm the state of the world today, the Global Peace Index states, and I quote – “There are now only ten countries in the world that are free from conflict”. 

The Independent has a 40 second video (HERE) of these ten countries, it’s worth watching, you’ll be surprised…

 

Some believe World War III has already started, most dispute that. It takes no more than a spark to light the fire and currently there are a lot of sparks flying around. Even political instability in the European Union as a result of a refugee crisis is a cause for concern. Pew Research, published just last month, confirmed that European’s fear a wave of refugees will mean more terrorism and fewer jobs. Violent protests have broken out, politician’s are worried. The VP of the International Relations Committee at Hungary’s parliament, Jobbik Member Marton Gyongyosi was supported by other EU leaders when he has suggested that “physical protection of our borders” is required. He went further –

 “The US caused this (refugee) problem in the neighborhood of Europe and then leans back criticizing European countries for not dealing with the problem efficiently.”

In that context, a few EU leaders are calling for an EU wide army and its own intelligence service. It seems America and therefore NATO are not as trusted as they once were. The US/EU trade deal TTIP, the largest deal in the history of humanity, is reported as being over. Is this evidence of the widening gap of disagreement, maybe.

The outcome is a changing political landscape. Before the European Union was created by the Maastricht Treaty on November 1st 1993 there were just 25 nationalist political parties. Since the birth of the formalised EU there has been a 150 per cent rise in political parties on the extremes of the political spectrum, now totalling 64. One of them was Ukip that focused on immigration and subsequently produced the ‘Brexit’ protest vote that now threatens to tear the EU project apart.

North Korea is a wild card scenario – anything could happen, but if South Korea was attacked, America would have no option but to step in. And what would China do – it’s anyone’s guess.

John Pilger's interview on Going Underground spells out the increasing risk of a global conflicthttps://www.youtube.com/watch?v=ahEdcuxlN1o

John Pilger’s interview on Going Underground spells out the increasing risk of a global conflict

Tension has substantially risen around the world over USA and Russia/China relations, the South China Sea, Ukraine and Crimea, multiple Mid-East conflicts, north Africa and South America. One should not forget currency wars, economic and political sanctions adding to the global strain. John Pilger’s interview on the Threat of World War Three leaves the viewer in no doubt as to where he lays blame, and if anyone knows about war, he should, he’s covered most of them since Vietnam.

Even basic resources are a cause for concern. Natural water for one, food scarcity, food security and environmental disasters all add to a backdrop where global terrorism is massively on the rise, global debt is now a third bigger than prior to 2007, mass protests due to political instability, such as South America (Brazil being a new hotspot) all adding to increasing tension.

The geo-political situation is now characterised by ever-increasing militarism across the world, bringing the prospect of another world war closer than at any time since 1939.

Scrutinising the underlying issues and causes for the devastating outbreak of World War I in 1914 which ended up killing 17 million, Leon Trotsky laid bare the startling similarities between the crisis of the world economy at the time and the turn to militarism. Historical records display a relevance for today that should serve as an advance warning of the horrors that extreme neoliberalism and globalisation offers up if we do not make efforts to pull back from the brink.

From WSWS  in an article entitled “Capitalist breakdown and the drive to war,” comparisons are made between the extreme economic conditions just prior to the first world war and today.

“The years leading up to the outbreak of World War I, like the period prior to 2008, were marked by stormy economic growth. But by 1913–14, the limits to that growth had been reached and the world economy experienced a fundamental shift. From the middle of the 1890s, Trotsky explained, the basic curve of capitalist development climbed steeply upwards. But this very upswing created the conditions for a breakdown. “In 1914,” Trotsky wrote, “a crisis broke out which marked not merely a periodic oscillation, but the beginning of an epoch of prolonged economic stagnation. The imperialist war was an attempt to break out of the impasse.” Further economic development at the pace of the previous period was “extremely difficult,” as the bourgeoisie “flinched against the limits of the market.” “This created class tensions, made worse by politics, and this led it to war in August 1914.”

Corrupt bankers represent a threat not only to those they directly rip off but also potentially the entire global financial system, the Governor of the Bank of England has warned.

Corrupt bankers represent a threat not only to those they directly rip off but also potentially the entire global financial system, the Governor of the Bank of England has warned.

The parallels are striking, particularly as the financial crisis forced upon us in 2007/8 by an out of control banking system, that benefited a tiny elite, caused wave after wave of economic turbulence, austerity and the dismantling of the social democratic movement that itself was born from the wreckage of World War Two. Peoples across the world are getting angry as inequality worsens.

Mark Carney has written a very strongly worded letter, in his capacity as chair of the Financial Stability Board (FSB) to a global forum of national regulators, financial ministries and central banks – to the G20, which is currently meeting in China.

“The incidence of financial sector misconduct has risen to a level that has the potential to create systemic risks” he says. The message is quite clear. Carney believes there is another systemic crisis centred around financial markets. Even he believes and openly stated that corrupt bankers now represent a threat not only to those they directly rip off but also to the entire global financial system. Last year, just four of Britain’s banks were fined well over £50billion ($67bn) for their egregious acts of criminality. Prison beckoned for no-one, whilst poverty soared. Don’t forget the London riots. Spreading like wildfire, the resulting chaos generated looting, arson, and mass deployment of police and resulted in the death of five people. In just three days, a dozens towns and cities were no-go areas of violence, 3,443 crimes reported, over a thousand arrests – from an unrelated spark.

According to Jim Rickards, the CIA’s Asymmetric Warfare Advisor, the probability of a new global conflict is rising every day. In a startling interview from last year he reveals that all 16 U.S. Intelligence Agencies have begun to prepare for World War III. Richards is predicting the fall of the dollar with the result of “an extended period of global anarchy”.

In the meantime, Russia is preparing to be attacked by NATO and America. Global Research reports that “Colonel General Leonid Ivashov, President of the International Centre of Geopolitical Analysis explained in an interview to KP, that ‘if data on Russia-NATO power balance at the Western direction is analyzed, as well as military activity build-up rate at our borders, scale of combat equipment deployment, if the grade of Russia’s demonization is estimated, one can say that preparation to a real war is taking place, as such acts are usually undertaken at the forefront of a war.’

Russia, so threatened by the West, it is now building huge nuclear bunkers around Moscow to protect itself at a time when financial resources are at best ‘stretched’.

As TIME reports “The South China Sea has instantly become uncharted waters for the globe’s two most-powerful nations. The ruling from the Netherlands, while legally binding, has no mechanism for enforcement. That means negotiations will be required to ease the growing territorial tensions in and around the South China Sea. If talks don’t happen, or go nowhere—and China continues to refuse to back down—a military clash could occur.”

Dr.Paul Craig Roberts quite firmly believes a Third World War is currently being fought. How long before it moves into its hot stage he asks.

 “Washington is currently conducting economic and propaganda warfare against four members of the five bloc group of countries known as BRICS—Brazil, Russia, India, China, and South Africa. Brazil and South Africa are being destabilized with fabricated political scandals. Both countries are rife with Washington-financed politicians and Non-Governmental Organizations (NGOs). Washington concocts a scandal, sends its political agents into action demanding action against the government and its NGOs into the streets in protests.”

We have already seen what the New World Order has done with Islam. As Pope Francis says, they have used it to foment a crisis, a clash of civilisations

“We have already seen what the New World Order has done with Islam” As Pope Francis says, “they have used it to foment a crisis, a clash of civilisations”

Even The Pope believes the start of World War Three is underway – ““To be clear, when I speak about war, I speak about real war. Not a war of religion. There is a war of interests. There is a war for money. There is a war for natural resources. There is a war for domination of peoples” Pope Francis said, alluding to globalisation and the goals of the so-called New World Order of complete and total control over every human being on the planet.

Already, the world has more displaced people than at any time during the course of either World War One or Two. The fight for resources as a direct result of globalism now threatens peace on every continent in the world.

The Doomsday Clock is an internationally recognised design that conveys how close we are to destroying our civilisation with dangerous technologies of our own making, nuclear weaponry by far our most dangerous experiment, makes the clock tick each year. It puts the current time of war at 23.57 – just 120 seconds left.

The current position of the Doomsday Clock is the closest it has been since 1984 and is actually a few clicks closer to reaching a global extinction event for humans than in 1962 when the Cuban missile crisis had twitchy American and Russian fingers on red buttons. What a cataclysmic ending for humanity, bombed back into the stone age. For what?

Roughly at the same time as China’s infamous snub of Obama‘s arrival at Hangzhou for the G-20 summit, when the G-20 host nation’s delegation first made sure there was no staircase for Obama to exit the plane and descend on the red carpet; forcing the president of the world’s most powerful nation to use an emergency exit…

… followed by a shouting match by a Chinese official who unleashed on the US Press corps and national security advisor Susan Rice, blocking them from crossing a blue rope holding back press and saying “This is our country. This is our airport”, Chinese officials had no such problems greeting Russian president Vladimir Putin with full honors, whose arrival – on the red carpet – took place without a glitch.

 The favor was returned: according to RT, Putin brought a box of Russian ice-cream as a gift to Chinese leader Xi Jinping:  “I promised you I’d bring some ice-cream,” Putin said. “I’ve brought for you a box of it as a gift.” Xi Jinping is a real fan of Russian ice-cream. “Thank you very much for the gift, for the tasty ice-cream. In my every trip to Russia I always ask to buy Russian ice-cream. And then, at home, we eat it,” the Chinese leader said.

“You have the best cream, and it makes it so tasty. I like it very much. Thank you for this courtesy,” he added.

* * *

Having brought no ice cream of his own, and his embarrassing arrival in China making front page news over the weekend, Obama quickly tried to talk down the embarrassing incident, saying the tensions were the result of different approaches to the media, as well as the sheer scale of the US operation when he travels, according to AFP. Obama pivoted away from the snub, instead accusing China of once again showing little respect for human rights: “Washington stands up for press freedom and human rights and – whatever the fallout – does not leave our values and ideals behind when we take these trips” he said.

“It can cause some friction. The seams are showing a little more than usual in terms of some of the negotiations and jostling that takes place behind the scenes,” Obama told reporters on Sunday.

The justification continued: “Part of it is we also have a much bigger footprint than a lot of other countries. And we’ve got a lot of planes, a lot of helicopters, a lot of cars, a lot of guys. You know, if you’re a host country, sometimes it may feel a little bit much.

Obama said it was not the first time Washington’s differences with Beijing had erupted during a visit, and that clashing values were also on display in his discussions with Xi.

Obama concluded by expressing hope the world would quickly move on and forget China’s snub of Obama on his last official visit to the country: “And so I wouldn’t over-crank the significance of it,” he said.

“None of this detracts from the broader scope of the relationship (with China),” he told a news conference. “The bilateral discussions that we had yesterday were extremely productive and continue to point to big areas of cooperation.”

* * *

Obama’s “explanation” aside, China took the initiative to continue piling its critisim of the US, when Chinese President Xi Jinping said at the open of a two-day G-20 summit that the global economy is being threatened by rising protectionism and risks from highly leveraged financial markets. He was referring to recent US trade war escalations, and Washington’s recent response to Chinese dumping with duties on cold-rolled steel as high as 522%. As for highly leveraged financial markets, pretty much anyone could be at fault there.

His warning on Sunday followed bilateral talks with Barack Obama that the U.S. president described as “extremely productive”, but which failed to bring both sides closer on thornier topics such as tensions in the South China Sea.

In addition to the previously leaked communique details, which as reorted last night will call for more fiscal and monetary stimulus, observers expect G20 leaders to mount a defense of free trade and globalization and warn against isolationism, eyeing Britain’s vote in June to exit the
European Union and before the U.S. presidential election in November. The global economy has arrived “at a crucial juncture”, Xi said, in the face of sluggish demand, volatile financial markets and feeble trade and investment.

“Growth drivers from the previous round of technological progress are gradually fading, while a new round of technological and industrial revolution has yet to gain momentum,” he said.

Xi also called on G20 countries to match their words with actions. “We should turn the G20 group into an action team, instead of a talk shop,” he said. Considering that the G-20 has been equated with the UN in terms of efficiency, we hope Xi isn’t holding his breath.

* * *

Meanwhile, some of the G20 leaders have begun drawing battle lines in disputes over issues ranging from trade and investment to tax policy and industrial overcapacity, suggesting there was far less smiling by world leaders going on behind the scenes.

According to Reuters, Xi held talks with Australian Prime Minister Malcolm Turnbull and told him he hoped Australia would continue to provide a fair, transparent and predictable policy environment for foreign investors. China was angered when Australia blocked the A$10 billion ($7.7 billion) sale of the country’s biggest energy grid to Chinese bidders last month.

China has accused Australia of bowing to protectionist sentiment in blocking the bid for Ausgrid, as well as an earlier one by a China-led consortium to buy cattle company Kidman & Co. Beijing has also criticized Australia, a staunch U.S. ally, for running surveillance flights over disputed islands in the South China Sea.

Meanwhile, European Commission President Jean-Claude Juncker shot back at China saying the G-20 host nation must set up a mechanism to address its problem of industrial overcapacity, adding it was “unacceptable” the European steel industry had lost so many jobs in recent years. “Overcapacity is a global problem but there is a particular Chinese element,” he told a news conference.

* * *

Britain’s future after its departure from the European Union was also subject to discussion. Obama reassured Prime Minister May that Britain’s closest political, commercial and military ally would stand by her, tentatively backing off his infamous line that Brexit would leave the UK “in the back of the queue.”  However, Obama did not shrink away from his stance that Brexit was a mistake and that London would not be able to jump the queue to arrange a bilateral trade deal.

Juncker said that if Britain wanted access to the European Union’s common market, it needed to respect the rules of the common market. Turnbull, meanwhile, said Australia wanted an early free trade agreement with Britain so markets could remain open between them when Britain formally left the European trading bloc.

* * *

Snubbed or not, Obama held talks with Xi on Saturday that ran late into the night focusing mostly on the recent geopolitical tensions surrounding the disputed islands. He urged Beijing to uphold its legal obligations in the disputed waters of the South China Sea, and stressed U.S. commitments to its regional allies. Xi responded by saying China would continue to safeguard its sovereignty and maritime rights in the South China Sea. But China is keen to keep the summit focused on economic issues and to prevent other disputes from overshadowing it.

According to a “fact sheet” on China-U.S. relations issued on Sunday, the two sides agreed on a range of issues, including avoiding competitive currency devaluations and not limiting deal opportunities for foreign information and communication technology providers.

Obama, in the last five months of his presidency, is using the visit to put a final stamp on his signature policy shift toward the Pacific, setting the tone for his White House successor, who will be elected in November and take office on Jan. 20. Judging by this weekend’s incidents, Chinese opinion of the highest US political institutions has never been lower.

Perhaps just as bizarre as the now infamous Obama snub, however, was China’s decision to convert parts of the city of Hangzhou, with its 9 million people, into a virtual ghost town as China sought to ensure that the G20 summit stays incident-free.

Amid renewed relations between Moscow and Berlin, German Chancellor Angela Merkel has indicated a willingness to remove existing anti-Russia sanctions.
While a number of Western officials are beginning to soften their stance on the sanctions against Moscow, hold-outs remain. As recently as August 19, Merkel was among the rank-and-file who argued in favor of continuing the roadblocks to global economic and cultural cooperation.
But on Monday, the German Chancellor appeared to reverse her position, saying she has “the very greatest interest in stopping sanctions.”
“As soon as we progress in the Minsk agreements, we will loosen the sanctions,” she told reporters, according to the International Business Times.
Currently serving her third term, Merkel has not made an official announcement on whether she intends to run for a fourth. Many German citizens are opposed to her remaining in power beyond 2017. Recent polling suggests that half of the population is against an ongoing Merkel administration.
Part of Merkel’s lack of popularity can be attributed to the migrant crisis, but her hardline stance against Russia has also played a role.
© Sputnik/ Georgiy ZimarevWest’s Most Serious Mistakes in Its Relationship With Russia “Merkel is a supporter of the idea that it is Germany’s natural role to become the leader of Eastern Europe (especially of Poland and the Baltic states, and Ukraine), and to drive the economic development of these countries,” said Alexei Fenenko, a senior researcher with the Russian Academy of Sciences’ Institute of International Security Studies.
Since the political elites in these countries are typically anti-Russian, Merkel “is turning Germany into the leader of an anti-Russian bloc.”
A policy reversal could be an indication that the German leader has recognized the political and economic benefits of mending ties with Russia.
“Germany has always been important to Russia as a kind of bridge – a point of contact between Russia, the US and the rest of the West. If we completely lose Germany – we will lose an influential international mediator,” Fenenko said.
“And that’s not even mentioning economic losses. Germany is important to us as a priority trade partner.”
Relations between Russia and the West began to deteriorate in 2014 with the exacerbation of the political crisis in Ukraine, as well as Crimea’s decision to rejoin the Russian Federation. This led to the imposition of economic sanctions on Moscow by the United States and the European Union.

While a number of Western officials have expressed an openness to lifting anti-Russia sanctions, the German chancellor remains steadfast.

In June, French lawmakers voted 302 to 16 to lift sanctions against Moscow, given the impact of counter-sanctions on France’s own economy. A number of EU members have made similar considerations, including Germany.

“German businesses have been at least as concerned about the impact of sanctions against themselves,” political analyst Bunn Nagara wrote in an article for Malaysian daily The Star Online. “No less than the German Vice-Chancellor and Foreign Minister have been floating the prospect of rolling back sanctions against Russia.”

German Chancellor Angela Merkel, however, appears to be resisting this trend. Speaking to RedaktionsNetzwerks Deutschland (RND) on Friday, the German leader indicated that she sees no end to the sanctions.

“Europe had to react against this violation of basic principles,” she said, referring to repeatedly rebuffed claims of Russia’s involvement in ongoing internal political instability in Eastern Ukraine.

She added that she and French President Francois Hollande are working “with all one’s strength” to force Russia to comply with the Minsk ceasefire agreement.

“This is and remains the yardstick for the future of the sanctions.”

Moscow has, however, repeatedly pointed out that Kiev has been conducting military operations against Donbass independence supporters.

“It is clear why it was done,” Russian President Vladimir Putin said on Friday, referring to the Ukraine’s recent attempt to sabotage critical infrastructure on the Crimean peninsula. “They [Kiev] do not want or are unable to implement Minsk agreements for whatever reasons. And they cannot explain to their own people the significant lapses in socio-economic policy.”

On Thursday, Eduard Basurin, deputy defense minister of the self-proclaimed Donetsk People’s Republic, said that Ukrainian authorities had again deployed heavy weaponry near the line of contact.

If Germany and the European Union insist on continuing sanctions against Moscow, they will be a political gesture only, without result, given the “size and economic weight of Russia,” Nagara points out.

“If any Western policymaker still harbors the thought of cornering or containing Russia, it should be obvious that Russia is too big and savvy for that.”