Russia’s Financial Nuclear Option against America

 

by John Galt
March 7, 2014 04:30 ET

Imagine a war starting between the United States of America and Russia where the Russians win without firing the opening salvo, killing any US soldiers (initially), yet destroying our country so thoroughly that our beloved Republic regresses into a third world dictatorship operating at the whims of government administrators without any resemblance of our former greatness.

President Obama seems hell bent on testing this theory out.

To understand how this could happen one only needs review one definition to start, courtesy of Investopedia:

Definition of ‘Illiquid’

The state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets also cannot be sold quickly because of a lack of ready and willing investors or speculators to purchase the asset. The lack of ready buyers also leads to larger discrepancies between the asking price (from the seller) and the bidding price (from a buyer) than would be found in an orderly market with daily trading activity.

The very fact that America has now become a basket case, a true banana republic debt slave is the very vulnerability which can destroy our freedoms, starve thousands if not millions, and create the greatest financial disaster in recorded history. Economist John Williams of the website Shadowstats highlighted this point in an interview with Greg Hunter on USAWatchdog.com via a YouTube interview on March 4, 2014:

 

While the mainstream media and mainstream business media will have everyone believing that Russia would never commit such an act as outlined by Dr. Williams in the video above, the truth is that the American people have no idea how fragile the confidence not just in this administration but in the integrity of our financial system really is. Such a liquidation in a short time period would have tragic results in parallel with a geopolitical disruption such as open military conflict in the Ukraine or East China Sea between Japan and China.

SENAKAU_ISLANDS_DISPUTEjgfla

The instability between the United States government’s policies on the world stage and the financial holdings of enemies and potential enemies caused great concern in the halls of our Congress last year. A study requested by the Congressional Research Service in 2013 and conducted by James K. Jackson came to an interesting conclusion:

If a foreign investor with large U.S. holdings or a group of foreign investors attempted to launch a withdrawal from U.S. Treasury securities, investors and other market participants would calculate quickly the expected effects of those intended actions on market prices, interest rates, and the exchange value of the dollar and would then act swiftly on those anticipated effects. As a result, the prices of Treasury securities likely would drop sharply, while interest rates would rise, because the price of such securities is inversely related to the interest rate. In addition, the dollar likely would fall in value relative to other currencies, because the shift away from dollar denominated assets would increase demand for and the prices of other currencies relative to the dollar. Consequently, the drop in the price of Treasury securities and the drop in the exchange value of the dollar would significantly discount the value of any Treasury securities that would be sold and sharply reduce the proceeds for any investor participating in such a sell-off. As a result, the potentially large financial losses that would attend an attempt to liquidate assets rapidly are likely to dissuade most investors from employing such a strategy.

The drop in the prices of Treasury securities and the decline in the exchange value of the dollar, however, probably would be short-lived. Foreign investors selling Treasury Securities presumably would do so in order to acquire non-dollar-denominated assets. Such a shift in demand from U.S. Treasury securities to other foreign securities would drive up the prices of those securities and the exchange value of foreign currencies. As a result, the lower prices for Treasury securities and for the dollar would offer other investors arbitrage and investment opportunities to acquire assets that investors likely would deem to be temporarily undervalued. As a result, investors likely would move to acquire Treasury securities and the dollar, which means that demand would increase for both the low-priced Treasury securities and the lower-valued dollar, which would drive up the prices of both assets. Such a response could significantly blunt, or even entirely reverse, the initial drop in prices of the securities and of the dollar. Given the dynamic nature of finance and credit markets and the instantaneous communication of information, such actions likely would occur within a very short time frame.

In normal times, I might tend to agree with the logical conclusions drawn above. However, American foreign policy is in its own vacuum, detached from reality and managed by childish amateurs with no direct guidance leaving the world doubting our ability to fulfill economic or military commitments.

To understand the threat, a review of the latest Treasury holdings by country is in order and the report at the thumbnail below indicates just how critically acute this crisis could become should the Congress and President initiate full scale economic sanctions against the Russian financial sector (click on the thumbnail to expand to full size):

TIC_DECEMBER_2013_jgflaIf Russia decides to start a stampede in US Treasuries that causes the nations I highlighted to panic in sympathy and of the “Oil Exporters” only $100 billion is liquidated, then America would face a fire sale north of $695 BILLION in Treasury Notes and Bills being dumped onto an illiquid market; and that does not even include the dollar amount of holdings the Communist Chinese could unload!!

The US markets nor banking system can neither absorb nor purchase that much paper outright. Add in the threat to decouple from the dollar and in all likelihood tie the Russian Ruble to a basket of commodities including gold, platinum and oil perhaps even sharing the basket with currencies like the Swiss Franc, Japanese Yen, the Euro, Norwegian Krone,  and maybe even the Canadian Dollar or Chinese Renmibi. This disconnect from the US Dollar might hurt the Russian economy in the short term, but with their commodity availability and willingness to nationalize US corporations, seize our assets, and openly liquidate US corporate bond holdings on the open market, our economy would turn into Argentina on steroids within months if not weeks.

If President Obama continues the push to impose sanctions against an enemy he can not attack nor defeat using conventional weapons by sending 40 year old fighters to border nations for example, then Russia could retaliate in concert with China and our supply of rare earth metals and goods necessary for the conduct of war might well be cut off. Our economy would crumple, the stock market decline by over 50% if it ever opened, interest rates would spike from the current 2.7% or so level to well over 8%+ overnight, and a nationwide bank holiday shutting down American commerce would commence until the Federal Reserve agreed to purchase anywhere from $500 billion to over $1 trillion or more in US Treasuries and corporate securities including stocks and bonds.

The Russian people are used to doing without. They are still conditioned to endure hardship, despite almost twenty years of quasi-freedom and quasi-capitalism, they get used to shortages, economic distress, and willing to endure it to some extent in the name of nationalism. The American people on the other hand are soft, unrepentant about their dependency on government handouts as far as 59% plus of the population, and unwilling to sacrifice anything to work harder and deal with capitalism as a real economic system without government meddling. Thus we are in no condition to deal with an economic war nor conventional one; if Russia nukes us with a bond liquidation, America’s only real solution might be to threaten the Russians with real nuclear weapons should relations reach this point.

 

 

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