Macro Report 15: BifurcationApr 26, 2022

“Through pride we are ever deceiving
ourselves. But deep down below the surface of the average conscience a still,
small voice says to us, something is out of tune.”

–Carl Jung

Commentary & Analysis

Be careful what you wish for; the odds of global bifurcation are growing.

bi·fur·cate – To divide into two parts or branches.

We have seen the word bifurcate used many times by the really smart global macro guys in the past, so we thought  we’d give it a go.

Yes, the global financial system is bifurcating along two lines:

1.      Those who believe, or are forced to believe, in the neo-liberal narrative; and

2.       Those who don’t.

There is also an interesting characteristic about this bifurcation:

A.     The followers (and creators) of the neo-liberal narrative tend to be countries with a significant degree of  financialization which drives wealth; while

B.     Those who don’t buy into the narrative tend to have lots of resources and/or make real stuff.

Obviously, there is some overlap.

What is puzzling is despite the West’s reliance and efforts to build an efficient global trading system and supply chain,  reating an astonishing consumer boom worldwide, Western leaders seem so nonchalnt about the prospect of it being badly damaged, or completely destroyed.  In fact, based on the most recent comments by US Treasury Secretary Janet  Yellen, it appears the US is preparing the ground for a bifurcated global economy and monetary system.

Yellen Speech

In a speech to the Atlantic Council recently, Secretary Yellen had made these stark warnings:

Yellen said that Russia’s decision to invade Ukraine “predestined an exit from the global financial system” and that the Kremlin “will be forced to choose between propping up its economy and funding the continuation of Putin’s brutal war.”  She did leave room for reconciliation, if peace comes soon: “Russia could end this unnecessary war and the near-term impact could be contained.”

And her criticism of China was aggressive, particularly by the careful standards of the Treasury Department: “China cannot expect the global community to respect its appeals to the principles of sovereignty and territorial integrity in the future if it does not respect those principles now when it counts.”

Yellen also implied that China could face significant economic blowback itself, if it does not use its recently affirmed special relationship with Russia to “make something positive” and “help to end this war.” “The world’s attitude towards China and its willingness to embrace further economic integration may well be affected by China’s reaction to our call for resolute action on Russia,” she said.

The message wasn’t just meant for China, but also for those other countries “who are currently sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and
backfilling the void left by others.” While she didn’t name any countries specifically, Indian Prime Minister Narendra Modi met with US President Joe Biden on Monday to discuss India’s use of Russian energy among other topics.

Granted, the Atlantic Counsel is paid-up member of the Military-industrial-congressional-think tank-complex so Secretary Yellin’s speech was well received.  But we would bet these stark warnings weren’t well received in China or Russia or Indian or any other of the countries across the globe who don’t buy into the Western narrative.

This is preceisely why we believe the idea of bifurcation of the financial and trading system has real legs.  And has the potential to get very ugly.  We site four major reasons for our angst below.

Our observation: It appears the US government is quite enamoured with its policy of weaponizing the US dollar and leveraging its overwhelming financial power.  Hubris (overbearing pride or presumption; arrogance) is the word which comes to mind.

Why do we say that?

1.      The US cannot do to China what it did to Venezuela, Afghanistan, Iraq, Iran, and Russia; i.e. steal its foreign reserves denominated in US dollars.  Why?  Because unlike the other countries, China possesses foreign assets well in excess the vlaue of its estimated $3 trillion in dollar denominate reserves.

It shouldn’t take even hubris-filled Washington D.C. long to realize $10 trillion in real investement trumps $3 trillion in reserves.  That is to say, if the US threatens to steal China’s reserves, China can threaten to confiscate all Western physical assets in the country.  Russia didn’t have this option, but it sure did a pretty good job of turning the tables by
pricing its gas supplies in Rubles.

2.      It seems the US actually believes the other half of the world—those losing access to Western technology and that culture-crushing entertainment media—will be worse off when the world is divided.  However, that other
half of the world will have discounted access to most major resources—energy and industrial materials—to a degree the Western half would not, and China’s technology is already on par with the West in many areas.

Plus, there is that other thing that shall not be named by Secretary Yellen; that which completely changes the game for countries who refuse to play along with cudly Uncle Same

Source: MERICS Mercator Institute of China Studies

”According to the official outline, BRI aims to ‘promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt
and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realize diversified, independent, balanced and sustainable development in these countries.’


“BRI is a global initiative but by its nature of building on the historic Silk Road puts a major focus on countries in Asia, Eastern Africa, Eastern Europe and the Middle East, a region mainly composed of emerging markets. According to the Belt and Road Portal, currently 71 countries are taking part in the Initiative, together representing more than a third of the world`s GDP and two thirds of the world`s population.”

BRI would unite Eurasia in a Chinese-block—the nightmare scenario warned about by Zbigniew Brzezinski in his book—The Grand Chessboard (the US foreign policy cabal’s bible).

As you view the BRI map above, notice how many of the rail links and pipelines run through Russia and Ukraine?  This
couldn’t possibly be one of the reasons the US is stirring-up chaos in the region now that it was chased out of  Afghanistan?

3.      Depsite protests and some well-reasoned analysis among global currency experts, the threat to US dollar
hegemony is real and could happen more quickly than most expect

Why do we say that?  Because Western experts are completely missing a major incentive for countries to leave the US dollar and become part of a new currency tied to a basket of exchange-traded commodities.

Pepe Escobar (Cradle magazine) interviewing Sergy Glazyev, Minister in Charge of Integration and Macroeconomics of the Eurasia Economic Union:

The Cradle: Michael Hudson specifically asks that if this new system enables nations in the Global South to suspend dollarized debt and is based on the ability to pay (in foreign exchange), can these loans be tied to either raw materials or, for China, tangible equity ownership in the capital infrastructure financed by foreign non-dollar credit?


Glazyev: Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in dollars, euro, pound, and yen. In this respect, it will be no different from the example set by the
countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of dollars. Since the US, Britain, EU, and Japan refused to honor their obligations and confiscated wealth of other nations which was held in their currencies, why should other countries be obliged to pay them back and to service their loans?


In any case, participation in the new economic system will not be constrained by the obligations in the old one. Countries of the Global South can be full participants of the new system regardless of their accumulated
debts in dollars, euro, pound, and yen. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system.
Nationalization of extraction industry,
likewise, would not cause a disruption. Further, should these countries reserve a portion of their natural resources for the backing of the new economic system, their respective weight in the currency basket of the new monetary unit would increase accordingly, providing that nation with larger currency reserves and credit capacity. In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for co-investments and trade financing. Let us write that again: “Countries of the Global South can be full participants of the new
system regardless of their accumulated debts in dollars, euro, pound, and yen. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system.”

We would say that a debt Jubilee for countries indebted to Western banks is an extremely good incentive to become involved in the new currency regime. This alone would crush finacial markets around the globe.

So, Secretary Yellen, be careful what you wish for.

Stay tuned. And be careful out there.

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