Jim—the points you raise regarding geopolitics, the US dollar, Treasury bonds and China are the million dollar questions affecting all of us. And their ultimate resolution will affect us in our daily lives, not just as investors.
The battles for global influence between the superpowers seem to be intensifying. The ugly scenes from Gaza are, unfortunately, only a scene in a long drama, when put into a historical context. A map of military bases in the world’s main oil-producing region shows an unresolved stand-off between the US and its opponents. China, Russia and India wait just off-stage, ready to throw their weight in when necessary.
An excellent book by the German journalist, Lutz Kleveman, describes the “New Great Game” in the region. Though written six years ago at the beginning of the Iraq war, Kleveman’s book remains full of timely observations about the struggle to control global oil supplies. I remember, on first reading it, my impression that the Chinese would be the long-term winners in the region, despite the US’s military might, since they, the Chinese, were playing the game with the most far-sighted tactics.
This ties in with your observations, Jim, about China’s leverage in the global financial system through its currency reserves and holdings of US state debt.
So when we make observations about the dollar’s prospects, or the likely outlook for US bond yields, it’s crucial to remember that there are huge political influences at play.
Yet there are also the laws of arithmetic at work. Those governments running huge deficits as a result of an overload of budgetary expenditures are pretty much guaranteeing inflation, whether now or in the future. Wars and foreign military commitments add to the burden. However, the inflationary effects of war may not be felt immediately. Forrest Capie, author of the standard textbook on major inflations in history, makes the observation that:
“Contrary to quite widespread belief, rapid inflations are not so much the consequence of war as of civil war or serious social unrest. The reason for this is that while governments often print money recklessly in wartime, being united against the common enemy, the populace is persuaded to behave in a patriotic fashion and to abide by a variety of controls, and so inflation is restrained. However, with civil disorder or the extreme case of civil war, the established government tries to placate the disaffected by printing money.”
Whatever the outcome of the current global conflicts, it seems likely that their resolution will be lengthy, stretching over years to come. There may be periodic rallies in the fiat currencies, as we have seen over the last year with the US dollar. However, the longer-term outlook still seems extremely favourable for holders of the precious metals, which are the ultimate insurance policy against the work of the money printers.