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Multipolarity Episode 5

The Balloon Goes Up, Sanctions Busting, Nigeria's Stablecoin Faceplant


[00:02:00] Andrew Collingwood: Coming up this week as America loses its mind over a stray balloon. We're delving into the gust of wind pushing this story along. Is this Hindenburg of hot air actually taking the temperature on a new kind of establishment mass hysteria.

[00:02:14] The 

[00:02:14] Philip Pilkington: Fed wants to create a so-called digital dollar, but with backgrounds and brawls erupting in Nigeria. A recent stablecoin experiment in that country may already have crushed the bank's ambitions, and 

[00:02:26] Andrew Collingwood: as we approach the one year anniversary of Western sanctions on Russia, can we officially say that they've failed?

[00:02:32] Several recent articles suggest that the Western media narrative may be shifting, 

[00:02:36] Philip Pilkington: but first the balloon goes up. 

[00:02:40] Andrew Collingwood: There was. A scare, a red scare again, returns to America in the form of a giant balloon up somewhere in the stratosphere. It was first noticed, I believe, above Montana floating ominously threateningly above the uh, American flyover state, and worryingly.

[00:03:02] For those of a more paranoid disposition, it was floating very close to some US nuclear missile bunk. Balloon was a huge white balloon that ostensibly was for meteorological studies. The lots of weather balloons all over the world, they're commonly used. But this one had apparently floated all the way from China.

[00:03:26] It had, uh, floated up, up north near the Arctic Circle around the Alaskan coast, down the Canadian coast. And from there, uh, brightening into the center of America. The whole news media in America seemed to break into hysteria about this. Was it really a weather balloon? Can the Chinese truly be trusted on this?

[00:03:49] Was it actually a secret surveillance balloon? Have the Chinese developed new balloon technology that is going to leave the Pentagon in the us uh, military industrial complex behind? Of course, this hysteria was all in my view at. Almost preposterous. It was laughable. In fact, a lot of the coverage I was watching, I was laughing out loud because these things run away all the time.

[00:04:15] There was apparently, we have discovered now two or three balloons, which followed similar courses and flew across America during the Donald Trump campaign, and this caused no concern whatsoever. The Pentagon was initially utterly unconcerned until the media had. Run for the smelling salts and lie on the fainting couch for a few days.

[00:04:35] Uh, in addition to that, both Russia, the United States and China accept unmanned surveillance of each other's territory. It's a longstanding, uh, protocol between superpowers that they'll allow each other to do this because it's simply safer. And, uh, not only that, there was really nothing whatsoever that the balloon could possibly have had.

[00:04:55] I would've thought that super. Modern Chinese, uh, satellites as apparently they are, couldn't have it. It really feels like the whole of the US media and, uh, establishment and political class just completely lost their minds for a few 

[00:05:10] Philip Pilkington: days. Yeah. Well, no one does a moral panic quite like the Americans. I mean, my feeling was the same as yours.

[00:05:17] I'm not an expert on contemporary satellite technology. You know, satellites are pretty good these days. They have been for a long time. I looked into Chinese satellite technology briefly. Even their civilian satellites can snap photographs of, uh, vast waves of the American landscape pretty quickly. There was actually some concern about this late last year, the SEC China morning press published.

[00:05:43] Photographs of, uh, San Francisco and, you know, then there were some concerns in America about the, the level of this technology or whatever. It all seems pretty strange to me. I, I always assume that we live in a world now where anyone can see anything. And if you want to, you know, do something that you don't want someone else seeing you, like, you know, put it in a building or underground in a layer, I suppose, if you want to go in that direction.

[00:06:07] So yeah, the whole thing was very strange. I mean, we could go through some of the arguments. Why people were saying this was different, that it could kind of loiter and I don't think any of it really makes sense. It's, they're not even sure what it does because they haven't got the, um, wreckage yet. And my guess is they never will cause they sunk it over the sea.

[00:06:25] But, you know, the narratives going back and forth, just, uh, in relation to the Trump. The triple Trump balloon threat during that administration, the Trump people are now saying they never, uh, they they never saw any of this, and now there's a back and forth about whether general Millie, who's kinda like villainized by the, the Trump fans, whether he covered up for the Chinese and everything.

[00:06:47] So it rolls on and on, but I, I suppose we, we should really say, has anything interesting comment of this, or is it just pure 

[00:06:54] Andrew Collingwood: specac. I struggle to find anything interesting about this. The first thing to say is that balloons themselves are hundreds year old technology. I mean, they were used significantly on the battlefields of World War I more than a hundred years ago, as surveillance platforms and armies have been trying to shoot them down, therefore, for well over a hundred years.

[00:07:16] In addition to that, I think you're quite right and you know entirely possible for a Chinese satellite. Take a photograph of somewhere and to be able to, you know, count the numbers of cars and the brand of car, or even with civilian technology, I'm sure that, uh, the, the geostationary satellites over America, you know, would be able to let the Chinese know which brand of cigarettes are being smoked on Fort Bragg.

[00:07:43] Right? I mean, the idea that a balloon could provide any greater degree of surveillance when it's like that. A little bit of a stretch and if a balloon could, then it, it's going to be degrees of improvement. However, one thing that did happen is that Anthony Blinken, the Secretary of State of the United States, the, essentially the US' most senior diplomats, the equivalent of our foreign minister, secretary of State for foreign affairs, canceled a trip that he was going to make to China.

[00:08:14] And there are theories swelling on the internet that this. Thing was blown out of proportion by hard liners within, uh, Washington or perhaps the Pentagon, with a view to derailing that visit. There's another idea that the Chinese deliberately sent this balloon across, or, or certain faction within China deliberately sent this balloon across to America.

[00:08:38] Similarly, to derail Mr. Blinker's visit. That obviously given the geopolitical situation at the moment, especially with regard to the Ukraine crisis, some of the sanctions, the number of moving parts there are around the world with new diplomatic ties and a geostrategic rearrangement, that visit was likely going to be quite important, and now it's been derailed.

[00:09:01] Now it's off. So who knows what's going to happen or why it's going. Again, I struggle to imagine that this is the case, especially from the Chinese side, given a balloon, is, you know, as we've known since childhood, uh, reliant on, uh, wind patterns and, uh, you know, it doesn't have propellers or jet engines.

[00:09:20] It, it floats with the wind. So if the wind changes direction, then the balloon goes a different way. Who knows how long it's gonna take to get all the way from China to the us It seems to me it would be a, a matter of remarkable planning from the Chinese side to get it all the way from China to the US at just the right time to do real Anthony Blinken visit.

[00:09:41] But apart from that, I see very little of interest beyond really, uh, a snapshot of the mood, uh, the snapshot of what seems to be a quite febrile. Mood within the United States. I mean, the hysteria really shocked me. I mean, you know, there was live commentary of the balloon on cnn. It was, you know, here's the balloon floating above us.

[00:10:07] Frighteningly ominously, and, and, you know, these guys were taking it really seriously. It really seemed like some sort of spoof of, of 24 hour news that they're so desperate that they had to take live footage of balloons. And then of course, Individual Americans taking pictures of the balloon on their smartphone, ruper and hollering as the US Air Force buzzed it and fired missiles added it.

[00:10:29] It was really quite remarkable as a, as, as I say, an indication of the mood in America and, and more. I mean, we, you and I Philippine communicating during the week, having, uh, quite a laugh at the reaction to. You know, one thing that concerns me is that in the run up to the First World War, you had this long periods of relative peace in Europe.

[00:10:51] Uh, I mean, obviously, you know, Prussia was expanding and we had the Franco Prussian War, which was, you know, was quite major. But then after that there was a certain period of peace and stability in Europe. But there was also quite a paranoid attitude in the United Kingdom, in in, in the United Kingdom, elites about the danger of German expansion.

[00:11:13] And you had all these kind of books like The Famous Battle of Dorking, the so-called, uh, German Invasion of, uh, of the strategic city of Dorking in, uh, which if any foreign listeners don't know why we're giggling, uh, you know, dorking is a quite a sleepy, uh, and relatively unimportant town in the United Kingdom.

[00:11:32] And so you had this, the, the, the story of the Battle of Dorking a uh, an imperial German invasion of Britain, and you had a similar kind of panic with. You know, the dread North War, the, you know, the dread nor arms race to see who could build more of these, you know, super battleships between the Imperial, the Creek's, Marine, and the Royal Navy.

[00:11:56] And I really feel this balloon, you know, getting beyond the, the humor of it, it, it does concern me that there is something of a, that kind of feeling you get in the United States at the minute. Obviously I'm not in the United States, so I can't say for certain, You know, from their elites. I'm starting to get that feeling.

[00:12:16] Yeah. I'd be, I'd be 

[00:12:17] Philip Pilkington: a little bit more optimistic on the front. I didn't get the feeling of kind of drums of war or, or moving up to World War I or anything. It felt to me more like harking back to the Cold War, you know, reds under the bed stuff and actually from following the headlines and so on. It seems like the way that this is, uh, pivoting maybe is toward reconsidering whether.

[00:12:39] The US might better place itself in an arms race. I saw, I think it was the Wall Street Journal reporting that China have more icbm land silos than America. I didn't look at the details of it. If, if it is true, I'm not sure if it's even that meaningful. I think it just means the Chinese submarine technology isn't very good and 

[00:12:57] Andrew Collingwood: I'm not together.

[00:12:58] Sure, that's true. I think they're expanding their, the number of silos at the moment because they have a significant deficit of the number of ICBMs that they. Compared with America's Minute Men three, for example. Uh, that's my understanding, but I must confess it's not something I've looked into before this podcast.

[00:13:15] Excuse me. Yeah, I do. I d 

[00:13:17] Philip Pilkington: I don't know the details of it. I, I dunno the details of most of this, but it was a headline and Yeah. I wonder if kind of the takeaway from the balloon thing, I mean, what, what does the Balloon thing communicate to and the American people? I think it basically communicates.

[00:13:30] There's a scary technological rival who can, you know, roll up on your doorstep one day. Whether that's true or not, I think that's the, the, the perception here and you know, it could kind of push the US to. To engage in a little bit more seriously with the arms race, because honestly, they haven't been the, the Chinese now have hypersonic missile.

[00:13:48] The US don't, the US is actually falling behind in a lot of these defense systems, and I'm not a, I'm not a peacemaker really, even though sometimes we might be a little bit contrarian on the podcast. And I do think kind of peace, true strength is, is a real doctrine If America thinks that it's keeping technological, With China and with Russia on kind of I I C B M technology and so on, and probably air defense as well.

[00:14:13] I think that's probably, probably means more stability, right? Because it means less, less likelihood of anybody firing off a nuke. Now, hopefully we can get to a point where there's also treaties and so on where we ended up in the Cold War, but it, it's probably a pretty good start to give DC a kick. Give the Pentagon a kick and say, you know, Stop investing money in things that don't make sense.

[00:14:35] We have to get our missiles up to scratch. We have to get our air defense up to scratch and so on. So, I mean, that's an optimistic take on what could come out of the great balloon scare of 2023. But, well, I, you know, 

[00:14:47] Andrew Collingwood: I, look, I, you know, I understand this, this idea of the Red Scare, but, you know, during the Cold War, you know, first of all, you had Sputnik, right?

[00:14:58] Sputnik was genuinely groundbreaking technology. It was the first man-made satellite to orbit the earth, and you could, and you could hear the thing beeping, right? And it was like the sound to remind America that they were simply behind on this sort of thing. I, I, if it indeed was a spa balloon, then a glorified weather balloon with some, you know, surveillance equipment of various types, whether it was photographic or electromagnetic, that is really quite common.

[00:15:27] Is, it's not quite the same as Sputnik. Equally had the, you know, the culture where you had the, the fear in the late fifties of a missile gap developing right now. I mean a balloon gap, uh, you know, although I did see it in one American headline, that fear is in the Pentagon of a balloon gap emerging between the United States and China.

[00:15:47] Again, that is not something that is necessarily. You know, of the same level of, of intercontinental ballistic missiles. It's similarly with air defense. Unless the Chinese are gonna start floating lethal balloons across the strait of Taiwan, probably accompanied by firing huge trebuchets from mainland China, then, you know, it's, it's not something that should particularly concern air defense.

[00:16:14] I mean, we saw with the F 22, it did knock the thing out with a single side wind. Know, they're neither stealthy nor particularly fast moving. So yeah, I do think that the US to a certain degree has fallen behind in some areas. And I think as well, for instance, the Chinese are investing a tremendous amount in drones and, and they really have a very large range of, uh, military drones at the moment, some of which are really quite unusual and interesting, although I think many of them are probably still in the development stage, but, It's not so much that the Pentagon hasn't been taking this stuff seriously so much as for the last 20, 25 years, they've been supporting this monstrously Hubristic mission of successive US governments, of both left and rights of both Democrat and Republican to remake the world in America's image and and to bring liberal democracy to all the corners of the earth.

[00:17:12] And because of that, the Pentagons had to think. Four and trained for counterinsurgency and low intensity conflict. Now it's faced with two peer competitors or, or certainly one peer competitor and perhaps a second in Russia, and that'll be a, a, a war of heavy metal. It'll be high intensity, huge amounts of ordinance and high explosives, expenders, massive casualties, hugely costly and expensive set piece battles, and obviously the whole Penta.

[00:17:44] Machinery has gotta do an about turn on that. So they are really now starting to think about it and starting to, to plan for it. But it's, it's going to take some time and I'm not sure the balloon per se is, is going to change that very much. I mean, for very many years now they've been talking about China, so I just don't particularly know what it's gonna achieve.

[00:18:05] I just found the hysteria to a certain degree a little bit. It was funny at first, but it's a little bit surprising now. 

[00:18:11] Philip Pilkington: Yeah. Just to be clear, if the result of the balloon scare is that they actually try to close the balloon gap, I think we can both agree it didn't end up going in ab productive direction, but we'll see.

[00:18:25] Andrew Collingwood: Sanctions busters, I mean another scary thing for the United States at the moment has been, or, or, or another thing that that's really been bubbling up through the media in between the. The, the, the furious stories about, uh, rogue balloons flying across America is, uh, realization or a number of articles that are starting to suggest that sanctions against Russia really haven't worked.

[00:18:50] Philip Pilkington, and you've been on this since before the sanctions were imposed last year, you wrote an excellent article for the critic saying that that just wouldn't work. Yeah. It's been 

[00:19:01] Philip Pilkington: a really hard week for the sanctions PR team if they have a PR. It has knock, operate, press this week. So I'll just, uh, name some of the articles that came up on my radar.

[00:19:14] The first was, probably the biggest one, was in the Wall Street Journal. The title was Upstart Indian Shipper Helps Get Russian Oil to Market. And it was a, it was a story of a small office in a suburb of Mumbai, which only opened until 20, or only started operating with ships in 2020. And, um, this small office has been able to allow the Russians to circumvent the oil sanctions.

[00:19:39] On top of this, Bloomberg reported that the Indian oil that's presumably being transported through this small office in Mumbai is actually coming to Europe. So we're just getting it outta premium. Really. It, it's a classic arbitrage on the part of India, the really bad headline came when, uh, CNBC had an oil analyst.

[00:19:58] Who smirked and said that the sanctions on Russian crude oil had failed completely and had been invented by bureaucrats with finance degrees. None of them really understand oil markets. It's been a total bomb. It has failed completely. So, I mean, that was definitely not the kind of rhetoric, you know, 10 months ago.

[00:20:20] It does appear that the sanctions policies are running outta steam. I think it's been a very obvious, they haven't, they, they don't work for a long time, but I think it's becoming more consensus. I did see that the, um, wall Street Journal also put out an article highlighting that, uh, the Russian government deficit had soared due to war spending and the oil embargo.

[00:20:40] But when you dig down into the article, They seem to be suggesting a, uh, government deficit of two to 3% of G D P for 2023 that's lower than any of the other Western countries. And so, yeah, good headline, not great. Uh, small print on that one. It feels to me like the, like the tide is turning on the sanctions policies.

[00:21:01] Maybe not at a policy level, but you know, the media's, it's pretty hard to ignore the data coming out. I think, uh, when assessing these policy, 

[00:21:11] Andrew Collingwood: Yeah, I think on, I, I think on countries like India and apparently now Morocco, helping Russia circumvent the oil sanctions, I suspect the European Union at least, is secretly turning a blind eye or not too unhappy about this.

[00:21:26] And the reason for that is, first of all, they have to be seen as doing something. There's a lot of do something itis, as I call it, or do somethingm, uh, floating around the Western world at the moment. They want to do so. Rather than actually think through what's going to work and, and, and how to achieve their, uh, desired aims.

[00:21:45] And I think that's a, a problem with foreign policy more broadly. But at the same time, this kind of DoSomething cannot interfere with the workings of the oil market too much. I mean, if oil, you know, because Russian supplies collapsed, suddenly spiked up to $250 a barrel, which was one of the options JP Morgan offer.

[00:22:08] When suggesting what would happen if even as little as 5 million Russian barrels were removed from the global market? Then forget about the economies. You know, we're not just talking about a sharp recession, we're talking about a global depression. Obviously, by having to go through these third parties, Russia also takes a hit from, its all revenue because the oil price is the, you know, the price, the point of entry.

[00:22:31] It, it's not necessarily the price when it exits the Russian port. So the Russians have. To swallow some of these extra transportation costs as relatively minor as they are. They're selling at a certain discount as well. So I think there's a certain amount of turning a blind eye to to some of this. I mean, there's a lot of indignant articles in the New York Times and The Guardian about how Indians are helping Putin sidestep sanctions.

[00:22:59] But I think the actual elites, the people who make decisions aren't that unhappy if it keeps the oil. With regards to sanctions overall, you know, the big thing this week was the IMF publishing its report, it's Global economic Outlook, and suggesting that this year Russian GDP had fallen by only a little over 2%, I believe it was in the end, which is a huge difference from some of the forecasts at the beginning of last year when sanctions were first imposed.

[00:23:32] I mean, these. The biggest kind of one-off sanctions. I think it's fair to say that anybody had imposed on any other major economy ever. I mean, it was real shock and aw stuff, and a lot of supposedly credible economists were predicting at the time that the Russian economy would decline by 10% or more.

[00:23:54] You also had a big piece of analysis come out of Yale or one of the business schools at Yale that suggested that companies, foreign companies, Who were responsible for as much as 40% of the Russian economy, 40% of Russian g d p had left or were going to leave. And therefore it was all doom and gloom for the Russian economy.

[00:24:14] So these were the sort of predictions that were happening, you know, around spring and the early summer of last year. There was a lot of backslapping and whooping and hollowing, uh, hollering in the, uh, in the western media and, uh, elites and, uh, political class about how the Russian economy was doomed.

[00:24:32] Oops, it only fell by 2%, which, you know, might be quite significant for developed economies. But as you'll know, Philip, for an emerging economy, two, a 2% fall isn't much at all but worse. The IMF is also predicted, uh, I think the Russian economy is set to grow in 2023, something which it doesn't expect for several Western economies, including.

[00:24:59] Philip Pilkington: I don't think there's any doubt about it. Now, the sanctions, do they hurt Russia? I mean, yes, they lower the price on Euros oil. The, the Russian oil slightly rolled up to the other benchmarks. But some of that, by the way, is voluntary because the Russians are offering the Indians. I think the Chinese as well.

[00:25:17] Oil of cheaper price are, I'll speak to that in a moment because it's important and not widely appreciated. What that means, whether the sanctions hurt Russia or not, maybe a little. Do they hurt Russia or Europe more? I don't think the jury's out on that anymore. They hurt Europe far more. I was skeptical of this from the very beginning.

[00:25:36] I, I've never heard a serious economic argument that understands anything about the Russian and European economies and how they interact. That would have taught any other outcome on this. Russia is an energy provider for the eu. The EU sells some stuff to Russia, like, I don't know, Mercedes or whatever.

[00:25:58] You can live without Mercedes. You can't live without energy. It's very simple. Beyond that, if you want to get a little bit technical, the Rubal, which was a big target for the sanctions policies, is driven by oil. It pretty much tracks the oil price. So if you do things that interfere with the oil market, you will drive up the oil price, and so therefore you will.

[00:26:18] The rubble. And that's exactly what happened. I mean, I knew all this from analyzing the economy back seven years ago when we were doing some work, when I used to work in financial markets and we were doing some work on the Russian economy. Anyone with any peripheral expertise on how the basic macro economy function should have been able to tell anybody this?

[00:26:37] It's been absolutely bizarre. I think there is a, a, the do somethingm or whatever, I think there's, there's an element to that, but then. Effects of the shifting trade patterns and even the slightly lower Euros price. I, again, I just don't think this is being thought through. Yes, okay. In the next year, maybe, um, the Russians will take a minor hit on revenue.

[00:26:58] They might pay some extra transaction costs as you alluded to, but what they're doing is they're building an entirely new energy system to their east. They're building an entirely new mode of the world economy consuming. And it's one that increasingly looks like it locks out Europe. Now some people say, oh, Europe needs to get off Russian energy and so on.

[00:27:21] And maybe they do. I'm, I'm not gonna take a strong view on that. The real question is, can they not really? Should they, this is kind of a an t argument when it should be an is argument. You start with the is and then you move on to the T. That's how. Philosophers are tall and, and probably policymakers should be too, whether they ought to be or not.

[00:27:40] I, I won't take a view, but the point is that number one, it's not probably going to hurt, hurt Russia in the long term because it's pivoting. It's all energy market east, but also it's creating a whole eastern block that's more and more insulated from the Western block. I don't think that that's a particularly.

[00:27:58] Good thing from a geostrategic point of view of the West, I don't see why you would want to create that block. You're just giving rise to a really robust rival power. You should be much happier when a country like Russia is straddled between reliance on the Eastern, reliance on the west. So the whole thing really just has.

[00:28:20] In my opinion, a terrible failure in both the short and the long term. I haven't really seen anybody seriously defend it in the past few months. I suppose the best you kind of get is, you know, people saying, yeah, the sanctions are working, Russia's gonna collapse, but those voices are gonna tune out. I think they're already tuning out right now, and we'll be left with the situation as it stands, and it'll be very interesting to see over the next five years how we digest the situation that the sanctions have.

[00:28:47] Andrew Collingwood: I think another thing to bear in mind is that in Europe there's a lot of congratulations and in general, far too much of a sangwe outlook with regards to the idea that they've passed the energy crisis. You know, uh, Putin's energy blackmail has failed. Well, I mean, whether or not you think it's blackmail or, or whether or not it's a simple economic.

[00:29:16] I don't think anybody can say that Europe has passed this. You know, it seems that through a certain degree of de-industrialization and especially in energy hungry sectors like fertilizers and chemicals, indeed, uh, Europe has been able to cut significantly back on its demand. And, and that means that things like gas storage is, is relatively high for this type of time of year despite the absence of, uh, Russian gas.

[00:29:42] But that doesn't mean that things aren't going to change. And if they don't, at what industrial cost. But in addition to that, we now have the introduction of the diesel ban into Europe coming. And in fact, Europe had, uh, was quite reliant on Russia for diesel, which is obviously refined from crude oil. Now, diesel is something that it has knock on effects throughout the whole economy.

[00:30:08] It's, it's used significantly for t. And that means if there's a diesel shortage or a big spike in the price of diesel, you'll feel that throughout the economy on things like food prices, because it requires diesel to get food from farm to to marketplace, so to speak. But I think on a broader note, we have to start asking the question, Philip Pilkington, whether sanctions work at all sanctions against Cuba, the United States sanctions against Cuba have made Cuba incredibly poor.

[00:30:40] You know, Hobbled economic growth at a level of perhaps the 1950s, but has it achieved US policy aims? Is Cuba now a capitalist democracy? No. Has the Castro family been booted out because of the diary economic situation? No. Is it a friend of the United States? No. The same with Iraq during the 1990s and you know, first few months of the 21st century.

[00:31:08] That sanctions have horribly economic effects, and especially some of the sanctions on things like medicine, uh, which really led to the unnecessary deaths of countless numbers of children. And it, it had a terrible effect on the Iraqi economy. But was it sanctions that brought Saddam Hussein to heal or led to Saddam Hussein's overthrow?

[00:31:30] No. Wasn't likewise Iran cause Russia, Is a larger economy than any of those three, because it's much more powerful, because it's more important to the global economic system. We're seeing, not just that the sanctions don't achieve Western foreign policy aims, but in fact they don't even kick much out of the economy.

[00:31:52] Germany's strategic bombing of the United Kingdom during the blitz in, uh, 1940 and 41 didn't have any effect on the outcome of the. Likewise, it's highly unlikely that, uh, the r a f and the US Air Force's strategic bombing of Germany did much better. Certainly the strategic bombing of Japan didn't, despite the huge amount of damage that it did.

[00:32:15] And in the same way, these sanctions like strategic bombing are very painful for the, for the target community and, and, and the ordinary person, but they don't achieve ever any of the policy aims of the sanction. Country. And in fact, I think there's a good argument to have that sanctions actively do damage.

[00:32:37] For instance, sanctions tend to commiserate the middle classes. It, it tends to push them back down to the working classes. And they're exactly the sort of people that usually lead to revolutions in Democratic, democratic, uh, renewals within c. And sanctions tends to destroy that class of people. It destroys the wealth in middle class, except the very elites who are able to entrench their position and in fact, they're able to blame their own faults on this outside power, which is artificially attacking their economy.

[00:33:15] So not only do I think that sanctions might not work, I think they might be actively detrimental to the policy aims of those who seek to apply sanction. 

[00:33:25] Philip Pilkington: Yeah, I'm, I'm not as convinced of that as you. I, there's always been a moral case against sanctions. It's been a, a fairly constant refrain from the left up until the Ukraine war.

[00:33:34] So, for example, take the example of Iran or Cuba. Did the sanctions work? Okay? It depends on how you define work. Did they work for a regime change effectively? No. Obviously not. Castro stuck around until he died of old age in his track suit. And the molls aren't going anywhere due to sanctions either. But does it work in contain.

[00:33:53] This economy? Yes, it does. Cuba remained, uh, a poor sinkhole effectively, and, uh, apart from when the Soviets tried to put nuclear weapons there, it's never posed any threat. Remember, it's just off the coast of Florida. If they had a little bit of money and a decent military, they could cause problems. In the case of Iran, you have the same issue.

[00:34:13] Iran has quite a serious military actually, and clearly we've seen some of their weapons being used in Ukraine. They seem relatively effective, but keeping the economy as. As the sanctions have, I think has actually achieved a goal in that sense, but I think now we need to judge it on a different plane that probably the largest economy that you can apply sanctions to and achieve those results is something like Iran and Iran's not a small economy, but it's not a huge economy.

[00:34:43] It's not a very large economy. I think that's pretty much maxing out. That's a sanction, sanctions maxed out policy. And the other problem is how many countries you do it on, because if you do it on too many countries, they can just join together. And that's actually kind of what's happening now. So we have a combination now of you're, you're doing the sanctions on countries that are too big.

[00:35:01] Russia's just simply too big. And you're also doing sanctions on too many countries, so you're causing them to join together. Another impact of of doing sanctions on too many countries is to scare everybody else into thinking you might do sanctions on them. And that's why we're seeing, we've discussed it in previous episodes, I think, and move away from holding US dollar reserves.

[00:35:21] So I think we're definitely at the point of what you might call sanction. I think sanctions now as a policy, unless they're being applied to a very small country for very, very specific goals, they'll probably be redundant as a policy tool moving into the next decade, I think. 

[00:35:38] Andrew Collingwood: I'm not even sure that, you know, sanctions are as useful as, as the limited case that you make out.

[00:35:44] For instance, Cuba was content economically, of course. Cuba was never, ever going to be a threat or even a counterbalance to the United States' economic power within that region. Furthermore, though, it didn't generate a, a serious military, certainly not in relative terms to the United States. It did produce enough of a military to get quite involved in some of the South African border wars in places like Angola and Mozambique.

[00:36:12] Uh, it sent troops and, and, and military aid to those countries. And, uh, similarly in central. And San what sanctions did was it, it, it essentially made Cuba an intractable enemy, kind of a recal enemy of the United States that wouldn't, that, you know, over which the United States had no influence. They had no economic chips left to play.

[00:36:38] They had no way of controlling or curtailing Cuban behavior, both internally and external. And that did create problems. And I'm not sure that they created any fewer problems than it would have been for a, a small Caribbean island compared to the, the, the global economic behemoth at the time, uh, would've done without sanctions and with normal economic development.

[00:37:01] Likewise with Iran, again, the sanctions were originally imposed on a revolutionary state because the US. Unhappy, I guess, at, at the fact that its own Iranian revolution had been hijacked by the, uh, AYAs and also because of the US Embassy in, uh, Teran and the, and the, uh, soldiers that the Iranians had captured.

[00:37:25] But by applying those hard line sanctions and refusing to remove them with the current regime in refusing to normalize relations, uh, the United States ceased to have any control or any sta say, or any chips to. With Iran, the, the sanctions were maximalist that made it quite hard to deal with. For instance, Iran's nuclear ambitions, if you believe the, uh, international Atomic Energy Agency, which I, I certainly was inclined to a decade ago, and you know, Iran still does have a relatively powerful lev.

[00:37:59] They still cause problems in the strait of hormone. They're still tremendously ac active in places like Iraq and Syria and the Lebanon. I'm not altogether certain that Sean of sanctions and allowed to develop economically or as reasonably as one, uh, would expect, uh, a religious, uh, the, uh, a theocratic dictatorship to develop economically.

[00:38:23] There would be any more powerful militarily, but at least in such a circumstance, the western world would have more chips to. To influence that country in the way perhaps they have done with Saudi Arabia. 

[00:38:35] Philip Pilkington: Two sides of the same stable coin. 

[00:38:39] Andrew Collingwood: Why am I seeing pictures on various internet news outlets of Nigerians queuing for ATMs for bank machines?

[00:38:49] Is this a standard emerging market financial collapse, banking collapse, or run on the banks, or is there something more to it than that? What's happening in Nigeria at the. 

[00:38:59] Philip Pilkington: Yeah, really interesting. This is not a standard emerging market debt crisis or monetary crisis or anything. You see them from time to time.

[00:39:08] I think if it was interesting enough, we'd probably still talk about it, but this is slightly different. The Nigerians are queuing up the ATM machines because the government is now trying to introduce new types of bank notes that it says are more secure. It's also trying to. Very large denominations being taken out from the atm.

[00:39:26] So that's, that's what's precipitated this run, run on the banks. They've basically said, you, you can only take out X amount. I think it's $43 US dollars worth of nira, uh, which is the Nigerian currency. And this has precipitated this run. Um, For some context and background on this, Nigeria, like many countries of that kind of wealth level, is a very cash dependent economy.

[00:39:49] Nigeria's been experimenting with ways to bring in. I would say quite forcefully, a more modern system. And not only are they just going down the root of, of trying to stamp out tax evasion and money laundering, although it's not even clear what money laundering means part of the world. Not only are they trying to do that, but they're trying to even jump one ahead of that.

[00:40:12] In 2021, they actually launched the E I R, which is the second central bank digital currency to go public. The first was in The Bahamas. Since launching the en ira, they found very little take up, no surprise on that one, and so they've continued to go down, I guess a more punitive route. I think what we're learning from the Nigerian case study is that you have to be very careful about the checks and balances that you put on your financial system.

[00:40:39] I think this has a lot to. The Western countries. Obviously there's a lot of talk right now about the US dollar losing its reserve currency status. I think we've discussed it on there before. We'll probably discuss it more, uh, in the future. But the response to this in a lot of corners has been to reach for a technological fix and easy technological fix in the form of a central bank digital currency, the US House of Representatives in 2021, mid 2020.

[00:41:06] Had an act put up called the 21st Century Dollar Act. Now, while it didn't specifically say we need a central bank digital currency, it raised concerns about other people having a central bank digital currency, which is of course in the financial arms race. The justification for getting on yourself. I've heard a lot of chatter around, around London, really frankly, about a central bank digital currency being a solution to some of these problems.

[00:41:30] I think what people have to understand first and foremost about currency, it's like it should be taught in every economics class, but it isn't apparently, is that currencies are a trust-based relationship. The economist time am Minsky used to say, anyone can create a currency. The problem is getting it accepted.

[00:41:46] What he meant by that is, you or I can create a currency. If I write, I owe you. X dollars, pounds, whatever euro, I hand that to you, and it's a form of currency. And the currency there, the, the relationship that currency establishes. If I get you to do my plumbing for me based on this i o U, it's a relationship of trust.

[00:42:03] And actually all financial relationships are ultimately when you boil them down. Trust based relationships typically enforced in a court of law. The problem with trying. Be too aggressive with monitoring of financial transactions is that people will lose trust in the thing that's being monitor. Nigeria, that level of monitoring is much lower in the west.

[00:42:25] In the West we're comfortable paying our taxes. Most of us, most of us don't engage in money laundering, which I think is genuinely can be categorized here as something in a place like Nigeria. A lot of people, frankly, probably don't pay their taxes, and a lot of people do engage in things that could be classified as, as a form of money laundering.

[00:42:43] And so if you try and bring them immediately up to Western standards, you get this run on the at. My feeling is that if we try and go too far, even past what we currently have now in the West with, for example, a central bank digital currency, which could in theory be used for all types of monitoring, it could be used as a kind of a micro level sanctions program on individual citizens.

[00:43:05] I think what will happen is people will simply exit that currency system. There are plenty of alternatives now there. It's, it's easier to create a cryptocurrency. Than it is to bake a cake these days. There's all sorts of payment platforms and payment system. Jai Minsky's still right? Anyone can create a currency.

[00:43:22] The problem is getting it accepted. If you diminish the trust in the state currency, you'll see a proliferation of private currencies. Uh, mushroom up. It always happens. Um, whether it be cigarettes in prison or whatever, or more advanced things like various types of crypto coins and so on. So I just think, um, we should look to Nigeria and not kind of snicker at a, at a, at a failed policy of a, uh, in a somewhat poor country, but actually look and say, well, what, what's actually caused this strange phenomenon?

[00:43:50] And realize that it's actually, when you try and impose too much on a trust-based system, I think this is the result you get. I just hope we don't try anything like, In response to realistic fears about the future of our currencies as reserve currencies, the 

[00:44:05] Andrew Collingwood: argument for digitalization of financial transactions on a, on a retail level, from person to person or from person to small business, and you know, FinTech, financial technology that can be carried around on somebody's mobile phone, if not digital currencies as a whole are actually quite interesting, I think for emerging economies, especially kind of frontier economies in places like Africa.

[00:44:30] Because of course, it's quite expensive to build out a, you know, a banking network for the average person. As you know, the cost of bank branches, of training, people of, of ATMs, of moving money around the country, securely, you know, transport and logistics routes might not be good. It might be not the, the safest place in the world.

[00:44:51] So, you know, if you can move to more digital transactions, especially since you know so many Africans, these. The arguments for that are quite good, I would've thought. And in addition to that, in emerging economies, uh, you also have a certain degree of counterparty risk. And the regulation of the banking sector is not necessarily as strong.

[00:45:13] Banks might not necessarily hold as much collateral as you would like them to. So you know, the potential for a digital currency to remove some of that risk might be strong as well. I just think, as you said, moving. So rapidly towards a full-blown digital currency, which the central bank seeks to control and the government seeks to corral people toward using perhaps isn't the way to go.

[00:45:39] There are a lot of ways to encourage people to help the people who are unbanked or underbanked within the emerging world by using financial technology or FinTech as it's. Outside the government doing that. And I certainly think that's true in the West. One of the things that I noticed the last time I went to the US like five or six years ago is that when I paid for things with my bank card, I still got a printed receipt that I had to sign in hand to the person at the uh, at the tills.

[00:46:08] And a friend of mine in the US at the moment, American friend of mine, who lives in the US says that people are still carrying around checkbooks in the US as well, which to me seems kind of real. Primitive stuff. I'm in my forties, but I can barely remember checkbooks myself. Even in Europe, I, you know, I hear contacts and friends who live in China where they said Europeans and Americans are miles behind.

[00:46:31] Things like WeChat in China make it so easy to make transactions. And, you know, FinTech and banking apps in Southeast Asia are way ahead of those in the west. So there are all kinds of things that we can do to improve the financial system to make it easier. Give people access to easy payment structures and things like that without going as far as trying to corral people to use a currency, which, as you say, has quite a lot of question marks in terms of civil liberties.

[00:47:02] And we saw what happened with Justin Trudeau last year with the truckers, where he went into people's bank accounts and, and, and, and contribution funds and all sorts of things and started freezing them. And you know, goodness knows what would happen. Everybody was using a digital currency, which the government had ultimate control of.

[00:47:21] But perhaps you can explain the argument, uh, Philip to me. But how on earth would moving toward a digital currency help the US dollar maintain its reserve status around the world? Uh, it sounds to me like the plan is something like, you know, step one, introduce a digital currency. Step two, question mark, question mark, question mark, step.

[00:47:43] Hedger money maintained. Ha. I don't understand what that kind of step two is. 

[00:47:48] Philip Pilkington: Yeah. I certainly don't. I, I, I think step two has something to do with the vast amounts of, uh, crypto marketing money, swelling around anywhere where people are willing to listen to a lecture. Yeah. 

[00:48:02] Andrew Collingwood: So you're trying to tell me that lobbying money has had an influence on Washington policy.

[00:48:07] Really surely. 

[00:48:08] Philip Pilkington: Well, well, it's not quite policy yet, but it's, it's certainly injected that meme as they say. FinTech is great. All power to FinTech. If you can convince people of using your app, again, it's back to Minsky. If you can convince people of using your form of money, go for it. Do it, you know, be the best at it that you can be, but it really has to be a carrot approach and not a stick.

[00:48:31] The moment that people. That you're trying to beat them into using a certain form of currency that'll run away from that currency. Money's a really primitive relationship. Like it has to be one of the most primitive relationships between people. You know? It's actually not that dissimilar without getting too philosophical as language.

[00:48:49] Right. And what's the cause of societal breakdown? Well, it's often when you try and ban each other's languages or force somebody to use your language and not theirs, that's usually the the kind of thing that produces social. The same thing as the case with money. If the Roman Empire came in and, uh, expanded into your borders, the first thing that they're going to try and get you to do is to use their currency, obviously, and use their financial system.

[00:49:13] So you have to be very, very powerful and have big guns to get people to forcibly use your money. Now, it's one thing to talk about trying to impose your money on another country. It's another thing entirely to try and forcibly convince your own citizens to use your money. I think when you're at that point, you're at the point where trust is being completely lost in your financial system, which is an entirely trust based system.

[00:49:40] Now, don't get me wrong, we're nowhere near that yet. We don't have runs on ATM machines like they do on. Because we haven't actually tried to do this, but when you see some of these experiments around the edges in doing it, and when you see a lot of talk about implementing technology, that would make it very easy to do.

[00:49:59] It makes me quite nervous. I'll just say one other thing. The Central Bank currencies themselves don't open the door to potential for what might be called spy coins. You could, you could do this, you could have run this technology for years. You could have done it in a very simple way. All you'd have to do is every note that's issued by a monetary authority has a, a barcode of some sort, right?

[00:50:22] It's a unique identification number. And if your currency doesn't have one, the central bank could easily make one. Okay? And all you'd have to. Is used that barcode to track where the, where the dollar went. Now would it be perfect? No, but you couldn't theory do it. Especially if, if, if these things were being, uh, constantly, uh, popped back into the banking system, it would be a little complex to do, but you could give it a shot and you might actually be able be able to do something like that.

[00:50:51] There are other ways that you can introduce into a pre-digital system forms of, uh, monetary tracking and. But no one's ever tried to do it because it's a bad idea. It destroys trust in the currency. Now, the issue with these technologies isn't that it makes it possible to do this, it's that it makes it very easy to do this.

[00:51:10] Technologies like this almost want to track you. I mean, that's the direction they go in. That's what we see with all the social media technology and so on. So it just opens the door to it much more easily. And so it kind of provides the temptation, you know, it's like the Apple and the Garden of Eden. You can see it right there on the.

[00:51:26] And I think that's what's happening here. It's just, it's a, it's a very bad temptation for policy makers to go down. But honestly, in the worst case scenario, if you imposed something like a spy coin or something like that, and the population gradually started to reject it, and a gray market economy mushroomed up.

[00:51:44] Using all sorts of different payment systems, getting that back under control is gonna be borderline impossible. And by the way, if you think that currency, which isn't even being used domestically is going to be a, a credible candidate for a foreign reserve currency, forget about it. Absolutely not.

[00:52:01] That's absolutely ridiculous. So in fact, imposing this kind of thing actually probably makes your currency less trustworthy and therefore less of a candidate for 

[00:52:09] Andrew Collingwood: reserve currency. That makes perfect sense to me. I perhaps should read more. The push toward the Central bank digital currencies, but I've never quite been able to understand why there's a big push for this.

[00:52:21] Because, you know, systems like Revolut in the UK kind of app only bank essentially I think are great. Fantastic. They work very well and they offer a whole range of things that perhaps couldn't have got with my NatWest account. And you know, they offer a range of services which are useful that uh, really help and, you know, make banking and life in general.

[00:52:44] Much easier. It's clear to me that these things are, are starting to improve the overall service level that banks can offer customers and, and also help customers in a range of ways that they weren't able to help before. But why then does central Banks want to get involved in that? Produce a currency that's somehow different from the digital transactions that you would already do through your, your Revolut card or your ordinary bank account?

[00:53:13] Sure. You know, as FinTech develops, okay, you want some regulator to make sure it's not the absolute wild west where, you know, we've had hints that the world of crypto is a little bit like that at the moment. So you wanna make sure that people don't get completely ripped off that these banks still have certain minimum reserve and capital requirements and, uh, they don't take customers for a ride.

[00:53:39] But beyond that, surely you want. Allow the private sector to develop as it will, because eventually you might get to the stage where these apps become so ubiquitous and internet access becomes pervasive throughout the entirety of society that very few people use cash anywhere. I mean, in, in the West, we've already seen a big decline in cash usage and there are certain shops in the UK that way you walk into and they'll only accept cards that won't accept cash.

[00:54:09] So if governments allowed that process to continue naturally, as those people who are less comfortable with the digital world and doing their banking online, pass on, then surely would go to a kind of a digital digitalized currency and transaction system. Anyway, I struggle to get my head around why central banks would then want to introduce their own.

[00:54:35] Parallel currency, which would also be tradeable digitally, but would not be available in physical format. Whereas the existing one would have exactly the same digital transaction and servicing power as the, the brand new currency. But you would also be able to get it in physical form. It would be something that you trusted.

[00:54:56] I mean, I, it's really just beyond me why there's this push and as we see in Nigeria at the moment, Efforts to corral people into it, especially, I would've thought in a low trust and cash based economy, like I'm sure Nigeria is because many emerging market markets are. It just perplexes me completely. I'm, I'm, I'm not sure quite understand it 

[00:55:18] Philip Pilkington: well.

[00:55:18] I think it's probably an instance of what you call do somethingm. It's probably one of those, or what the kids say nowadays. Fomo, you know, maybe the central bankers see all. Hip, young folk coming in and 21 new employees and they all know about the latest crypto. You know, the older guys wanna hop on board, but in a kind of civilized way with a shirt and tie.

[00:55:41] I don't think it's going to end up being the wave of the future, but I hope we don't have to experiment and, uh, experience the potential negatives to realize that

[00:55:56] Andrew Collingwood: you've been listening to Multipolarity Subscriber Follow for Fresh episodes every week.

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