- - Sunday, May 11, 2014


While fearful eyes concentrate upon events inside Eastern Ukraine, some ignore a larger threat that could change forever the way we live inside America, Western Europe, and Japan.

Russian President Vladimir Putin’s choreographed pirouettes towards territories in the former Soviet Union may simply be the opening act in his attempt to recalibrate the balance of power between Russia and the rest of the world.

A credible plan to introduce a widely traded currency that holds value relative to precious metals, petroleum and natural gas would start disrupting global markets shortly after being announced.

A new currency for savers?

Sponsored by Russia, with support from like-minded governments, this new currency would suddenly strike the debt-addicted and deficit-prone West at the center of our financial hearts. In an instant, we would lose unchecked ability to turn pieces of paper and digital entries into items of value as so many governments and central banks have done.

Seemingly with little notice, the terms of trade in global commerce would adjust abruptly to favor producers of key natural resources, the creditworthy, and those who live within their means. Such nations’ assets exceed their debts and, as prices rise for the commodities they sell on global markets, their financial strength would only increase.

Dethroning fiat currencies suddenly would hurt all who have failed to plan appropriately, yet leave Russia in commanding position to serve rising consumers in China and India with exported petroleum and natural gas. Moreover, Russia would have even more financial wherewithal to purchase those imported goods required to modernize and expand infrastructure.

Nothing lasts forever

For too long, savers have been trapped in currencies such as the dollar, the euro, and the yen — all “fiat” currencies that are evidently backed now by hollowed out promises and have managed to decline in value.

Instead of understanding and heeding Mr. Putin’s overarching concerns and repeated warnings about the still-stressed global financial system, we “shoot first and aim later” trying to change his calculus in Russia’s sphere of influence by imposing and potentially widening, manifestly ineffective sanctions.

Defiant today and potentially even emboldened, Mr. Putin is not only redrawing the map within Russia’s sphere of influence. He seems fully prepared to earn his mark in history challenging us in ways that were unthinkable before 2009. Should he succeed, and well he might, overleveraged Western governments, financial institutions, corporations, and households could suddenly come crashing down again.

The biggest deficit we face inside America, Western Europe, and Japan is a competence deficit when it comes to considering global market realities. Elected leaders, minions in the bureaucracy, and mavens in the mainstream punditry cannot seem to grasp simple economic truths.

When supply exceeds demand, prices fall.

When demand exceeds supply, prices rise.

Because savers have long been denied viable alternatives, prices for most Western assets have been pushed up artificially using means that cannot work for much longer.

Will Putin prove Lenin correct?

Vladimir Lenin once described capitalists as toiling “to prepare their own suicide.” Especially in recent years, the evidence may prove Lenin correct.

The toughest lesson we soon shall learn first-hand in America, Western Europe and Japan is that you cannot pay bills forever using currencies backed by empty promises.

Despite holding so many strategic advantages for so many years, America and allied nations steadfastly refuse to redress imbalances in the supply and demand for financial assets.

Should Mr. Putin have his way, prices for our assets will fall sharply just as our borrowing costs soar. When this happens, those of us who remain unprepared will have only ourselves to blame.

Charles Ortel serves as managing director of Newport Value Partners (newportvalue.com), which provides economic research to executives and to investment firms.



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