The Breakdown - Putin Weaponizes Inflation

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, June 26th, and that means it's time for Long Reads Sunday. And boy, today, do we have a spicy one for you. But before we dig into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the show notes, come join us on the Breakers Discord. You can debate us about the meaning of Putin's weaponization of inflation, or discuss basically any other topic you want. You can find a link in the

Starting point is 00:00:50 show notes or go to bit.ly slash breakdown pod. Lastly, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. Now today, we are reading and discussing a thread from Stack Hoddler, which is actually a reflection on a speech that Vladimir Putin just gave. What we're going to do first is go through the summary as Stack Hodler has presented it, and then we'll discuss it point by point. Putin just gave a speech with massive implications for Bitcoin and global macro. We won't read a word of it in Western media, so I pulled out the interesting bits. Regarding freezing of foreign exchange reserves and assets, quote, the very principles of the global economic system have taken a blow. Fundamental business notions as business reputation,

Starting point is 00:01:34 the inviolability of property, and trust in global currencies have been seriously damaged. The quote continues, When I spoke at the Davos Forum a year and a half ago, I also stressed that the era of a unipolar world order has come to an end. I want to start with this as there is no way around it. This era has ended despite all the attempts to maintain and preserve it at all costs. End quote. Stack Hodler goes on, saying, on the use of sanctions.

Starting point is 00:01:58 Putin again? Sanctions as a weapon have proved in recent years to be a double-edged sword damaging their advocates and architects just as much, if not more. We see social and economic problems worsening in Europe and in the U.S. as well. Food, electricity, and fuel prices rising, with quality of life in Europe falling and companies losing their market edge. The European Union has lost its political sovereignty and its bureaucratic elites are dancing to someone else's tune, doing everything they are told from on high and hurting their own people, economies, and businesses. And basically the rest of it is all just straight Putin quote, so I'm just going to read it straight on through. Surging inflation

Starting point is 00:02:33 and products and commodity markets has become a fact of life long before this year. The world has been driven into this by years of irresponsible macroeconomic policies pursued by G7 countries, including uncontrolled emission and accumulation of unsecured debt. Because they could not or would not devise any other recipes, the governments of the leading Western economies simply accelerated their money printing machines. Such a simple way to make up for unprecedented budget deficits. Over the past two years, the money supply in the United States has grown by more than 38%. The EU's money supply has also increased dramatically over this period.

Starting point is 00:03:06 It grew by about 20% or 2.5 trillion euros. We all hear about the so-called Putin inflation in the West. When I see this, I wonder who they expect would buy this nonsense. People who cannot read or write, maybe. Anyone literate enough to read would understand what is actually happening. So they printed more money, and then what? Where did all that money go? It was obviously used to pay for goods and services outside Western countries.

Starting point is 00:03:29 This is where the newly printed money flowed. They literally began to clean out, to wipe out global markets. While at the end of 2019, imports of goods to the United States amounted to about $250 billion a month, by now it has grown to $350 billion. It is noteworthy that the growth was 40% exactly in proportion to the unsecured money supply printed in recent years. America's role has changed drastically. It has turned from a net exporter of food into a net importer.

Starting point is 00:03:56 Loosely speaking, it is printing money and pulling commodity flows its way, buying food products all over the world. The European Union is building up imports even faster. Obviously, such a sharp increase in demand that is not covered by the supply of goods has triggered a wave of shortages and global inflation. Under the cloud of inflation, many developing nations are asking a good question. Why exchange goods for dollars and euros that are losing value right before our eyes? Global currency reserves are at 7.1 trillion and 2.5 trillion euros now. These reserves are devalued at an annual rate of about 8%. Moreover, they can be confiscated or stolen any time if the United States dislikes something in the policy of the states involved.

Starting point is 00:04:35 I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies. A conversion of global reserves will begin. They will be converted from weakening currencies into real resources like food, energy commodities, and other raw materials. Obviously, this process will further fuel global dollar inflation. Then Stack sums up in their last tweet. It was a long speech. But the main takeaway is that Putin expects the world to move away from sovereign debt as a primary store of value. There are 13 trillion in global foreign exchange reserves. That wealth needs to be moved into something that can't be debased or seized. Got Bitcoin? I should also say that Stack gives a caveat, I don't simp for Putin

Starting point is 00:05:15 or any other politician. I don't agree with murdering political opponents and I wouldn't want to live in Russia. But I understand not wanting to trade scarce goods for fiat printed from the sky, and I think the implications are worth considering. Now, I agree with that entirely. It is worth considering, but I think that we want to put it in its context as we consider it as well. Because make no mistake, even if you, like me, find yourself nodding along to parts of this, it is propaganda. Now, the reason it's worth looking at even as propaganda is that when a good propagandist is trying to shape a narrative, we have a chance to learn what they believe will resonate with their targets. In other words, it doesn't matter if all of these data points are cherry-picked to elicit a specific

Starting point is 00:05:58 response that Putin would find politically favorable to him. If he is trying to craft a new narrative for emerging market leaders or other governments that are non-aligned, the specific points that he chooses to cherry-pick and the overall narrative that he tries to strike is still worth examining. I think Stack did a great job curating, so I'm actually just going to go point-by-point based on what they presented. The first point was the idea that this freezing of foreign exchange reserve assets that just happened was a blow to the principles of the global economic system. I think that this is true. The weaponization of the dollar system is a creeping but real phenomenon.

Starting point is 00:06:36 For the vast majority of U.S. allies, maybe our actions vis-à-vis Russia's reserves won't register as a huge reason not to deal in U.S. treasuries, but for some it will. And even in those it doesn't really, it still makes clear that this is a line that that the U.S. is now willing to cross, albeit in extreme circumstances. I'm not sure that the U.S. political establishment has fully thought through those long-term implications. They're much less pronounced than the big bat signals that politicians tend to deal in. This is the type of thing that creates the seed of a germ of a doubt that festers, even in allies, and ends up impacting behaviors in really subtle ways. A hedge here, a hedge there, away from U.S. controlled reserves.

Starting point is 00:07:18 over enough time and distance that can lead to big change. Now, I will also point out because I can't not, that a man who invaded another sovereign country lecturing about the inviolability of property is pretty fucking rich. But again, we're not here to just understand the point he's making but why he's making that point, and who he's trying to make that point for

Starting point is 00:07:40 and why he thinks it will resonate. In this case, he's trying to give life to that germ. Nexo lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins. Nexo makes passive income easy with interest paid automatically and daily. With Nexo, you can also borrow against your crypto at 0% APR and exchange over 300 pairs. Receive a welcome bonus of up to $150 in Bitcoin until June 30th at nexo.io. That's nexo.com.

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Starting point is 00:09:39 The U.S. is in retreat from its role as global policemen, and if you want to understand how this shift has been happening and what the historical context is, go read basically anything from Peter Zion. That said, I think what we're experiencing and understanding is that withdrawing isn't so easy. as it seems, and I expect there to be a lot of geopolitical volatility for some time. Next, Putin claims that sanctions as a weapon have proved in recent years to be a double-edged

Starting point is 00:10:03 sword, damaging their advocates and architects just as much, if not more. Nearly all of the tools of foreign engagement are blunt instruments, and he's not wrong that sanctions come with huge consequences. Unfortunately, usually it's for the bottom rung of the socioeconomic ladder in the targeted countries. But I would not go so far as to say that they damaged their architects as much as they damage their intended targets. Look no further than Russia following sanctions after it annexed Crimea to understand how sanctions can weaken a country significantly. Indeed, what Putin is clearly trying to do here is flip the narrative and say your sanctions have not worked. Next up is Putin talking about social and economic problems worsening in Europe and in the

Starting point is 00:10:43 U.S. Food, electricity, and fuel prices rising. The European Union losing its political sovereignty, bureaucratic elites. This is both general and specific. It's specific in that Putin is shifting blame off of himself and Russia for the problems that it is causing, namely energy and food. But it's also general in the sense that it's a broad appeal to populism, effectively blaming elites for all the ills that people are experiencing. We've seen over the last few years that there is a large and ready-willing audience for this around the world. This is also a good reminder, however, that in addition to speaking to foreign governments and nations,

Starting point is 00:11:19 he is also speaking to his own citizens here as well. He's trying to make the people next door look worse, which is implicitly saying we're better or at least not as bad as you might feel we are. But then we get to the next section, which is frankly the most interesting. This is the section in which he talks

Starting point is 00:11:35 about surging inflation. He talks about the West having no ideas other than to fire up the money printing machine. He talks about the rise in the money supply in the United States and the EU. And at this point, it sounds like it could be coming directly from a Bitcoiner, which is probably why it's getting such traction on Twitter. This is nothing less than the propaganda weaponization of inflation. And to be clear, the attempt here is to make the West look

Starting point is 00:12:01 gluttonous, stupid, bereft of ideas. He goes on talking about, we hear about so-called Putin inflation, and I wonder who would buy this nonsense, and then says it's all about the printed money. So a couple things here. First, of course Putin is going to acknowledge the Western claim of Putin's inflation. It puts him in a position of power. Frankly, that's a narrative risk that the Biden administration took by trying to use this as a lever. But also he's not wrong that people spotted this as political bullshit right away. It's not that war didn't and isn't contributing to inflation, of course it is. But come on, man. We were already in the sixes and sevens in terms of annual inflation percentage based on official measures before the war ever happened. The problem when you try

Starting point is 00:12:49 to re-narrativeize something that's clearly untrue is that people just don't buy it and you give your political opponents blunt instrument weapons that work like this one. But let's go back to this argument I'm making that Putin is trying to make the West look gluttonous, stupid, and bereft of ideas. The next part of this is he goes on to talk about how our imports have come in dramatically, how our role has changed drastically. What I believe he's doing here is shifting fundamentally the narrative of globalization. Instead of an America that has built a deeply interconnected globalized system of market efficiencies, that has allowed it to change its production models and where it sits in that

Starting point is 00:13:28 economic system. Putin is instead depicting America as a decrepit shell of itself, not even able to feed its own people anymore. economics becomes moralistic in this construction. I don't think it's an accident he chose to focus on food. Not being able to produce food, which, by the way, is an artificial construction just for this argument. But again, that's neither here nor there. Not being able to produce food isn't just an economic decision.

Starting point is 00:13:54 It's a moral failure. Sure, there's a lot that Putin is glossing over, of course. Such as the fact that in the wake of the fall of the Soviet Union, Russia became the world's biggest exporter of raw everything, because it lacked the capacity to turn those everythings into the actual things that people need. But that's not the point of this speech. The point of this speech is reframing globalization as failure, and not just an economic failure, but as a failure of leadership. But then we get to the attack on American currency and American foreign exchange reserves.

Starting point is 00:14:24 Putin says, under the cloud of inflation, many developing nations are asking a good question. Why exchange goods for dollars and euros that are losing value right before our eyes? I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies. A conversion of global reserves will begin. They will be converted from weakening currencies into real resources like food, energy commodities, and other raw materials. Now, this is quite transparently not the recognition of a threat. It is an attempt at self-fulfilling prophecy. I am not up to speed enough to know what Putin's objectives are vis-a-vis other nations.

Starting point is 00:15:02 and I also don't know to what extent this is aimed just at citizens in his own country versus at some of those foreign heads of state. But whatever the case, the fact is that inflation is now officially being weaponized as a tool of propaganda by one of the U.S.'s most apt political opponents. I think it's a super interesting speech, and I really appreciate Stack Hodler taking the time to pull these parts out of it. For now, I want to say thanks again to my sponsors, nexus.io, near and FtXX. and thanks to you guys for listening.

Starting point is 00:15:34 Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Putin Weaponizes Inflation

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