U.S.-China | How will Chinese Digital Currency Help the Yuan vs Dollar

The People’s Bank of China (PBOC) started working on its digital currency (CBDC) in 2014. In April, the PBOC introduced pilot programs in four large cities. In July, China’s ride-hailing company said it was working with the PBOC to test the Chinese digital currency on its platform. In August, China’s Commerce Ministry said it would expand the program to Beijing and Hong Kong. The PBOC also indicated the plan to test the digital yuan’s capabilities and risks in cross-border transactions during the 2022 Beijing Winter Olympics. The digital yuan is known as “DC/EP,” or “digital currency/electronic payment.” Users will not require bank accounts. The digital wallet might allow touch payments without the internet. Unlike Bitcoin, it will be highly centralized. And the central bank seeks “controllable anonymity.” The CCP is will more likely use the digital yuan to replace all renminbi in circulation and increase surveillance on Chinese citizens. On August 7, the Treasury sanctioned 11 Chinese Communist Party and Hong Kong officials. And China’s large state-controlled banks are complying because the US dollar currently holds a dominant position. Apparently, the CCP intends to bypass the dollar system. Once complete, Beijing could share the digital currency technology with other countries and ask the Belt and Road participating countries to accept the digital yuan, creating a digital belt and road. A cheaper, faster payment system that avoids US sanctions would be a challenge to the US dollar dominance. According to the BIS, about 50 countries participated in the Central Bank Digital Currencies (CBDC) projects. The Federal Reserve has been researching on the digital dollar. On August 13, Governor Lael Brainard brought up some obstacles. Trust in the CCP has been deteriorating even among belt and road countries. Some have canceled, downsized, or postponed the projects to avoid debt traps. It is hard to say if they’ll adopt the digital yuan. That doesn’t mean ignoring challenges to the USD. Instead of merely catching the digital trends, the US government and the Fed should focus on responsible fiscal and monetary policies that protect the market’s confidence in the USD.

 

Transcript

China’s digital currency (CBDC) being tested has caught the world’s attention. And a Foreign Affairs article painted a picture as such. In 2022, Iran is purchasing critical components for its nuclear and missile programs. The funds come from selling oil to China and Europe. And all transactions are done with the digital yuan that bypasses U.S.-controlled financial systems. America’s ability to sanction its enemies is significantly weakened. In this video, we’ll discuss whether the digital yuan can challenge the USD dominance. What risks will it bring? And how is it different from the current digital payments and cryptocurrencies? The Leader in Large-Scale Testing The People’s Bank of China, China’s central bank, started working on its own digital currency back in 2014. In May 2019, the BBC revealed Facebook was planning to launch its version of cryptocurrency, Libra, by the first quarter of 2020. This motivated the Chinese Communist Party to speed up the digital yuan’s development. And regardless of whether the Libra would be approved by western governments, the CCP wanted to win the race. In April 2020, the central bank introduced a pilot program in four of China’s large cities. And screenshots of the digital wallet mobile app were circulated on the internet showing functions of making and receiving payments. In Suzhou, a large city west of Shanghai, the government employees would start receiving half of their transport subsidies in digital yuan. In July, China’s ride-hailing company, Didi, said it was working with the People's Bank of China to test the digital yuan on its transportation platform. And in mid-August, China’s Commerce Ministry said it would expand the pilot program to regions that include Beijing and Hong Kong. The central bank also indicated the plan to test the digital yuan system’s capabilities and risks in cross-border transactions, which will take place during the 2022 Beijing Winter Olympics. Under the proposed timeline, a digital yuan-based international payment system will start running in about a year and a half. It will likely be the world’s first government-operated digital currency system. As an authoritarian regime, the Chinese Communist Party might not be concerned about violating people’s privacy when pushing for the digital yuan. Once the tests turn out successful, large scale adoptions might complete very quickly. So how will the digital yuan work? “Controllable Anonymity” The digital yuan doesn’t have an official name but is known internally as “DC/EP,” which is just short for “digital currency/electronic payment,” Unlike the current digital payment systems such as Alipay and WeChat Pay, digital yuan users will not require bank accounts. And according to Mu Changchun, the People’s Bank of China official in charge of digital yuan’s development, the digital wallet will allow some form of touch payments where transactions can occur even without the internet. Compared to Bitcoin, which is believed to be decentralized and anonymous, the digital yuan will be highly centralized. Although the central bank claimed the parties to the transactions will be anonymous, in practice, it seeks quote “controllable anonymity.” It will be able to track the users’ purchases. And therefore, the system could help fight money laundering, gambling, and terror financing. The People’s Bank of China has also claimed the digital currency was intended to replace some physical cash in circulation, also known as M0. That was not very convincing. China already has a very high level of cashless rate. According to the central bank’s report, by the end of 2018, 82.39% of China’s adults used digital payments. There are 900 million people that use Alipay. And, in 2019, cash only accounted for 4% of household financial assets versus 24% in the United States. It would be hard to believe all the resources spent are just to erase the 4%. “Actually, replacing the M0 would be just a start. It will not be limited to M0. Instead, it should replace all the currency and maximize the digital currency’s functionality and value. Otherwise, there will be issues with return on investment,” writes Wang Yongli, former vice president of Bank of China. Therefore, the CCP is will more likely use the digital yuan to replace all the renminbi in circulation and increase its surveillance on China’s economy and every Chinese citizen, especially political dissidents. When the central bank can create and issue money digitally, it can seize the citizens’ money with one push of a button. And will the digital yuan help the CCP challenge the US dollar? “The Digital Belt and Road” On August 7th, the U.S. Treasury Department sanctioned 11 Chinese Communist Party and Hong Kong officials. The targets included the director of the CCP’s liaison office in Hong Kong, Luo Huining, and Hong Kong’s chief executive, Carrie Lam. On August 12th, Bloomberg News reported that China’s largest state-controlled banks are taking steps to comply with U.S. sanctions. This might sound surprising to many people. Why would China’s banks do anything against their government by a foreign country’s order? But the reality is the U.S. dollar currently holds a dominant position in global finance. And in 2019, almost 90% of international transactions were conducted in US dollars. The U.S. government can ask all banks that process US dollar payments to stop providing services to those under sanctions. And, apparently, the CCP does not want to be put in such a position. It intends to bypass the dollar payment system. In the state media CGTN’s words, the digital currency provides quote “a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.” Aditi Kumar and Eric Rosenbach at Harvard Kennedy School, authors of the Foreign Affairs article, believed once the digital yuan is successfully launched in China. Beijing could simply share this technology to countries with the same motives. For example, Iran could adopt the same technology and build a compatible digital currency system. And the trade between the two countries would technically be no longer trackable by the US government. And what might happen when the People's Bank of China does become the first central bank to introduce a digital currency that works? Matthew Graham is the chief executive officer of Sino Global Capital. He predicted quote: “It’s very possible that other countries adopt the China framework, and then a first-mover advantage turns into a strong network effect…This is the best-case scenario for China.” Beijing could ask the Belt and Road Initiative's participating countries to start accepting the digital yuan. And this might include using the digital yuan to make loan payments. It could pay to install infrastructures such as point-of-sale terminals and lower the transaction fees, effectively create a digital belt and road. As Bank of America’s analysts pointed out, Asian countries like Thailand, Singapore, and South Korea are assessing their digital currencies. Those currencies might be integrated with the yuan-based systems and quote “especially if it entails significantly lower transaction costs and real-time transfers.” In fact, the CCP has already been doing that under current systems. On August 3, China waived transaction fees between the yuan and 12 currencies, including the Russian Rouble, the Singapore dollar, the Korean Won, and the Thai Baht. According to the State Administration of Foreign Exchange, this move was to quote: “actively cooperate with the national belt and road development strategy.” A cheaper, faster payment system that can also avoid US sanctions would be viewed as a challenge to the US dollar’s dominance. Then what should the United States do about it? Obstacles to The Digital Dollar The People’s Bank of China is not the only central bank working on the digital currency. According to the Bank for International Settlement, about 50 countries participated in the Central Bank Digital Currencies projects in 2019. Michael Casey at CoinDesk believes there is a lot at stake. “A China victory in the digital currency race would have profound negative effects for the U.S., and Western capitalism generally,” he said. "If the U.S. doesn’t catch up soon, it’s going to lose.” Kumar and Rosenbach suggested the United States develop the dollar version of digital currency. And they hope it will quote: "combine the strength and stability of the US dollar with the convenience and efficiency of digital technology." The Federal Reserve has indeed been conducting research and tests on hypothetical digital dollars. But, on August 13, Governor Lael Brainard brought up some significant obstacles to having a digital dollar. Among them was whether the Fed can build a digital currency system that can resist cyberattacks. And another would be to settle the legal question of whether the over 100-year old Federal Reserve Act allows issuance of digital currency at all. On top of those, we should expect to see pushbacks from Americans who value privacy and limited government surveillance. It seems a lot of debate will take place before the Fed receives a go-ahead. And the chance the Fed will roll out a digital dollar before the digital yuan would be minimal. The Future of the Dollar “Remember that credit is money.” This was a quote by Benjamin Franklin. And it revealed the essence of modern currencies. Since 1971 when President Richard Nixon declared that the dollar was no longer convertible to gold, we lived in a world with only fiat currencies backed by the faith in their respective governments and economies. More importantly, a fiat currency's fundamentals depend on whether a country has checks and balances, the rule of law, and a market-driven exchange rate. The CCP provides none of those. Therefore, in reality, the Chinese yuan has very low credibility. And although China is the second largest economy, the yuan’s usage falls behind the EURO, the Japanese Yen, and the British Pound. The trust in the CCP has been deteriorating even among belt and road countries. Some of them have canceled, downsized, or postponed the projects to avoid potential debt traps. It is hard to say whether they will gladly adopt a digital yuan issued under the CCP’s control. But that doesn’t mean we can ignore challenges faced by the US dollar. We believe in the long run, the dollar's dominance will have to be secured by the US economy's strength, not the other way around. Therefore, instead of merely catching the digital currency trends, the US government and the Federal Reserve should focus on introducing responsible fiscal and monetary policies that protect the market’s confidence in the dollar. How much international acceptance do you think the digital yuan will receive? Leave your comments below. Thank you for watching Unseen Fortunes. If you enjoyed our content, please click like, subscribe, and share. We’ll see you next time!

 

Reserve Currency set by Country that offers Regime Protetion (Petro-Dollar)

Reserve Currency Status

Brainard’s speech didn’t address recent concerns regarding the reserve currency status concerns of the US dollar or China’s current lead in the CBDC race, which could advance its national interests. The reserve currency status is among others determined by the resilience of a country’s payment system, depth and trust in the well-functioning of the capital markets and exchanges, appeal to and innovation acumen of its tech industry and financial market infrastructure, international thought leadership, lead into climate change solutions and the global military might and power base, which reinforces adoption of a currency. (Customers pay for oil in the currency of the nation which offers regime protection at the oil fields. Asians and Europeans move every month out of their home currency in favor of the US Dollar to pay for their imported oil bill).  Global adoption can also be ensured if censorship or control concerns, linked to the use of the CBDC, can be substantially mitigated.

Referring to innovation acumen and climate change solutions, could the central bank digital currency project incorporate scientific data observations regarding climate change triggering terrestrial and atmospheric trends? Could TRACE, a consortium tracking greenhouse gas emissions 24/7 by satellite, foster a balance between monetary policy and a thriving planet and be made part of this initiative? Could monetary policy be framed incorporating observations from those data trends, with support from climate scientists? Could digital currency be directed at ZIP code levels, impacted by climate change calamities? From a supervisory perspective, could solvency weightings for banks’ asset exposure be dynamically set as a function of the data observations and the remaining finite carbon budget? Could bank stress testing scenarios under CCAR (Comprehensive Capital Assessment and Review), undertaken to assess the banks’ adequacy of solvency levels, be articulated as an extended continuum of such climate change observations?

Innovative monetary design ingenuity linked to climate change solutions can only solidify the continued appeal in the US dollar as the global reserve currency.

The Current Five-Headed Crisis

The current crisis is five-headed in nature, characterized by a

  1. public health crisis, a
  2. financial crisis, a
  3. social justice crisis, a
  4. climate change crisis and a
  5. trust crisis in institutions and international trade.

Could a central bank digital crypto currency address each of the crisis challenges? How could financial inclusion offer a dent into the social injustice paradigm? How could distributed, decentralized and crypto-graphed data sharing enhance trust in institutions?  How could the Central Bank consensus protocol be made more energy efficient than the private crypto-currency protocols? How could smart contract design introduce a central bank digital currency-based reward economy?

Instead of offering mere helicopter money, could compensation be offered in exchange for contributions to the regenerative (climate change) and caring economy (childcare and parental care at home)? How could blockchain supported supply chain data trace the global export and import flows in relationship to FX trades and exchange rates? How could market intervention and/or sustainable change to circular economic paradigms be steered on the back of those data?

Need For A New Anchor Currency 

The debasing of currencies by the most important central banks ($6 Trillion of QE in the US alone), the arising currency tensions in the emerging markets (e.g. Lebanon, Turkey, South-Africa,….) and the COVID-19 default impact on total debt outstanding of $258 trillion per Q1 2020 will only accelerate the need and call for debt rescheduling and ensuing FX rate mechanism interventions. If gold is no longer an option, could a central bank issued stablecoin, finite in supply, become a store of value or new anchor currency to manage the restructurings and market support activities?

Brainard’s speech makes reference to a new initiative with the Bank of International Settlement’s Innovation Hub. This initiative could provide a useful avenue to design such Central Bank stablecoin.

The collateral base of the stablecoin could consist of a reserve of natural capital assets, consisting of

  • 50% of land and forests,
  • 35% In renewable energy initiatives, and
  • 10% in the top 100 most compliant ESG companies and
  • 5% in biotech research.

The collateral base would be managed dynamically, but would also benefit from monetary policy and prudential supervisory decisions aimed at regenerating the natural capital base on earth and replenishing its finite carbon reserve.  The supply could be managed, within a range, as a function of the TRACE observations.

On the occasion of Bretton Woods II, the new Central Bank Stablecoin could be introduced and offered, akin to the gold standard, as a fixed rate against all other fiat currencies, including the US dollar.

Conclusion 

Milton Friedman once observed, only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. Then, ideas once dismissed as unrealistic or impossible might just become inevitable.

The First Iraq War Was Also Sold to the Public Based on a Pack of Lies

Polls suggest that Americans tend to differentiate between our “good war” in Iraq — “Operation Desert Storm,” launched by George HW Bush in 1990 — and the “mistake” his son made in 2003.

Across the ideological spectrum, there’s broad agreement that the first Gulf War was “worth fighting.” The opposite is true of the 2003 invasion, and a big reason for those divergent views was captured in a 2013 CNN poll that found that “a majority of Americans (54%) say that prior to the start of the war the administration of George W. Bush deliberately misled the U.S. public about whether Baghdad had weapons of mass destruction.”

But as the usual suspects come out of the woodwork to urge the US to once again commit troops to Iraq, it’s important to recall that the first Gulf War was sold to the public on a pack of lies that were just as egregious as those told by the second Bush administration 12 years later.

The Lie of an Expansionist Iraq

Most countries condemned Iraq’s 1990 invasion of Kuwait. But the truth — that it was the culmination of a series of tangled economic and historical conflicts between two Arab oil states — wasn’t likely to sell the US public on the idea of sending our troops halfway around the world to do something about it.

So we were given a variation of the “domino theory.” Saddam Hussein, we were told, had designs on the entire Middle East. If he wasn’t halted in Kuwait, his troops would just keep going into other countries.

As Scott Peterson reported for The Christian Science Monitor in 2002, a key part of the first Bush administration’s case “was that an Iraqi juggernaut was also threatening to roll into Saudi Arabia. Citing top-secret satellite images, Pentagon officials estimated in mid-September [of 1990]  that up to 250,000 Iraqi troops and 1,500 tanks stood on the border, threatening the key US oil supplier.”

A quarter of a million troops with heavy armor amassed on the Saudi border certainly seemed like a clear sign of hostile intent. In announcing that he had deployed troops to the Gulf in August 1990, George HW Bush said, “I took this action to assist the Saudi Arabian Government in the defense of its homeland.” He asked the American people for their “support in a decision I’ve made to stand up for what’s right and condemn what’s wrong, all in the cause of peace.”

But one reporter — Jean Heller of the St. Petersburg Times — wasn’t satisfied taking the administration’s claims at face value. She obtained two commercial satellite images of the area taken at the exact same time that American intelligence supposedly had found Saddam’s huge and menacing army and found nothing there but empty desert.

She contacted the office of then-Secretary of Defense Dick Cheney “for evidence refuting the Times photos or analysis offering to hold the story if proven wrong.” But “the official response” was: “Trust us.”

Heller later told the Monitor’s Scott Peterson that the Iraqi buildup on the border between Kuwait and Saudi Arabia “was the whole justification for Bush sending troops in there, and it just didn’t exist.”

Dead Babies, Courtesy of a New York PR Firm

Military occupations are always brutal, and Iraq’s six-month occupation of Kuwait was no exception. But because Americans didn’t have an abundance of affection for Kuwait, a case had to be built that the Iraqi army was guilty of nothing less than Nazi-level atrocities.

That’s where a hearing held by the Congressional Human Rights Caucus in October 1990 played a major role in making the case for war.

A young woman who gave only her first name, Nayira, testified that she had been a volunteer at Kuwait’s al-Adan hospital, where she had seen Iraqi troops rip scores of babies out of incubators, leaving them “to die on the cold floor.” Between tears, she described the incident as “horrifying.”

Her account was a bombshell. Portions of her testimony were aired that evening on ABC’s “Nightline” and NBC’s “Nightly News.” Seven US senators cited her testimony in speeches urging Americans to support the war, and George HW Bush repeated the story on 10 separate occasions in the weeks that followed.

In 2002, Tom Regan wrote about his own family’s response to the story for The Christian Science Monitor:

I can still recall my brother Sean’s face. It was bright red. Furious. Not one given to fits of temper, Sean was in an uproar. He was a father, and he had just heard that Iraqi soldiers had taken scores of babies out of incubators in Kuwait City and left them to die. The Iraqis had shipped the incubators back to Baghdad. A pacifist by nature, my brother was not in a peaceful mood that day. “We’ve got to go and get Saddam Hussein. Now,” he said passionately.

Subsequent investigations by Amnesty Internationala division of Human Rights Watch and independent journalists would show that the story was entirely bogus — a crucial piece of war propaganda the American media swallowed hook, line and sinker. Iraqi troops had looted Kuwaiti hospitals, but the gruesome image of babies dying on the floor was a fabrication.

In 1992, John MacArthur revealed in The New York Times that Nayirah was in fact the daughter of Saud Nasir al-Sabah, Kuwait’s ambassador to the US. Her testimony had been organized by a group called Citizens for a Free Kuwait, which was a front for the Kuwaiti government.

Tom Regan reported that Citizens for a Free Kuwait hired Hill & Knowlton, a New York-based PR firm that had previously spun for the tobacco industry and a number of governments with ugly human rights records. The company was paid “$10.7 million to devise a campaign to win American support for the war.” It was a natural fit, wrote Regan. “Craig Fuller, the firm’s president and COO, had been then-President George Bush’s chief of staff when the senior Bush had served as vice president under Ronald Reagan.”

According to Robin Andersen’s A Century of Media, a Century of War, Hill & Knowlton had spent $1 million on focus groups to determine how to get the American public behind the war, and found that focusing on “atrocities” was the most effective way to rally support for rescuing Kuwait.

Arthur Rowse reported for the Columbia Journalism Review that Hill & Knowlton sent out a video news release featuring Nayirah’s gripping testimony to 700 American television stations.

As Tom Regan noted, without the atrocities, the idea of committing American blood and treasure to save Kuwait just “wasn’t an easy sell.”

Only a few weeks before the invasion, Amnesty International accused the Kuwaiti government of jailing dozens of dissidents and torturing them without trial. In an effort to spruce up the Kuwait image, the company organized Kuwait Information Day on 20 college campuses, a national day of prayer for Kuwait, distributed thousands of “Free Kuwait” bumper stickers, and other similar traditional PR ventures. But none of it was working very well. American public support remained lukewarm the first two months.

That would change as stories about Saddam’s baby-killing troops were splashed across front pages across the country.

Saddam Was Irrational

Saddam Hussein’s 1990 invasion of Kuwait was just as illegal as the US invasion that would ultimately oust him 13 years later — it was neither an act of self-defense, nor did the UN Security Council authorize it.

But it can be argued that Iraq had significantly more justification for its attack.

Kuwait had been a close ally of Iraq, and a top financier of the Iraqi invasion of Iran in 1980, which, as The New York Times reported, occurred after “Iran’s revolutionary government tried to assassinate Iraqi officials, conducted repeated border raids and tried to topple Mr. Hussein by fomenting unrest within Iraq.”

Saddam Hussein felt that Kuwait should forgive part of his regime’s war debt because he had halted the “expansionist plans of Iranian interests” not only on behalf of his own country, but in defense of the other Gulf Arab states as well.

After an oil glut knocked out about two-thirds of the value of a barrel of crude oil between 1980 and 1986, Iraq appealed to OPEC to limit crude oil production in order to raise prices — with oil as low as $10 per barrel, the government was struggling to pay its debts. But Kuwait not only resisted those efforts — and asked OPEC to increase its quotas by 50 percent instead — for much of the 1980s it also had maintained its own production well above OPEC’s mandatory quota. According to a study by energy economist Mamdouh Salameh, “between 1985 and 1989, Iraq lost US$14 billion a year due to Kuwait’s oil price strategy,” and “Kuwait’s refusal to decrease its oil production was viewed by Iraq as an act of aggression against it.”

There were additional disputes between the two countries centering on Kuwait’s exploitation of the Rumaila oil fields, which straddled the border between the two countries. Kuwait was accused of using a technique known as “slant-drilling” to siphon off oil from the Iraqi side.

None of this justifies Iraq’s invasion of Kuwait. But a longstanding and complex dispute between two undemocratic petrostates wasn’t likely to inspire Americans to accept the loss of their sons and daughters in a distant fight.

So instead, George HW Bush told the public that Iraq’s invasion was “without provocation or warning,” and that “there is no justification whatsoever for this outrageous and brutal act of aggression.” He added: “Given the Iraqi government’s history of aggression against its own citizens as well as its neighbors, to assume Iraq will not attack again would be unwise and unrealistic.”

Ultimately, these longstanding disputes between Iraq and Kuwait got considerably less attention in the American media than did tales of Kuwaiti babies being ripped out of incubators by Saddam’s stormtroopers.

Saddam Was “Unstoppable”

A crucial diplomatic error on the part of the first Bush administration left Saddam Hussein with the impression that the US government had little interest in Iraq’s conflict with Kuwait. But that didn’t fit into the narrative that the Iraqi dictator was an irrational maniac bent on regional domination. So there was a concerted effort to deny that the US government had ever had a chance to deter his aggression through diplomatic means — and even to paint those who said otherwise as conspiracy theorists.

As John Mearsheimer from the University of Chicago and Harvard’s Stephen Walt wrote in 2003, “Saddam reportedly decided on war sometime in July 1990, but before sending his army into Kuwait, he approached the United States to find out how it would react.”

In a now famous interview with the Iraqi leader, U.S. Ambassador April Glaspie told Saddam, “[W]e have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait.” The U.S. State Department had earlier told Saddam that Washington had “no special defense or security commitments to Kuwait.” The United States may not have intended to give Iraq a green light, but that is effectively what it did.

Exactly what was said during the meeting has been a source of some controversy. Accounts differ. According to a transcript released by the Iraqi government, Glaspie told Hussein, ” I admire your extraordinary efforts to rebuild your country.”

I know you need funds. We understand that and our opinion is that you should have the opportunity to rebuild your country. But we have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait.

I was in the American Embassy in Kuwait during the late 60’s. The instruction we had during this period was that we should express no opinion on this issue and that the issue is not associated with America. James Baker has directed our official spokesmen to emphasize this instruction.

Leslie Gelb of The New York Times reported that Glaspie told the Senate Foreign Relations Committee that the transcript was inaccurate “and insisted she had been tough.” But that account was contradicted when diplomatic cables between Baghdad and Washington were released. As Gelb described it, “The State Department instructed Ms. Glaspie to give the Iraqis a conciliatory message punctuated with a few indirect but significant warnings,” but “Ms. Glaspie apparently omitted the warnings and simply slobbered all over Saddam in their meeting on July 25, while the Iraqi dictator threatened Kuwait anew.”

There is no dispute about one crucially important point: Saddam Hussein consulted with the US before invading, and our ambassador chose not to draw a line in the sand, or even hint that the invasion might be grounds for the US to go to war.

The most generous interpretation is that each side badly misjudged the other. Hussein ordered the attack on Kuwait confident that the US would only issue verbal condemnations. As for Glaspie, she later told The New York Times, ”Obviously, I didn’t think — and nobody else did — that the Iraqis were going to take all of Kuwait.”

Fool Me Once…

The first Gulf War was sold on a mountain of war propaganda. It took a campaign worthy of George Orwell to convince Americans that our erstwhile ally Saddam Hussein — whom the US had aided in his war with Iran as late as 1988 — had become an irrational monster by 1990.

Twelve years later, the second invasion of Iraq was premised on Hussein’s supposed cooperation with al Qaeda, vials of anthrax, Nigerian yellowcake and claims that Iraq had missiles poised to strike British territory in little as 45 minutes.

Now, eleven years later, as Bill Moyers put it last week, “the very same armchair warriors in Washington who from the safety of their Beltway bunkers called for invading Baghdad, are demanding once again that America plunge into the sectarian wars of the Middle East.” It’s vital that we keep our history in Iraq in mind, and apply some healthy skepticism to the claims they offer us this time around.

Joshua Holland was a senior digital producer for BillMoyers.com and now writes for The Nation. He’s the author of The Fifteen Biggest Lies About the Economy (and Everything Else the Right Doesn’t Want You to Know about Taxes, Jobs and Corporate America) (Wiley: 2010), and host of Politics and Reality Radio. Follow him on Twitter: @JoshuaHol.

Coronavirus crisis could cause $25tn fossil fuel industry collapse

Value of reserves could fall by two-thirds as Covid-19 hastens peak in demand, study shows

The coronavirus outbreak could trigger a $25tn (£20tn) collapse in the fossil fuel industry by accelerating a terminal decline for the world’s most polluting companies.

A study has found that the value of the world’s fossil fuel reserves could fall by two-thirds, sooner than the industry expects, because the Covid-19 crisis has hastened the peak for oil, gas and coal demand.

The looming fossil fuel collapse could pose “a significant threat to global financial stability” by wiping out the market value of fossil fuel companies, according to financial thinktank Carbon Tracker.

The report predicts a 2% decline in demand for fossil fuels every year could cause the future profits of oil, gas and coal companies to collapse from an estimated $39tn to just $14tn.

It warns that a blow to fossil fuel companies could send shockwaves through the global economy because their market value makes up a quarter of the world’s equity markets and they owe trillions of dollars to the world’s banks.

Kingsmill Bond, the author of the report, said: “Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.”

The report says the world is “witnessing the decline and fall of the fossil fuel system” owing to the quicker-than-expected growth of clean energy alternatives coupled with the collapse in demand for fossil fuels amid the pandemic.

It follows findings from the International Energy Agency, which forecast the Covid-19 fallout would lead to the most severe plunge in energy demand since the second world war and trigger multidecade lows for the world’s consumption of oil, gas and coal, while renewable energy continued to grow.

The world’s demand for fossil fuels has plunged by almost 10% amid the coronavirus lockdown, and many energy economists believe it may fail to recover from the crisis.

Bond said fossil fuel companies and their investors had failed to realise the current decline of the fossil fuel industry may prove terminal.

“The bizarre thing is that the fossil fuel incumbents have been so resistant to the idea of change for so long, and put out so much bogus PR, that they risk falling victim to their own rhetoric,” he said.

“There is far more risk inherent in the fossil fuel system than is conventionally priced into financial markets. Investors need to increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs.”

Let Putin and MBS Both Lose

The American shale industry will almost certainly outlive either man’s rule.

Not for the first time, let’s wonder how much Vladimir Putin and Crown Prince Mohammed bin Salman really know what they’re doing.

Oil has crashed to $35 a barrel thanks to a sudden feud between Russia and Saudi Arabia, which comes amid the Covid-19 shock to the global economy. The upshot could bankrupt a lot of U.S. shale companies, if that’s either man’s thinking. But their equipment would survive, the drilling rights would survive. Employees would retain their skills. All would end up in hands of lenders who have every incentive to preserve value and keep applying technology to lower the price at which operations become profitable again.

The U.S. has deep pools of entrepreneurial capital. It has highly sophisticated private equity that can scoop up bargains and bring assets back into play in a way that, as has been happening for a decade, tends to cap any cyclical rebound in oil prices that the Saudis and Russians may be hoping for.

More important, the U.S. may be the world’s biggest producer but oil is a tiny share of its economy. What America loses in terms of oil-industry wages and profits it gains in lower gas prices for consumers and energy costs for downstream industries. Plus our political system at all levels is geared to assuage unhappiness from dislocated industries. We have a national election coming up in which bums can be thrown out and new bums installed.

The strongmen’s desperation is understandable but nothing else about their feud is: Saudi Arabia and Russia have zilch to offer the world except oil and gas. Their political systems are poorly designed to handle the shocks coming their way. Russia needs an estimated price of $50 a barrel to keep its budget afloat given limited borrowing options under sanctions, and that $50 price hardly sustains the millions of Russians not directly on the government’s payroll.

Saudi Arabia is said to have the world’s lowest production costs—$3 a barrel—if costs are construed narrowly. But throw in the subsidies habitually required to keep restive princes and social classes in line and the Saudi government needs $90 to sustain the political model it has foisted on itself.

MBS’s role at least can be explained: His legitimacy is obviously in question judging from this weekend’s arrests of members of the royal family amid accusations of a coup plot. To be seen surrendering the Saudis’ role as price leader to the Kremlin right now would hardly strengthen his claim to the throne he wants to inherit from his father.

Mr. Putin rode an oil boom to power 20 years ago but the degree to which he has mastered the energy politics of even his own country is debatable. He has often seemed at a loss and fearful of taking sides in oligarchic disputes, even when they threatened his carefully prepared come-hither to Western oil companies such as Shell and BP. His crushing of Yukos and its impresario in 2003 took care of a personal threat from a democracy promoter but also began the slow strangulation of ties with the West, which has been costly to him and his cronies. It took only a flick of Donald Trump’s finger recently to scuttle Mr. Putin’s precious Nord Stream 2 pipeline as it neared completion.

No part of Mr. Putin’s plan was provoking an oil price collapse on the eve of Tuesday’s carefully scripted parliamentary kabuki. Valentina Tereshkova, an 83-year-old lawmaker and throwback to the glory days of the Soviet Union as the country’s first female cosmonaut, proposed a constitutional change to let Mr. Putin serve in de facto perpetuity.

The president is the guarantor of the constitution,” said Mr. Putin in a speech accepting the idea, his sentence structure apparently confusing subject and object.

These changes must pass a Russian court in a system where judges are beholden to Mr. Putin, and a plebiscite that may test even Mr. Putin’s highly accomplished election rigging. His popularity has been eroding in polls of voters who don’t kid themselves that their phone calls aren’t monitored. A heavy ding to oil revenues that account for 30% of gross domestic product will not improve his standing. Remind yourself what it was about the 2014 Ukrainian revolution that so threatened Mr. Putin: a post-Soviet public standing up against a corrupt and impoverishing dictatorship.

Enthusiasts for free trade and free flow of people, whom Mr. Trump sometimes derides as globalists, cherished the idea of a planet growing richer and freer together. Some of us still do.

But, ironically, it’s the authoritarian states that are most hurt by the retreat. China is dependent on the world to absorb its superfluity of manufactured goods. Russia and Saudi Arabia are economic pygmies that need a fast-growing global economy to buy their oil. A retrenching world would be less prosperous and harmonious but in such a world you would also rather be the United States than anybody else.

Inside Saudi Arabia’s Decision to Launch an Oil-Price War

Riyadh prepares emergency budget for $12-20 a barrel oil; “It’s all about egos now.”

Saudi Arabia and Russia intensified an escalating oil-market war on Tuesday, with Riyadh set to raise output to record levels and Moscow saying it was ready to pump more crude.

State-run Saudi Arabian Oil Co. said it would boost production to 12.3 million barrels a day in April, some 300,000 barrels a day over the company’s previous maximum sustained capacity.

Russian Energy Minister Alexander Novak, meanwhile, said his country could rapidly open its own taps.

Oil prices lost a fifth of their value Monday, after Saudi Arabia over the weekend slashed its crude prices and signaled it would boost its output next month. The move followed Russia’s rejection of a Saudi-backed plan by the Organization of the Petroleum Exporting Countries to cut crude output in response to dwindling demand in China and elsewhere.

Even as the price war escalated with fresh salvos from both sides, former Saudi energy minister Khalid al-Falih was in talks with Mr. Novak in an attempt to reverse the production hikes and revive the collective OPEC-Russia output curbs, according to Saudi-government advisers and officials.

Mr. Falih, who negotiated the initial production cuts in 2016, is now Saudi Arabia’s minister of investments. His outreach to Mr. Novak is done with the approval of Saudi authorities, the advisers said. If Mr. Falih’s mediation succeeds, the advisers and officials said, OPEC and its allies including Russia will convene an emergency meeting in April.

Mr. Novak said Moscow isn’t ruling out further cooperation with OPEC, adding that the next scheduled meeting is planned for May or June.

“The doors are not closed,” he said.

Amid the escalating fight, President Trump called Saudi Crown Prince Mohammad bin Salman on Monday to discuss global energy markets, the White House said Tuesday morning. The leaders also discussed “other critical regional and bilateral issues,” according to a statement.

Global GlutOil prices have fallen as demand from China has slowed and Saudi Arabia haspledged to pump more.

Saudi Arabia and Russia’s decisions to flood markets are surprising, as China—the world’s largest oil importer—has been hobbled by the deadly coronavirus, which has hurt its demand for oil after refineries and factories were forced to shut.

Saudi Arabia’s struggle for oil-market supremacy might earn it a sliver of market share at the expense of Russia and rival U.S. shale producers, but the cost of a price war might be too much for the kingdom to bear, analysts and oil officials say.

The combination of declining global consumption and rising supply pushed Brent crude, the benchmark for global prices, to its sharpest decline since the first Gulf War in 1991 on Monday. Some of these losses were recouped Tuesday as the Brent oil price gained 8% amid a broader revival in markets.

Saudi Arabia’s aggressive discounts are targeting some of Russia’s core markets in China and Northern Europe. The kingdom is also taking aim at U.S. oil producers, Saudi and OPEC officials said.

The Russian energy minister declined to comment and the Saudi energy minister didn’t respond to a request for comment.

Some oil officials say theystruggle to see the logic behind Saudi Arabia’s decisions. Others see the battle as tied to Prince Mohammed’s recent efforts to tighten his grip on power and raise his international clout, according to people involved in the OPEC talks.

Russia’s failure to find common ground with Saudi Arabia and OPEC on oil cuts was preceded by talks in early February between Riyadh and Moscow that focused on the possibility of forging a broader, long-term alliance. Under one scenario, Saudi Arabia would have sped up its investments inside sanctions-hit Russia and backed the Kremlin’s military efforts in Syria, according to people familiar with the matter.

Ultimately, the crown prince didn’t commit to a deal, say the people familiar with the matter, because he didn’t want to alienate the U.S. Weeks later, roughly at the same time that Russia was refusing to endorse the Saudi-backed plan to cut oil output, Mr. Putin was initiating a rapprochement with Turkey, a Saudi foe, the people said.

“It’s all about egos now, not about the oil market,” said a Saudi-government adviser.

Meanwhile, Prince Mohammed saw the OPEC debate as a way to assert his broad influence over the kingdom’s oil policies and to prove to his older brother, Saudi energy minister Prince Abdulaziz bin Salman, that he could force Russia’s hand, according to people familiar with his thinking.

In a terse phone call to Prince Abdulaziz late Thursday, the crown prince overruled his brother, who had agreed to a three-month production cut with OPEC, and extended the proposed cuts through the end of the year, these people said.

Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, on Thursday.

PHOTO: CHRISTIAN BRUNA/SHUTTERSTOCK

The crown prince ordered the minister to force OPEC to adopt the decision—even if that meant risking any hope that Russia would join in, they said.

Now the kingdom is pursuing a strategy of undercutting its rivals by drowning markets with cheaper oil—a move that has a tendency to backfire, say longtime market watchers.

On Saturday, the Saudi energy ministry told Aramco officials that instead of cutting production, they should pump more oil and lower the price. Saudi Arabia soon spread the word throughout the market. “It was the Saudi declaration of war against Putin,” said a senior Saudi official.

Within hours, officials at the finance ministry were tasked with preparing a budget scenario that envisions benchmark Brent crude prices dropping into a $12-$20 a barrel range. All Saudi ministries were also asked to cut their spending significantly to prepare for this scenario.

But the strategy has backfired before.

In 2014, then-Saudi oil minister Ali al-Naimi persuaded OPEC to pump at will to compete with U.S. shale producers. His rationale was that the cartel’s members had the ability to produce at extremely low costs. But after the price of Brent crude fell below $28 a barrel in early 2016, the Saudi royal family fired him. His successor, Mr. Falih, negotiated a pact between OPEC and Russia to cut production in the first OPEC+ deal. Within months, oil prices more than doubled.

The move to depress prices also missed its mark in the 1980s and led to a period known in oil circles as the “Lost Decade.” In 1986, OPEC faced competition from rising North Sea production. Saudi Arabia’s delegation was so upset about OPEC members flouting the group’s production agreements that it unleashed a flood of oil that sank prices for a prolonged period.

Eventually, Saudi Arabia backtracked and cut production, but the move wasn’t a complete failure, as it helped score a political victory against the Soviet Union. Riyadh had been backing insurgents battling Russia in Afghanistan—many of whom would later found al Qaeda. As the oil price fell to around $30 a barrel, Russia faced a budget crisis that contributed to food shortages and an end to its war in Afghanistan. Its then-leader Mikhail Gorbachev retreated from Kabul and launched the restructuring of Russia under his perestroika policy.

Russia is better prepared to weather low oil prices than in the past. Oil is now accounts for less than a third of budget revenue. The country has also accumulated massive reserves. The Russian finance ministry said Monday that it could withstand 10 years of prices at $25 to $30 a barrel.

Still, some Russian producers say the oil-market war is excessive.

“I’m in shock. This is a very unexpected, irrational decision to put it mildly,” Leonid Fedun, vice president of Russian private producer Lukoil was reported as telling Russian newspaper the Bell. Russian oil companies would like to increase production, he said, but that won’t make up for losses from falling prices.

The mood is more somber in Saudi Arabia, which needs oil prices over $60 a barrel to balance its budget, according to Saudi officials. The kingdom is now contending with its own coronavirus outbreak, moving Monday to suspend all air travel with many of its neighbors.

Saudi Arabia’s national oil company Aramco fell about 7% to 27.95 riyals ($7.45) a share on the Saudi domestic exchange Monday. The Saudi price decrease has “literally burned all global energy investors,” said a Saudi official. “[Saudi Aramco] Won’t sell a share to foreigners again,” he said, referring to the Crown Prince’s plan to list Aramco internationally.