The strategic dance between geopolitics, economics, and investments

Wednesday, 20 July 2022 — Albert Park

[5 min read]

Dear Reader,

It’s a complicated world we live in. Between wars, inflation, food shortages, and so much more, it can be hard to know the best way to understand it all.

Today, Jim Rickards describes a useful framework to understand all this craziness — geoeconomics.

Keep reading to find out what this is and how it can help with your investments.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

Geopolitics plays a major role in the outlook for global economies. Today, I’ll describe how to look at the world through the prism of geoeconomics.

What is geoeconomics? Obviously, it’s a portmanteau of the words geopolitics and economics. There’s nothing new about considering those disciplines in the same context. Wars are geopolitical and are often won through industrial capacity, which is primarily economic.

The UK won the Napoleonic Wars in part because of its ability to impose a commercial blockade on continental Europe through the Royal Navy. The Japanese attack on Pearl Harbor was triggered in part by FDR’s freezing of Japanese bank accounts and the imposition of an oil embargo in the months ahead of the attack. Economics and global strategy have always been entwined.

What is new is the idea that economics is not just an adjunct of geopolitics but is now the main event. This doesn’t mean that warfare is over or that military prowess doesn’t count. It means that the major powers in a globalised age will base their calculations on economic gain and loss, and will use economic weapons not as ancillaries, but as primary weapons.

It’s the economy, stupid

This change was described at the beginning of the new age of globalisation by strategic thinker Edward N Luttwak in a seminal article titled ‘From Geopolitics to Geo-Economics — Logic of Conflict, Grammar of Commerce’, published in the Summer 1990 issue of The National Interest. Luttwak wrote that the end of the Cold War and the start of globalisation meant that armed conflict was too costly and uncertain for great powers. Economic interests would now be the arena for great power conflict.

Luttwak wrote:

‘The waning of the Cold War is steadily reducing the importance of military power in world affairs […] The deference that armed strength could evoke in the dealings of governments over all matters — notably including economic questions — has greatly declined and seems set to decline further. Everyone, it appears, now agrees that the methods of commerce are displacing military methods — with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advance, and market penetration in lieu of garrisons and bases.’

Luttwak concluded:

‘While the methods of mercantilism could always be dominated by the methods of war, in the new “geo-economic” era not only the causes but also the instruments of conflict must be economic.’

To be clear, Luttwak’s analysis principally applied to great powers, including the US, China, Russia, Japan, members of the EU, and Commonwealth nations, such as Canada and Australia. Luttwak recognised that middle powers such as Israel, Iran, Iraq, Pakistan, North Korea, and some others might still find warfare beneficial.

He also didn’t rule out the fact that great powers might intervene in wars involving these middle powers, such as the US interventions in Iraq and Afghanistan and Russia’s involvement in Ukraine. His point was not that war was obsolete, but only that it wouldn’t involve direct confrontation between great powers. Interventions and wars involving lesser states would still be on the table.

How to think in the age of geoeconomics

Geoeconomics — great power competition using economics as a goal and a weapon — is an excellent tool for analysing hotspots dominating strategic thinking in the world today. One of these is China’s threat to Taiwan, which I will cover in a future issue, with a view to its impact on markets — especially stocks, interest rates, gold, and commodities.

While Americans are preoccupied with Capitol Hill games on the filibuster, voting rights, Build Back Better, and other stories that are mostly for show, more serious thinkers are applying themselves to oil, natural gas, gold, the dollar, technology, and other geoeconomic benchmarks. Let’s leave the Washington circus to others and focus on what really matters to investors. Let’s focus on geoeconomics.

In my next issue, I’ll describe one prevalent geoeconomics hotspot — the China-Taiwan conflict. Make sure you tune in for that one.

Regards,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

Hasn’t anyone ever read de Caulaincourt?

David Petraeus was on the TV this morning — hustling for more taxpayers’ money. The disgraced general (he gave national security secrets to his mistress, who put them in a book) was drumming up support for Ukraine…or more specifically, for buying more weapons from US military suppliers to send their way. Mr Petraeus is one of many spokesmen and shills for the war sector, one of the US’s biggest and most profitable industries.

For decades, the war mongers have kept the pot boiling, always looking for enemies — foreign and domestic. And this past February, they finally succeeded in goading Russia into war. The long, sorry history of government in Ukraine is beyond the scope of this blog. So, too, is it beyond the interest of Americans, generally. There couldn’t be more than a few dozen people in the whole US who care whether the Donetsk People’s Republic is controlled by the Ukrainians, by the Russians, or by the people themselves.

One of the goals of the war industry has been to make Russia the ‘them’ that ‘us’ has to fight. Though, in 1990, US Secretary of State James Baker had promised Mikhail Gorbachev that NATO would ‘not advance one inch to the East’, by 2022, it had pushed Putin’s back to the wall. NATO’s missiles in Ukraine were as unacceptable to Vladimir Putin in 2022 as Soviet missiles in Cuba were to John Kennedy in 1962. And when the Biden Administration brushed off his concerns, Putin took action.

Who’s right? Who’s wrong? Who knows? But today, people all over Europe and the US are flying Ukrainian flags, listening to David Petraeus, and treating Volodymyr Zelenskyy like a war hero. Even from the pulpit, we were advised to pray for Ukrainians, but not for Russians.

Unremarkable allegiance

None of this is especially remarkable. In baseball and war, people take sides. Usually, they take whatever side is sold to them most successfully. During the First World War, for example, Americans could choose to take the side of France and Britain or of Germany. But England had cut the cable from Berlin to New York. All the news coming from the war was filtered through the British propaganda service. And it wasn’t long before Americans were stoning Dachshunds in the street and shooting foreigners in the mistaken belief that they were German nationals.

Also not remarkable is that the world’s leading empire is going after Russia. There must be something about Russia; like a chorus girl on the make for a rich, old man, she seems to attract degenerate empires.

Charles XII of Sweden attacked Russia in 1708. He was an early proponent of the blitzkrieg — striking hard and moving fast with his cavalry. The Russians retreated, destroying all farm animals and food stocks as they went. Then, as they continued to pursue the Russians, the Swedes ran out of supplies. And in the final battle, at Poltava, the Swedes were decisively defeated. Only 543 Swedes escaped — including Charles XII himself — out of an original force of 40,000.

A century later, Napoleon repeated the adventure, but with 10 times as many men. Similarly, the Russians retreated…using their same scorched earth tactic. And then, reaching Moscow, but achieving no decisive victory, the French were forced to retreat — in the winter — across the vast steppes. The Russians counterattacked. The Cossacks harassed the fleeing French. ‘General Winter’ did his part. And by the time the survivors reached safety, approximately 380,000 French and allied troops had died.

Then, in 1941, Hitler couldn’t resist. Again, he upped the ante, committing 10 times the number of troops used by Napoleon — 3.8 million soldiers. Same story, more or less. And the same outcome. He retreated, leaving about one million dead.

It was in his defeat that the amusing story was told.

Lessons unlearned

Armand-Augustin-Louis de Caulaincourt was a general in Napoleon’s army. He had previously been sent as a diplomat to Moscow and knew the country well. When Bonaparte announced his plan to conquer Russia, de Caulaincourt begged him not to do it. He described the distances, the poor roads, the savage, long-suffering people, and the unbearable weather. Still, Napoleon was determined to attack and took de Caulaincourt with him.

Of course, all of the miseries de Caulaincourt warned about — and more — soon became apparent to the French and the general later recounted them in a delicious memoire, With Napoleon in Russia.

In 1944, German troops were rediscovering the hell that de Caulaincourt warned about. A group of German prisoners sat on the hard ground as Soviet troops prepared to interrogate them. A Soviet officer with a sense of humour approached them.

‘What’s the matter with you people? Didn’t any of you read de Caulaincourt?’

Curiously, at least one German general actually did have a copy of de Caulaincourt’s book, in his pocket, when he was captured at Stalingrad.

And now…Joe Biden and his allies have begun a ‘sanctions war’ against Russia, as well as a real shooting war, using the Ukrainians as proxies.

What could go wrong? Have they read de Caulaincourt?

More tomorrow…

Regards,

Bill Bonner,
For The Daily Reckoning Australia