By Michael Every of Rabobank
Friday saw the death of US Supreme Court justice Ruth Bader Ginsburg at 87. She was a true titan of the law, and leaves a critical (until now very liberal) Supreme Court seat vacant at a time when the US is bitterly divided on all issues. President Trump insists on pressing ahead with a hearing on a new appointment before the election - just as President Obama did before him when the (very conservative) justice Scalia died; Senate Republicans are saying they will proceed, which they wouldn’t in 2016; and the Democrats insist on not proceeding until after the election, which they didn’t in 2016. So business as usual.
However, this makes the US election even more important and heated than it already was - and harder to call. Listen to US commentators and all other topics are now secondary, including both the economy (bad for Trump) and Covid-19 (good for Trump). Republicans and Democrats are incredibly fired up given the outcome of the election could shift the balance of the court for a generation. Imagine if it shifted to 6-3 conservative; also imagine if no judge is appointed and it is then tied 4-4 when having to rule on a key element of what is widely expected to be a legally contested election; imagine the court being increased to 11 by Biden if he were to win; and imagine it going up to 15 or 17 if a Republican wins in 2024. This election was already seen as a potential risk event: arguably far more so now.
Meanwhile, on both Friday and Saturday, over a dozen Chinese fighter jets and bombers breached Taiwanese airspace, forcing defensive scrambles in response, and the Global Times has since threatened Taiwan’s president will be “wiped out” if she makes a misstep. That paper’s editor added on Weibo: “If we have no choice but war, we should avoid direct conflict with the US. We can (instead) severely beat up a US running dog that always crosses our bottom line….to send a warning.” It’s been a while since I’ve heard “running dog of US imperialism”: it isn’t very Davos.
As military strategists note, Taiwan must now allow Chinese military jets to fly unimpeded, not knowing if an attack might come; scramble its jets all the time, and see its far smaller forces become worn down; or respond militarily and provoke a terrible response. At which point the question of the US again enters the picture - unless it is too tied up in its own internal conflicts to focus on the outside world. However, legislation is currently being put forward forcing the US to defend Taiwan if it is attacked. Articles about TWD strength are justified on the macro level, but not so much at the meta level. Meanwhile, on the China-India border forces continue to build, and infrastructure building to allow rapid deployment continues apace even if the financial press has lost interest. The voluble Indian press, however, talk of fears of a surprise attack on US election day, or Xmas.
Against this backdrop, the US has reimposed full sanctions on Iran, which nobody else accepts the validity of - yet US secondary sanctions await anyone who breaks them; and the US reports Iran could have enough fissile material for a nuclear bomb by the end of the year; and that it is cooperating with North Korea to build an ICBM delivery system.
Echoing the hypothetical scenario we put forward in 2018, Iran is arguably happy to escalate this crisis because it believes with Russia, China, and even Europe and the UK unwilling to stand behind the US, the era of American global hegemony is close to a humiliating end, akin to the British at Suez. The bitterly divided US ‘will have to blink’.
And once it has blinked once, it will have to blink again and again, in Asia, in the Middle East, in Europe, etc., etc. One can imagine the kind of consequences that would flow: we might even talking about a new Potsdam and Yalta, even as we are would also be talking about whether the USD could remain top dog.
At the very least, Iran hope a change of president might see a new deal offered to them in January. [Ironically, as the hawkish US Foundation for the Defence of Democracy (FDD) notes, Iran is meantime relying on asset inflation until the US election is out of the way: despite “...recession, currency depreciation, and high inflation, [it is] showing all the signs of a state-initiated, state-sustained bubble.” Who knew the US and Iran had something in common?]
Relatedly, the latest financial scandal --where leaked documents show an alleged USD2 trillion of suspicious/illegal banking transactions-- is news today. However, all previous scandals have had no market or political impact, and ‘the system is corrupt’ is hardly man bites dog, sadly. Perhaps the news can even be seen as bullish in that is shows some banks allegedly just ignore the kind of sanctions now back in place on Iran anyway.
Let’s be clear, however: US hegemony is extremely unlikely to go quietly into that good night. Like RBG, it is a fighter to the end. The US can still overcome internal divisions; its military prowess is still unmatched; and its financial architecture is the one in which we all work. True, the gloves may have to come off and sticks replace carrots, but a hegemon it is likely to remain. Such tail risks, the kind the likes of Bloomberg only refer to obliquely because it almost religiously inconvenient for them, are still very USD bullish should they transpire – which we all fervently hope they do not.
Yet we are proceeding down that same path at a more market-friendly pace anyway. TikTok might be saved, but as a de facto US entity, a mirror of how China’s critics say it treats Western tech firms there. However, a certain bank is reportedly going to be first on the newly defined China Unreliable Entity List, entry to which will mean loss of access to the Chinese market. The same bank is ironically also rumoured to be at risk of potential US sanctions for its actions supporting China. Moreover, Beijing is pressing ahead with reforms that mean Communist Party members must now enter into senior positions in all private companies, presumably including foreign firms. Again, this is likely to close off the current market ‘middle way’ of being in China but not ‘of China’, just as one could be in the US but not ‘of the US’ until TikTok.
As all this unfolds, Europe keeps on Europe-ing. The FT reports the EU wants new powers to break up tech giants, which means a head-on clash with the US unless the US comes to the same conclusion independently; the EU has to decide if it will follow US sanctions on Iran or not; it also has to try to decide today on its own sanctions on Belarus and for breaches of the Libyan arms embargo, including on Turkish firms; the EU is considering its own Magnitsky Act; and the ECB is considering reviewing its Covid-related bond buying program next month just as more and more countries see actions resembling a second lockdown more and more.
It’s hard work being a hegemon. Imagine if Europe were one again.