$3.3 billion of Circle’s USDC reserves are held at the failed Silicon Valley Bank. That is leading to USDC depeg and USDC is currently trading at 87 cents. 3.3B out of 40B market cap is about 92%. So the price should be 92 cents. However, as investors sell their USDC and the market cap of the stablecoin goes lower and lower those 3.3 billion loom larger and that can in turn lead to even lower prices of USDC. If USDC goes down to $20 billion market cap then USDC price should be around 82 cents. If it goes down to $10 billion, then it will be 66 cents. Where USDC price bottoms will reflect the potential outflow from USDC. I think Circle has money to cover the gap but it will have to scramble. And worse yet, the outflows will dent its ability to earn interest on their treasury holdings which it can use to cover the SVB loss. If Circle earned 6% on $40 billion that is 2.4B which covers about 75% of the loss (that would be 98 cents price for USDC). But if USDC continues to experience outflows, they may not be able to cover the gap with interest payments. And I am pretty sure they will experience outflows because Tether (USDT) is there at $1 and people would rather have their money in USDT than USDC. The whole point of a stablecoin is stability. These aren’t money people are gambling with. So Circle might totally bomb out here. We’ll see what happens. But for sure, I won’t be buying 90 cent USDC thinking that it will go back to par on Monday. I may be wrong, but I think a lot of money will move from USDC to USDT and that in turn will lead to ever lower USDC prices. In fact, I recommend you move your money from USDC to USDT immediately.
USDC is a US dollar inside the US banking system. USDT is a US dollar outside of the US banking system. USDT is a Digital Eurodollar.
You are probably asking: wait what? What is a Eurodollar? Yes, there is a large pool of US dollars abroad that are circulating in foreign banking systems. These dollars actually have no connection to the Federal Reserve and the US banking system. They are direct claims on US central bank reserves since they are US dollar bills, but they can’t be sanctioned or regulated because they are outside of the scope of US jurisdiction. Think about a US dollar bill I put in my pocket and traveled to China. I can buy something in China with that US dollar bill and the merchant in China can go deposit it with the local gangster who gives him one Tether USD dollar back on his phone. That US dollar then is in the hands of the gangster who buries in a pot deep underground and the Chinese merchant hopes the USDT on his phone doesn’t disappear because the gangster has a bad day. In other words, Eurodollars are subject to non-US country risk and the regulatory, banking and custody policies of various countries abroad. So far though, it seems the global investor in the cryptoverse much prefers the unsanctioned US dollar USDT as USDT has led USDC in market cap for its entire existence. The crypto crackdown by the Biden administration might further erode international confidence in the US banking system based US dollar stablecoins like USDC. The crypto industry then will shift its focus even more on the Eurodollar market (USDT) and that is a process that might get accelerated very quickly here. BTW, the word “euro” in Eurodollar doesn’t mean the “Euro” currency at all and also doesn’t mean dollars that are in European banks. They could be in Asia, Latin America, Africa, etc. Eurodollar is simply the word used for non-US dollars since the 50s. I know it is kind of confusing.
What does it mean for the US to have the reserve currency in the world? Every major transaction around the world happens in US dollars. But that doesn’t mean inside the US banking system or with the US banking system. China can trade with Vietnam using US dollars in their own banks that never touch the US banking system. China can get dollars from the US by exporting its product there and then China can use those dollars to trade with other countries. In fact, that is exactly what is happening. The Eurodollar got started in the 1950s during the Cold War when Russia was afraid the US would steal its US based dollar deposits and moved them to London. The first Eurodollar account was Soviet owned US dollars in a London bank. Later on China had similar concerns around the Korean War and moved its US dollars to a French bank. During the Marshall Plan years, America shipped aircraft carriers with cash to Europe in the tens of billions to do reconstruction there. If you remember recently, America left pallets of cash in Iran and Afghanistan. All of those are Eurodollars – US dollar bills that are as good as any other US dollar bill but better – they are not subject to US sanctions. But you have to deal with Afghanis or Iranians to get them. And for many that is fine. Thus a Eurodollar is a preferred payment instrument abroad.
What most Americans likely don’t understand quite well is the size of the Eurodollar market. It is massive. I have a cheat sheet printout on my wall from pre-COVID times to remind me of the size of the US economy and its various components. $25 trillion stock market (it is now 32 trillion), 20 trillion Treasury market, 10 trillion in bank savings, 10 trillion in mortgage debt (real estate), 4 trillion balance sheet, etc. I think I have to update that cheat sheet. LOL. Bank deposits today in the US are about $17 trillion. The Eurodollar market equivalent of bank deposits is about $20 trillion from what I was able to gather. Obviously it is hard to estimate Eurodollar size because it is in many jurisdictions. But it is not doubt massive. It rivals the banking deposits in the US. When you include the various derivatives the Eurodollar market is north of $50 trillion. There is a LOT of unsanctioned US dollar bills out there to back USDT. When the East/West financial systems separate, the US dollar price of Bitcoin will come from Eurodollar market. Actually, even today most of the pricing of Bitcoin comes from the Eurodollar market via USDT and Bitfinex. All the Bitcoin whale trades happen on Bitfinex. But that will become even more so going forward. And don’t worry, the Eurodollar gets fresh infusions every year since the US trade deficits go ever higher. The US is shoveling more and more unsanctioned US dollars abroad, about $1 trillion per year via the China channel. And those US dollars are obviously controlled not by Biden but by a different set of global leaders – Jinping, Putin, Ursula, MBS, Netanyahu, etc. As it stands, the Tether which issues USDT is technically based in Hong Kong, now a Chinese jurisdiction, and its parent company owns both Tether and the Bitfinex exchange.
Believe it or not, there is more US dollars outside of America in 2023 than in America. That makes USDC the poor cousin from America in the stablecoin market. I hope Circle survives Biden’s Operation Choke Point. I am not waiting to find out.
Originally sent to VIXCONTANGO subscribers on June 3rd, 2022
As I was going through the latest issue of Foreign Affairs, I stumbled upon a remarkable obituary of liberalism written by none other than the father of modern liberalism himself – Francis Fukuyama. The piece is called “Liberalism Needs the Nation” and in it Fukuyama tries to put together a twisted argument for why the Democratic Party in America and liberals worldwide in general need to participate in the fight for Ukrainian independence. You have probably seen how all the liberal pundits on Twitter put Ukrainian flags in their handles, Ukrainian flags on their lapel pins and in my very liberal town in Connecticut, there are far more Ukrainian flags being waved alongside the LGBTQ pride lawn signs than there are American flags. The lifetime proponents of open borders and the destruction the nation state and fervent haters of everything traditionally American, all of a sudden found a flag to wave and new issue to feel more virtuous about – and Mr. Fukuyama of course is again there to provide the bankrupt reasoning for their flip flop. Not that Fukuyama is a bad thinker but with thinking like his, one can’t be surprised why Japan floundered in World War 2. The holes in his reasoning are bigger than the Pacific Ocean.
It is a very bizarre feeling living in America these days. I immigrated to a country called America 30 years ago and now I find myself in an occupied territory where bizarre rainbow flags are being waved from government buildings and churches in towns all across the country. These flags were something I used to only see in the distinctly gay Castro district of San Francisco during the annual gay parade there. Now this bizarre Californian ideology is chasing me across the continent. I ran away from California 20 years ago about as fast as I could but apparently California is not done stalking me.
There is an illegitimate regime that has taken over the US government with its own strange ideology, it has a flag and has done a soft coup while nobody noticed. That illegitimate regime is erasing everything that America stood for 250 years. Freedom of speech in America is over. I and many others are banned from social media and live in society where one can’t express themselves on virtually any topic. Conservative comedians are getting attacked on stage. Jokes are entirely prohibited as any statement no matter what can be dissected in a negative way. During communism, people had vastly more freedom of speech than the average American does today. I have lived in both regimes and it is not even close. People in America are afraid to speak unless of course they are from the “protected” classes favored by the Democratic Party. The protected classes are allowed everything and can even shit in public like in San Francisco. Double standards everywhere. I can tell you one thing though – nobody was shitting in public during communism.
If I were to apply for a job in a corporation in America today I probably won’t get it regardless of qualifications simply because I am from Eastern Europe and I am white. Somebody in America’s elite decided that I am not oppressed so therefore I am marked for extinction – denying me survival in America is now priority number one of this country. I survive in America despite America not because of it. Just put me in a coffin and bury me. I feel like Rip Van Winkle. I wake up in a place that I can’t even recognize. People used to leave Europe for the stability of America, but today America is the most unstable place on the planet. After waging an economic war on its own population in the Midwest for the last 2 decades depriving it of manufacturing and jobs, overnight for its next act liberal America has decided to perform an economic genocide on anything Eastern European and remotely connected to Russia. All of these sanctions don’t hurt Russia, but they do hurt Eastern Europe greatly where inflation has skyrocketed 50% and purchasing power has collapsed. Europe will see its biggest recession yet. America has suddenly decided to erase Russia from their foreign policy, history books and maps. In Ukraine, Biden’s puppet Zelensky is on the march to cancel the great Russian author Pushkin. Pushkin lived most of his life 200 years ago in what is modern day “Ukraine”. Yet his statues are being pulled down in the towns he used to live in by American financed Nazi military groups like the Azov batalion. But what happens in Ukraine won’t stay there. I won’t be surprised if Mark Twain’s statues in Connecticut get pulled down soon by an angry crowd of woke Yale students wrapped in Ukrainian flags and tattooed with Nazi Black Sun insignia, Twain’s library in Redding burned and his books banned. If it happens in Ukraine, it will happen in Connecticut. In fact, it is happening in Ukraine because Connecticut wants it to happen. America’s liberalism is on the march to erase everything in its path – nations, borders, history, religion, race, identity. Everything.
When I arrived in the United States 30 years ago, Francis Fukuyama wrote the seminal book on liberalism called “The End of History” with which he announced that liberal democracy had won over fascism, communism and the nation state forever. Even though the liberal movement didn’t start with Fukuyama, Fukuyama was its biggest thought leader and America was captured by its self-serving narrative. In Fukuyama’s vision, nations and borders were obsolete. Instead, the individual ruled and then the purpose of the US government was to become a global dominating force and “protect” every individual around the world. There wasn’t an “oppressed” minority anywhere in the world that the US didn’t feel the moral obligation to send troops to ensure its protection. The idea of the US as an unelected global policeman traces its roots to Fukuyama. Every grouping of people around a territorial line (state), a shared history, language and ethnicity (nation) or race was immediately deemed an enemy to this liberal new world order and targeted for extinction. There was only one set of rules – the American ones – and if you didn’t like this “rules based order” get ready for America to destroy you. And boy did America wage war after war in Korea, Vietnam, Somalia, Syria, Libya, Iraq, Iran, Ukraine, Yugoslavia, on and on. Borders and nations are the last thing liberal America would respect. In 90% of world conflicts since WW2 America was a direct or indirect participant. America has killed over 37 million people in all these in pursuit of America’s vision of borderless liberalism. Stalin is starting to feel jealous. In its bid to save all the oppressed people in the world, America turned the world upside down everywhere. Whether people were really oppressed we’ll never know because the American government isn’t capable of saying the truth. Of course, sole discretion as to who is deemed “oppressed” was for the American foreign policy “elite” to decide. That same “elite” in Washington DC that over the past 40 years has turned America’s K-12 school system into a giant day care center and its colleges into sports leagues and adult parks. That same elite that relies heavily on the Russian, Chinese and Indian educational systems to educate America’s future professionals.
The end point of this global liberal vision is a single world government, one giant global elite bureaucracy that rules over the entire world. And of course it is very important for that bureaucracy to be unelected and unaccountable. Accountability is the last thing any real bureaucrat wants since bureaucrats don’t produce anything. They aren’t bound by economic rules like the rest of us in the private sector. Bureaucrats are parasites. The only thing a parasite wants to figure out is how much blood it can suck from its host (private sector). When left unchecked the parasite will destroy the host and in the process kill itself. An unchecked government bureaucracy tends to destroy the country it is supposed to guide to a better future. Happens time and again. When you think more deeply about what the end goal of Fukuyama’s vision is, liberalism is just another word for imperialism. The same imperialism that Hitler aspired to with the Third Reich. It just that “liberalism” sounds so much better than “imperialism” in polite society. And of course, it is very important for America’s modern “liberal” imperialists to rephrase the issue and call Hitler’s imperialism “nationalism” and then smear their mortal enemy – every nation state in the world. National sovereignity is not allowed in America’s rules-based order.
Over the past 40 years, through neoconservative and neoliberal governments, America pushed for Fukuyama’s vision of a strong unipolar one world “liberal” government. As technology advanced over the last 30 years, big government repression advanced as well. With Biden, we have the apogee of the unhinged bureaucrat who represent mortal danger to everybody else in American society. They can eradicate anybody from life without jailing them through bureaucratic oppression. Debanking, deplatforming, social media ostracision, frivolous lawsuits, government investigations, fake protests, FBI intimidation, big tech blackmail, denial freedom of speech, choice and association, America is a master of all that. The government lawyers can make anybody disappear. If you go into an American courtroom, America can find a lawyer to can convince a jury of people of anything. Black is white and white is black routinely in America. There is no definition that isn’t under attack. Clinton’s blowjob isn’t sex. Supreme Court justices don’t know what a woman is. Hunter Biden is a choir boy. When we don’t know what “is” is, we end up with a cacophony of voices. The country loses itself in the cacophony. We’re reliving the Biblical story of Babylon and the tower that fell. When you have a government responsible to too many constituencies, it collapses from the volatility. Liberalism takes society towards back towards its natural state of entropy (chaos and disorder).
My father who had PhDs in microbiology and cybernetics had a saying he repeated often: “every extreme turns into its opposite”. By this he meant that when something is taken to extreme it becomes destructive. Sustainable organic systems can’t tolerate extremes because the extremes destabilize them and ruin their ability to survive in the future. In this case, liberalism was fine when it was a grass roots, counter cultural movement but when state power is utilized to protect every individual, liberalism turns into fascism – the state ends up policing every small part of social and economic life. When you police all individuals many of whom often have completely opposite viewpoints, the state inevitably has to take a side and harm some. Big government simply can’t be a champion of liberalism. Liberalism can’t be coming from the government. It turns into fascism. For that reason today in bastions of liberalism like America and Canada we observe fascist behaviors similar to a century ago in Nazi Germany. The target isn’t Jews but Russians today. Anti-semitism has been replaced with Russophobia: burning of books, eradication of authors, eradication of history, eradication of trade, eradication of Russian nation, eradication of Slavic ethnic groups. Boy, aren’t blacks in the Biden government happy today to show who is boss and get on a high horse to oppress Russians? What did Russians do to blacks to deserve this? Did Russia put the US ambassador to the United Nations Linda Thomas-Greenfield forefathers in chains? Remind me which Russians enslaved blacks in Atlanta before the Civil War? None of what you watch on TV makes any sense at all. It’s just repackaged American imperialism masquerading as “liberalism” and using minorities to deflect the blame for the same old destructive behavior we have seen for decades.
Where does liberalism find its roots? Liberalism is based on the concept of trade – economic cooperation and comparative advantage. While nations have always been all about territorial control, the practical reality is that all commodities and products needed for a good life in a given nation can’t be found on the territory of the nation. Autarky (economic self-sufficiency) is rarely possible, no matter how big a country is. Thus a nation must engage with other nations on economic matters. Leon Trotsky’s article “Nationalism and Economic Life” in Foreign Affairs is an excellent read on the subject:
The fiction of economic self-sufficiency thus causes tremendous overhead expenditures in two directions. Added to this is inflation. During the nineteenth century, gold as a universal measure of value became the foundation of all monetary systems worthy of the name. Departures from the gold standard tear world economy apart even more successfully than do tariff walls. Inflation, itself an expression of disordered internal relationships and of disordered economic ties between nations, intensifies the disorder and helps to turn it from a functional into an organic one. Thus the “national” monetary system crowns the sinister work of economic nationalism.
The most intrepid representatives of this school console themselves with the prospect that the nation, while becoming poorer under a closed economy will become more “unified” (Hitler), and that as the importance of the world market declines the causes for external conflicts will also diminish. Such hopes only demonstrate that the doctrine of autarchy is both reactionary and utterly utopian. The fact is that the breeding places of nationalism also are the laboratories of terrific conflicts in the future; like a hungry tiger, imperialism has withdrawn into its own national lair to gather itself for a new leap.
While liberalism is a successful economic ideology, it is an utter failure as a social ideology. Starting with Obama, America incomprehensibly moved away from successful economic liberalism by implementing a heavy sanctions regime and splitting the world into Western and Eastern spheres while simultaneously moving towards a destructive policy of social liberalism. Liberalism finds its death in the “paradox of liberalism”: If all people of the world blend into one global culture and their history, race and ethnicity is erased then diversity itself disappears. They become all the same. You see it clearly in America today. 2nd generation American born Indians or Asians hardly have any understanding of the history or culture of India or Asia. They can’t even hold a conversation with their own immigrant parents. They are often ashamed of their own parents. Young Asian-American TV anchors are totally bewildered when they interview proper Asians. They can’t understand their viewpoint at all or even conceive of the existence of such viewpoint. How dare you be Chinese? How dare you be Russian? In order to have diversity, you need to have different cultures, different ethnicities, different religions and different practices. The atheism of liberals is not a replacement for religious tolerance. Atheism itself is an attack on every religion. Social liberalism is not a replacement for diversity. Social liberalism is an attack on diversity. To have diversity, you need to respect identity and to respect identity you need to respect people’s history, culture, religion and the complex multi-generational processes that created that identity which includes nationalism. The people living today aren’t an accident of randomness. They are the product of the deliberate efforts of prior generations who organized in various forms to guarantee their children’s survival. The nation state and territorial defense alongside religious and ethnic lines is how this survival was ensured through the centuries. Even the theoretical attempt by Fukuyama to discard the concept of a nation is sure sign of intellectual laziness and rank stupidity. It’s a practical impossibility. In his own article Fukuyama admits to what should have been obvious to him 30 years ago – that a nation is a fundamental organizational construct. Human rights aren’t universal. Nations define what human behaviors help them survive. Some nations put the public interest ahead of the individual’s rights. Other nations don’t. The cat can be skinned a thousand ways. Fukuyama‘s ideas were so bankrupt he himself had to write their obituary. It only took him 30 years of war and 30 million deaths to realize his own stupidity. The vision of unipolar world order, “end of history” and all of that neoliberal and neoconservative non-sense was doomed from the start. The cherished concept of “diversity” can only exist in a multi-polar world order that has healthy respect for the national sovereignty. That is the world order that China and Russia will force on a liberal America that has lost its way.
The country I live in is called “United States of America”. It is not called the “One State of America”. America is a federation of states. It was built to be a federation of different cultures. Somewhere along the line America’s elite confused itself into thinking that “united” and “uni” are the same word and the same concepts. “United” sure as heck does not mean “one”. It means “different but together”. America’s founding principle is the federation (the founding documents are called the “Federalist papers”) implies discussion and resolution of differences on a federal level. It doesn’t mean the elimination of differences at the local level through government force. Federalism is a very different concept than Fukuyama’s state enforced liberalism and I am not sure how America got to this place where it abandoned its founding principles. The collapse of the Soviet Union in 1990 was the worst thing to happen to America. It lost its ideological compass. I hope America finds its way back to its founding principles because Fukuyama’s liberalism will surely lead to the destruction of the American state as we know it.
The current Biden government is clearly the biggest domestic threat to the American constitution ever seen in the history of this country. It is not an accident that he has the lowest approval ratings of any President ever, even worse than Trump. His ideological abandonment of the American Constitution is unlike anything we have ever seen. Trump presented a monarchist threat to the American constitution. Sadly American voters replaced it with an even more dangerous liberal globalist threat in Biden. Biden routinely thrashes core constitutional principles in his public addresses and with his executive orders. The court system can barely keep up with constraining Biden’s extremism in the executive branch. It is pretty obvious that Biden has an ideology that is incompatible with what the American constitution stands for.
Ultimately, Biden’s imperialist ambitions both domestically and abroad put America in a very dangerous place. If America continues on its current globalist course, it will find itself in a war with every other nation that wants its sovereignty respected. Nations will rise up in a coalition to fight against America and its globalists. With its behavior towards Russia and China over the past decade, America has brought Russia and China together closer than ever before because American globalist imperialism has presented itself as an existential enemy to both of those nations. Other nations like India and Saudi Arabia in the Middle East are also waking up to the grave threat that America’s globalism presents to them. The naked aggression of the Biden administration has been a rude wakeup call to a lot of countries. Since America is incapable of checking itself, other big nations will have to do the dirty work of checking it on the global scene. The only thing I fear here is that these countries decide that America needs to be broken up to ensure that its imperialism is squashed forever as it was in Germany and Japan in WW2.
Russia doesn’t want American weapons on its borders and China doesn’t want American weapons on the stationary aircraft carrier that is Taiwan. Neither China nor Russia aspire to be a single ruler of the world. Only America has those delusions of global grandeur. With COVID, China wanted to show America that Fukuyama’s liberalism isn’t a panacea and with Ukraine invasion, Russia wanted to put a stop to American funded Nazism and the most irresponsible foreign policy in American history. It’s pretty clear to me what is required to achieve global balance of power. It is not clear however whether Biden’s foreign policy establishment has the humility to understand it and that ultimately can be a very bad development going forward.
America’s 30 year experiment with liberalism resulted in an abject failure. American unipolarity is dead. America now needs to find a new governance philosophy that allows it to survive in a multi-polar balance-of-power world that will seek actively to contain American belligerence. A return to federalism and republicanism is probably what is needed here. Unfortunately given America’s track record of constantly screwing up world affairs since WW2 and the Cold War, the transitional period will likely to be very unpleasant for everybody involved.
Originally sent to VIXCONTANGO subscribers on October 3rd, 2022
This is going to be a primer on International Relations theory.
Blitzkrieg vs Echelon
There are 2 major styles of military warfare: Blitzkrieg and Echelon.
Blitzkrieg is the military style of the West which in its modern variant originated in Prussia (Germany). It relies on quick and decapitating strikes, emphasizing speed and power (“striking first is striking twice as hard”) and catching the opponent unaware. The idea is that with quick but effective strikes, resources are preserved and you get maximum use of limited resources. You also achieve a quick resolution to the conflict by taking out the leadership and submit the opponent’s troops to your will by minimizing bloodshed. Since Alexander the Great’s win at the Battle of Issus where a heavily outnumbered Macedonian army concentrated its strike power on the cohort of the Persian King Darius and caused him to flee thereby demoralizing the Persian troops, the West has preferred this style of warfare. Decapitate the command center quickly and everything else falls in line quick. Hitler’s Operation Barbarossa in Russia to this day is considered the pinnacle of Blitzkrieg warfare as within a year Hitler conquered what was majority of known Russia – Ukraine SSR, Belarus SSR and the Western part of Russia, a territory as big as the whole of Western Europe itself. In modern day, the American “Shock and Awe” campaign in Iraq during the Gulf War is another example of successful Blitzkrieg style warfare.
Echelon is the military style of the East which is practiced in both China and Russia, or generally speaking in descendent nations of the Mongolian Empire. Not much is known about Echelon warfare in the West because the West does not practice it. I guess some have read Sun Tzu’s “Art of War” which articulate some of its principles. Echelon warfare relies on small but persistent strikes that come in waves one after the other over a long period of time. The idea is that the opponent is being weakened slowly, piece by piece and that eventually he will submit to peace negotiations once his strength is drawn down low enough to where the prospects of complete failure start to enter the equation. Slow escalation is the primary mode of this warfare with the most expendable resources being utilized first. Major battles are avoided, bloodshed is avoided, and primary strength and critical resources are always preserved and used as very last resort. Americans understand that the Chinese practice this type of warfare but for some reason don’t want to understand that the Russians employ it as well. In the West, Russian military successes – and there are many (Napoleon, Hitler) – are always being explained with General Winter or a vast population advantage. As if nature shouldn’t be used as a military tool?!? Russian military has a general reputation for inefficiency in the West. “Quantity is a quality of its own” is the best Americans can say about Russian warfare. Yet, Russia is a dominant military power and the only military on par with the American one in the world. While much is being made about American participation in World War 2, 80% of the casualties in WW2 and 80% of the destruction of the Germany military happened on the Eastern front by the Red Army. Russians came at waves at the Germans first stopping their deep advance, then reversing it and the walking it all the way back to Berlin until achieving complete victory. Such was the fate of Napoleon as well when the Russian army led by Generalissimo Suvorov walked all the way to Paris after Napoleon’s army had burned Moscow. The best part about Echelon warfare is that practitioners of Blitzkrieg warfare never understand what hit them. The losses are small and imperceptible and at the end the destruction has arrived in an invisible fashion.
To use a nature analogy, Blitzkrieg warfare is the Rock whereas Echelon warfare is the Ocean Waves. Waves are softer and weaker than the Rock but they come at it relentlessly over a long period of time. The Rock never really understands how the Waves turned it into sand.
Realism
Just like there are 2 major styles of military warfare, there are 2 major schools of thought in International Relations: Realism and Idealism. The usual term used for idealist foreign policy in literature and the media is “liberalism”. The usual term used for realist foreign policy is “Realpolitik”.
Realism features 3 major theories – Classical Realism, Neorealism/Structural Realism and Neoclassical Realism.
In Classical Realism states are the main actors of the international system, there is no supranational authority, states act for their own national interest and states want to expand their power to ensure their preservation. Classical Realism assumes that anarchy is the default state of international affairs with relative power (military, political and economic) between states determining the relationships between them. You have often seen the term “entropy” being used on FinTwit. “Entropy” is a physics term about how the default state of nature is chaos and that order naturally degenerates into chaos unless energy is spent to preserve the order. “Entropy” and “anarchy” are basically interchangeable terms, and all of the guys talking about “entropy” in the field of international relations really are talking about Classical Realism. Classic Realism assumes that domestic politics drives national interest and since human nature is not benevolent, states generally act out of fear to protect themselves from other states or overconfidence to take advantage of weakness in other states. Classical Realism (or realpolitik) was the dominant international relations doctrine of both the Soviet and American governments during the Cold War (1950-1990).
An important concept in Realism is the “Security Dilemma” – when the increase in one state’s security leads other states to fear for their own security (because they don’t know if military buildup is for defensive or offensive purposes) and that results in those states to increase their own military spending. Consequently, security increasing measures can lead to tensions, escalations or outright conflict producing an outcome that is detrimental to all sides – a political instance of the prisoner’s dilemma (where both sides out of selfish considerations select the worst possible combined outcome).
Neorealism/Structural Realism assumes that power politics among nations is permanent and sees limited potential of cooperation between Great Powers. As such competition is forever. Neorealism then states that Great Powers could undertake one of two strategies during this permanent competition – Defensive and Offensive. Defensive Realism states that states primarily concentrate on maintaining their own security. Offensive realism states that nations seek to gain as much power as possible in the international system (power maximizers).
There are two foreign policy doctrines from the past that are considered to be classic Offensive Neorealism – “Weltpolitik” (or World politik) of the German government prior to World War 1 and “Lebensraum” of the Hitler government prior to World War 2. Both were imperialist doctrines that sought to maximize German power in the world. Weltpolitik is conquering the entire world. In the case of Hitler, his aspirations were actually more modest because “Lebensraum” was a doctrine of acquiring only the territory that has the necessary resources for the success of the Aryan race. For Germany that territory is modern day Ukraine since Germany doesn’t have soil that can produce food in large enough numbers, whereas Ukraine does. Thus the exact cause of World War 2 and Germany’s inspiration for Operation Barbarossa was its desire to annex Ukraine for itself.
To keep it simple here: Offensive Neorealism is Imperialism.
Neoclassical Realism states that politicians in countries may not be able to corral domestic resources for their desired foreign policy or simply that states might mismeasure the power of other states. This results in periods of “Inappropriate balancing” or “Overbalancing” when a state incorrectly perceives another as threatening and uses more resources than it needs in order to balance. “Underbalancing” is a when a state fails to balance out another state and perceives it as less of a power than it is. “Nonbalancing” happens when a state avoids balancing through “buck passing”, “bandwagoning” and other escape strategies. A state may choose to “nonbalance” for many reasons including lack of ability to balance.
A case can be made that America’s view of China in the 1970-2020 period is perfect case of “underbalancing” – America perceived China for being less of an aspirational Great Power than it actually was. A case can also be made that America “overbalances” in its relationship with Russia. There is a huge Cold War military apparatus in the US that is specifically aimed at Moscow despite Moscow not being as big of an economic player as China (at least not right now). All of America’s nuclear infrastructure and military/foreign policy apparatus is primarily targeted at Russia and very little of it against China. That is obviously a terrific miscalculation as the American rear is open to Chinese invasion and is being very successfully invaded.
The primary contributors to Realism are Thucydides, Machiavelli and John Mearsheimer. Thucydides is a Greek historian best known for his “Melian Dilemma” which states that losers of war must accept what they must to survive and the “Thucydides Trap” which states that two Great Powers that go into conflict with each other both lose by weakening each other enough to where a third power supplants them. Machiavelli is a Florentine diplomat who separated morality from politics and foreign policy in a time when the Christian church, ie morality, was an important influence in all aspects of governance. Machiavelli is known for the saying “the ends justify the means” and is considered the main influence of modern political and international relations theories. My employer at Stanford while I was an undergraduate student was Professor Angelo Codevilla who was a Republican expert in realist foreign policy (also happened to be the guy who staffed Reagan’s CIA) and who is also one of the main translators of Machiavelli’s masterpiece “The Prince” in English. John Mearsheimer invented Neorealism/Structural Realism and he is the guy that predicted correctly 8 years ago that the Ukraine war would erupt. Other famous founders of Structural Realism are Hans Morgenthau and George Kennan. Neoclassical Realism was created more recently by former Foreign Affairs editor Gideon Rose to explain failures of US foreign policy over the past 30 years.
Idealism
Idealism is the second major strategy in international relations theory. It has only one major school of thought called Liberalism which is sometimes called “International Liberalism”. Liberalism rejects power politics and rejects the security/warfare principles of Realism. It emphasizes that international cooperation is a win/win proposition that benefits both nations and it emphasizes a role of international institutions such as United Nations to limit the sovereignty of nation states, direct policy choices and coordinate dependencies among countries. It wants to foster international trade because when economies are interconnected with trade, countries are less likely to go to war with each other. Liberalism wants to spread democracies around the world because theoretically well-established democracies will not go to war with each other so if there are more democracies there will be less war. Liberals see nation states interacting through economic, financial and cultural means instead of military means. With proper institutions and diplomacy, liberals believe that states can work together to maximize prosperity and minimize property damage and conflict.
Liberalism was first coined by the German philosopher Immanuel Kant who was one of the major Enlightenment thinkers. Kant believed that reason is the source of morality and as such denied major religions (such as Islam and Christianity) as source of legitimate moral codex, obviously ignoring the fact that religions are rules of morality (ie rules for behavior between people) acquired through generational and inter-generational experiences of many different types of people and represent reason that is not easily accessible in one lifetime. Kant denied the existence of God and set the modern foundation for atheism. But just like you need a thousand years of astronomical records to be able to predict planetary motions, similarly a single person’s experiences in a single life do not encompass all possible experiences and models of behavior and as such are not a good way with which to build a moral codex. Religion as a practical matter is a better guide than the experiences of a single individual in how to craft morality that can live through generations. Kant sticks to individualist and confined view of direct experiences on which to base morality. Kant becomes infatuated with the idea that universal democracy and international cooperation will end human conflict and that would be the culminating stage of world history. Not sure why history needs a culmination but Kant seems to be infatuated with the apocalyptic paradigm of Christianity and I mostly attribute that to him being German and living in an inhospitable landscape.
The practical usage of liberalism as a foreign policy was initiated by US President Woodrow Wilson who created the League of Nations after World War 1 – the first major international institution. Wilson started the projects of all the international institutions we see in practice today such as the United Nations, International Monetary Fund and World Bank. His initial attempts failed miserably and resulted in World War 2. After America was the only major country left standing after World War 2, America was able to bully and force other countries to accept Wilson’s ideational liberal foreign policy designs to this day.
Neoliberalism is a revised version of liberalism that states that democracies should fight wars in order to expand the footprint of democracies around the world.
Liberalism took a back stage during the Cold War from 1950 to 1990 and was replaced by Realism as that was a better model for the relationship between the Soviet Union and USA at the time. Liberalism resurfaced after the end of the Cold War in 1990 in its newer and more aggressive form – neoliberalism. Neoliberalism today is the official foreign policy of the United States, European Union and a few other American vassal countries like United Kingdom and Japan. America’s neoliberal foreign policy has resulted in constant financing and waging of wars around the world – Iran, Iraq, Syria, Libya, Yugoslavia, Afghanistan, etc. Since the end of World War 2, America has been involved in 90% of the military conflicts in the world clearly showcasing that neither democracy nor neoliberalism is a force for peace.
Commentary
Now that we know what Realism and Liberalism is, I have a lot to comment on.
First and foremost, it should be pretty obvious that America’s neoliberal foreign policy is in fact Offensive Realism. America is not defending itself or its allies against an opponent infringing on its values, it is waging an offensive war on alternative forms of government. As Biden coined it, it is a war of “democracy vs autocracy”. This is not something that is a conspiracy, this is the official foreign policy of the US government as stated by Biden, Blinken, Jake Sullivan, etc. Thus America’s neoliberalism is direct descendant of Germany’s Weltpolitik from WW1. America is not happy with what it has but it wants to impose its values on the entire world. There is no place on Earth where America won’t wage war to impose its values. America is after all the only country in the world with 150 military bases. America is a clear cut practitioner of Offensive Neorealism.
The Democratic Party of America has a foreign policy of Weltpolitik – they want to spread their values everywhere. The Republican Party of America has a foreign policy of Lebensraum which was Hitler’s foreign policy of waging war for resource extraction. Mike Pompeo recently gave a “Three Lighthouses” speech recently identifying Taiwan and Ukraine as countries of intense focus of US foreign policy alongside Israel. The reason is Ukraine substantial food and energy resources and Taiwan human resources and semiconductor manufacturing. These are all key for American industry and America wants complete control over them just like Hitler’s Third Reich wanted control of Russia. Unfortunately for our generation, the closest analogies of the past for America’s foreign policy are Germany’s Wilhelm 2nd Weltpolitik and Hitler’s Lebensraum! Not a good thing folks because both of these resulted in massive world wars that killed tens of millions of people.
The 2nd observation is that Liberalism as an ideational theory is fundamentally utopian and therefore totalitarian. Ideas are fiction in the imagination of people. They are not observable reality. As such any judgement as to their “goodness” is entirely arbitrary and can’t really be proven empirically. For that reason, these values and ideas have to be imposed on nations by all means necessary including brute force, censorship, bullying and intimidation. It is not a coincidence that Biden’s idealism has turned America into a totalitarian state. People – here or abroad – don’t accept its values and America finds itself in a position in which it has to wage war both against other nations and against its own people. Since Neoliberalism is really Offensive Realism, the only response to disagreement is war. There is a reason why American government is waging wars all the time. Its ideology demands it. There isn’t an international conflict which America has declined to participate in. The propagation of American “values” by force is always on the agenda. The more America falls down into the vortex of liberalism, the more totalitarian and despotic its government is. If you can’t recognize modern America, it is because it is no longer the America of the past. This is anew neoliberal America which is the biggest threat to world peace since the end of the World War 2. And the reason why America is the biggest threat to the world unlike during the Cold War is because today it utilizes an incorrect ideational model of international relations and that will bring us into a nuclear conflict quickly.
The 3rd observation is that NATO is clearly an offensive alliance. Because America practices Neoliberalism which is in reality Offensive Realism, clearly NATO will expand to areas that will provoke war with other Great Powers. If neoliberalism was indeed not Offensive Realism, you would have NATO in Ukraine without Russia triggering war. But because Russia triggers war that means that neoliberal model of describing international relations is incorrect. All the neoliberals were wrong. States do care about their security. The correct model to describe this situation is Realism.
But there can be no discussion of that in America because America is an idealist power and thus all internal dissent is censored out. John Mearsheimer is big time realist American foreign policy scholar and he is being censored by the media. Why is he censored by the media? Because again they are liberal idealists and in idealist circles diversity of thought is not allowed. The censorship needs to be totalitarian and absolute. There is only one line of thinking allowed in the media and that is liberalism. Needless to say there needs to be top to bottom overhaul of American media and its censorship of discourse in the country. If “liberal democratic” America reminds you of the Soviet Union that is because it is exactly like the Soviet Union. Its foreign and domestic policies are ideational.
In order for NATO to be recognized as the defensive alliance that it was intended to be at its founding in 1950 (ie practice Defensive Realism), NATO should reject membership of countries that Russia or China views as no touch such as Ukraine, Georgia and Taiwan. NATO should not have an open door policy. It should have an explicit blacklist of certain countries in order to limit conflict with other major powers like Russia and China.
What type of foreign policy America practices is a matter of economic and military power. If a certain foreign policy leads to America or its allies getting nuked and results in substantial economic and territorial damage, that foreign policy clearly is not modeling the world well and is not good policy to follow. Expansionism of NATO to Ukraine, Georgia and Taiwan is a bad idea. America needs to stop demanding “solidarity” from Eastern European countries on actions that can lead those countries into an undesired war with Russia. Support for arming Ukraine is one such demand. The war in Ukraine is an American war of choice. Ukraine is not a member of NATO and America and its allies have no obligation to arm it or to defend it. From the very beginning this year, America should have pursued a peaceful and diplomatic resolution to the conflict. But it didn’t. For America to demand European countries that are neighbors of Ukraine to be in “solidarity” with its warmongering actions is bullying, intimidation and an outright insult to the sovereignty of these nations. Yet that is what America does every single day. America is easily the biggest mobster and intimidator in the world today and that is not a compliment. And that is a direct consequence of its liberal foreign policy. Many countries are reconsidering their alliance with America as a result of the tensions, threats and intimidations experienced this year.
America practiced Defensive Realism during the Cold War because that was the military and economic reality during the Cold War. The collapse of the Soviet Union erroneously shifted American foreign policy into Neoliberalism (which is really Offensive Neorealism) which has now expanded its influence directly next to the borders of China and Russia. Neoliberalism is no longer a good model to follow because as you can see in Ukraine, it will trigger war, then escalation and it will get us all nuked. Triggering wars with these Great Powers will not end well for America as the prisoner’s dilemma tells you it. America needs to go back to the Defensive Realism foreign policy that was employed during the Cold War. American population needs to see John Mearsheimer on TV far more often than it does now. America does have great foreign policy scholars and it is a shame the US government itself does everything to repress them. The list of American dissidents grows every day.
Further, America’s descent into woke ideology under the Biden administration – Critical Race Theory, Transgenderism, Open Borders, Soft on Crime – has resulted in America promoting values that are NOT shared in Europe. These values are not what the transatlantic alliance was based on after World War 2. Then officials in both governments were Christian, from European descent and could agree that marriage is between man and woman, that there are only 2 sexes, that laws should be executed without prejudice, or that borders and immigration need to be controlled. Now American and European officials no longer agree on these basics, because America is now an atheist country that rejects Christianity. America also rejects its European roots. In fact, Biden government’s ideology is distinctly Europhobic in nature. America is treating Europe as an enemy despite the fact that 70% of American have European descent. Many Americans reject fundamentally that they are descendants of European settlers. They reject European values. Whatever the reason for that is I don’t know but that is a problem for Europe today. America no longer can count on Europe being in its coalition. International alliances are based on shared values and American values now call for the extinction and destruction of Europeans. That is not a shared value at all. This is a direct threat, clear and present danger to all Europeans. America’s bombing of the Nordstream pipelines last week is a clear act of war against Europeans. It is direct destruction of their property and energy security.
America’s neoliberalism and its highly offensive neorealist/imperialist foreign policy will now result in a dramatic reduction of the American sphere of influence. Not only will China, Russia and India walk out on America but soon will Europe as well. Since America now threatens the European national interest, at the very minimum Europe will have to take on a Defensive Realist posture against the United States. Unfortunately, in its rerun of Weltpolitik, America just like Germany in WW1 and WW2 made enemies everywhere and will see its influence shrink dramatically going forward. National conservatism can’t arrive soon enough in America and Europe. Because of neoliberalism we are living in the most dangerous times since the end of World War 2.
VIXCONTANGO BLOG 