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Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions of economics, finance, writing and education, and... More
  • US Can Harm Russia Far More Than Russia Can Harm The US In An Economic Tit For Tat. 3 comments
    Mar 24, 2014 6:07 PM

    I recently wrote an article addressing the Russian threat of dumping US T-Bonds in an effort to harm the US economy. The threat is basically a joke. Selling $100 or even $200 billion most likely won't even register on the scale. Vladmir Putin would only prove himself to be impotent if he were every to attempt such a fool-hearted effort. Russia simply isn't an economic powerhouse. In 2013 Russia was the 8th largest country in the world, with a GDP of barely over $2 trillion. Russia is dwarfed by its quazi-communist/state capitalist cousin China's $8 trillion, and much bigger brother US's $16 trillion. Given the vast resources, educated workforce and population Russia's embarrassingly small GDP is a testament to its complete and utter failure as a political/economic system. Russia has the largest land mass of any Nation on earth, it is rich in natural resources, and the best it can do is rank 8th. That is pathetic. A country blessed with so many advantages should dominate the world, but because of its opposition to freedom and free markets they barely make the top 10.

    It is because of the inherent inefficiencies of the "central planners" of a totalitarian command and control quazi-communist government that Russia will always lag the world. Ronald Reagan understood that, and that is how he won the Cold War without firing a shot. He simply drove down the price of oil robbing Russia of badly needed capital and increased US spending of the military. Highly efficient free market capitalist systems simply can easily outspend inefficient communist system. The US economy made a military war unnecessary, the US simply beat the Russians at the grocery store and gas station.

    Because of that history, Russia is foolish for threatening the US. The US spends over 1/4 the Russian GDP on its military, and US citizens spend more that 1/10th the Russian GDP just on entertainment.

    Military

    Excluding war costs, the budget contains $549 billion for military programs, a more than 5 percent increase relative to 2014. That includes $28 billion for the "Opportunity, Growth, and Security Initiative." The president said this fund would allow the Pentagon to "accelerate the schedules for developing and buying new or upgraded systems."

    Russia stores a lot of its wealth in gold, and is the 4th largest producer of gold in the world. The most recent report I can find shows the Russian government holding 1,000 tons of gold, or 8% of its reserves.

    7. Russia

    Russia holds 1,034.7 tonnes of gold, which represents 8.3% of its reserves. Russia has more than doubled its gold reserves in recent years and is likely to keep buying. In 2011, Russian Prime Minister Vladimir Putin claimed the United States was "like a parasite" on the global economy and said the dominance of the dollar as a world reserve currency is a threat to the financial system. In 2013, Russia's central bank added 77 tonnes of gold to its official reserves.

    While Russia has substantial holdings in gold, it isn't enough to shoot your mouth off about. Russia can talk big, but it is a bluff. The US dwarfs the Russian gold reserves. Selling just a small fraction of its vast gold holdings would almost certainly cost Russia a small fortune. Just mentioning the possibility would likely send gold tumbling. Bully Vlad has simply brought a knife to a gun fight.

    1. United States

    Despite ending the gold standard in 1971, the world's largest economy holds 8,133.5 tonnes of gold, representing 71% of reserves.

    The other real threat the US has in energy. With friends like Vlad, Russia doesn't need enemies. The political environmentalist left has been highly effective in the US at preventing an aggressive move towards fracking, drilling, building pipelines, mining coal and building out the liquefied natural gas or LNG infrastructure. Now that the EU has been rudely awakened to the fact that wind farms and solar panels are no protection against Soviet diesel powered tanks, the focus is almost certainly going to be shifting towards how the EU can break its addiction/dependency on Russian oil and gas. The EU simply can't afford to be blackmailed by bully Putin.

    The financial media has been quick to pick up on this theme, and the response has been ruthless. I wouldn't want to be running for office in the US opposing energy production and LNG facilities if this is the kind of press the issue is generating. Just watch these videos, the coverage is devastating. Bully Vlad may be just the catalyst needed to motivate the US to embrace a serious effort towards becoming energy independent and a net exporter of fuel. If Vlad triggers the next cold war, it will be up to US natural gas to keep the EU warm.

    Video #1: Obama needs to take a stance on nat gas: Pro

    Video #2: USA's superpower status in focus as Russia makes power play

    Video #3: Playing potential EU nat gas plan

    Video #4: Could US LNG exports actually scare Russia?

    Video #5: Time to put climate change agenda on ice?

    The obvious winners of another energy driven Cold War would be the companies related to fracking. I recently wrote an article that included many possible winners. Defense contractors may also be potential winners. Gas-to-liquids and coal-to-liquids could also be technologies that have finally come of age.

    The losers of another Cold War would be the green economy. Countries have already begun to abandon their "green" agendas, and public support has been on the wane here in the US. The EU's inability to reach energy self sufficiency following the environmentalist's agenda even after extreme and expensive efforts has left them vulnerable, and fear is a highly effective emotion to drive voters to act. Pursuit of a "green utopia" is a luxury, and will be the first thing to go when lives are on the line. Wind and solar barely even register as energy sources when compared to the entire energy consumption of the EU. Wind and solar don't really register here in the US either, yet they have gotten a disproportionate about of attention. Sure "Big Oil" got subsidies too, but "Big Oil" provided affordable and reliable energy for those subsidies, wind and solar can't make those claims. When push comes to shove society will turn to proven, reliable, conventional, abundant and affordable energy, the energy provided by our coal miners, frack drillers and good old "Big Oil." Continued pursuit of the "green economy" is a luxury the EU and US won't be able to afford if bully Vlad insists on reminding society just how dangerous a path that is they have chosen. I would imagine continued Russian aggression will signal the end of the "green revolution."

    Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: market-outlook
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Comments (3)
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  • Anyoption
    , contributor
    Comments (745) | Send Message
     
    Just like in North Korea, Putin is driving his people into the ground out of his own despotic desires for power. I don't see Russia every becoming as threatening as they were during the Cold War, although they are still a threat, especially due to their many allies in Asia and the Middle East that oppose the US.
    25 Mar 2014, 09:48 AM Reply Like
  • Investor Talkroom
    , contributor
    Comments (520) | Send Message
     
    I agree that Russian GDP is pathetic but for a counrty which just recently went through a complete collapse and dark ages (the 90s) it is doing not to shabby.
    Russians learned their lesson from the communist era and they are steady moving forward. While some countries are moving in the opposite direction.
    MSM propaganda about "thirst for power", "imperialism", "threats of cold war" - is just that - -propaganda.
    Everything Russia was doing in the recent years makes perfect economic sense for their country.

     

    And going back to the articles topic:
    US companies like Exxon, Coke, Pepsi, McD, Ford, JNJ, Deer, CAT - they are all heavily invested in Russia. If it comes to tit for tat economic sanctions Russia can do much more damage than some people realize.

     

    Even with pathetic GDP Russia still has balanced budget and can pay the bills.
    You cite massive military spending here in USA - the money are borrowed and most of it wasted. This is what I would call pathetic.

     

    Long: RSX.
    25 Mar 2014, 11:05 AM Reply Like
  • Robert Wagner
    , contributor
    Comments (2302) | Send Message
     
    Author’s reply » "You cite massive military spending here in USA - the money are borrowed and most of it wasted. This is what I would call pathetic."

     

    I wouldn't say keeping the world safe is "pathetic." Just look at the military budgets of other countries and ask yourself what would happen if the US didn't defend them? They would be crushed. The entire free world gets military welfare from the US, and they call our spending "pathetic." What is pathetic is what happens when the US doesn't come to the rescue. Be thankful you can insult the US like that an know that you can still sleep safe at night. No other country will keep the world free and safe.
    25 Mar 2014, 03:54 PM Reply Like
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