As we can see in this chart, the idea that the crisis in the Middle East involving Iran and Qatar would make European bonds implode is not really the case. In fact, the bonds are about at the same level as they were. The bonds of Germany and the UK are at the same level as they were back on March 19th.
At the same time, the bonds of the US and Japan are drifting. In other words, it could be that what’s going on with Japan has a more direct effect on the US. But the idea that the situation in the Gulf is right now making the bonds of the UK and Germany implode is false, and it is clearly visible on the charts.
Now, there is an interesting idea from Mr. Bessent which has been floated: that in order to strengthen the credit of the US, the US would go for “3, 3, and 3”: 3 million barrels more of production, a deficit of 3%, and a 10-year at 3%.
And this is principally a mad proposition, in a sense, because it is essentially based on the idea that you can strengthen your credit by hurting your creditor.
What do I mean by that?
Thornton’s View on Credit
If we look at Henry Thornton’s view on credit, he says that credit depends on the idea that if you lend to a farmer, you expect — you have confidence — that the farmer, when he comes into possession of the fruits of his labor, will either be compelled by the law of the land or induced by a sense of justice to fulfill his part of the contract when the harvest is over.
He also explains that in a society in which law and the sense of moral duty are weak, and property is consequently insecure, there will, of course, be little confidence or credit, and there will also be little commerce.
Now, this brings us to the idea that the US could strengthen its credit by hurting its creditors.
Essentially, as we have seen in previous discussions, the UAE was about to release a lot more oil because they had increased their capacity to 4.85 million barrels per day versus 3.3 million barrels per day under quota, and were going into the OPEC meeting with the threat of either already quitting OPEC or releasing more of their oil.
And this resulted in a long delay in that meeting in Vienna, where the Saudis and the African nations decided, okay, let’s do it. Let’s release another 200,000 barrels for the UAE.
Now, it’s interesting because when the oil price was at $53 in May last year, if the US had not constrained the output of Venezuela and shut down production capacity in the Gulf, then this idea of 3 million additional barrels would be completely ridiculous.
Because if we were in May last year and the UAE said, “Okay, I’m going to release 1.85 million of my extra capacity,” you would certainly have seen the barrel price in the low 40s. Now add another 3 million barrels of production from the US on top of that?
Unfeasible, because as Scott Sheffield was explaining, in the state of affairs before the Venezuela and Iran situation, there was already a glut of oil.
So, in a sense, yes, Mr. Bessent is deranged in saying, “Well, we want 3 million barrels more.” It will have to come at the cost of some countries reducing their output. The problem is that those countries are creditors to the US.
Of course, under the old logic of conquest, when the land of the US was Native American land, there were no Native American nations who were creditors of the US. And back then Europe did not care about those people either and was actively engaged in expropriation on its own.
And I’m not here to make that argument, but I am saying that when Mr. Trump recently goes and says, “Oh, we could release more oil if we go after Greenland,” then there is a question.
Now, when it was Native Americans or nations from Africa, nobody cared. But now there is an enormous sovereign wealth fund in Norway. And the UAE and Saudi Arabia are also large creditors of the US.
So the idea that you are going to improve your credit by hurting your creditors is completely mad. It is positively mad, and it is in complete contravention of the principle articulated by Henry Thornton.
Henry Thornton does not even mince his words. If you are a net debtor in a war, you do not even seize property in retaliation against your enemies — so against your creditors? Saudi Arabia, the UAE, the Nordic peoples?
I do not know where Mr. Bessent got the idea that this would work. This policy, and these threats toward Greenland, are hurting the credit of the US.
How about Nazi Germany seizing the gold of European Jews and then telling American Jews: “Look, we have seized the gold of European Jews, so now we are more creditworthy — why don’t you lend us money now that we are more creditworthy?”
That is not very different from the US thinking it will look better in the eyes of the Norwegian sovereign fund by making threats of seizing the oil of Greenland.
https://thehill.com/policy/international/5891381-landry-greenland-iran-strait-of-hormuz-oil-prices/
In fact, Henry Thornton has a definition for this type of behavior: a rapacious enemy. Do nations have a willingness to lend to a rapacious enemy?
How about Bonaparte going to see Pitt and asking him, “Could you please lend me some money so that I can wage war against you and seize some UK property on continental Europe?” ( the parallel is threats of military intervention in Denmark )
I believe we are dealing with deranged people in this administration, frankly.
I would go even further by explaining that Henry Thornton said at the time that the UK should not retaliate through confiscation, even against enemies, because it was a net debtor.
Here we are not EVN talking about enemies. I mean, if production was taken from Iran — okay — ( even Thornton would say avoid confiscation against enemies because you are a net debtor to the rest of the world, and you do not want people to lose trust, because credit comes from trust. We just saw that with Thornton).
But then you cut the production of Venezuela — okay. You cut the production of Iran — okay. But you cut the production of the UAE and Saudi Arabia? And you are making threats toward Norway’s neighbors and brothers?
Denmark, Sweden, and Norway are the same Nordic peoples. They have different countries, but you could say they are part of the same ethnic and cultural group. And Norway has enormous sway through its sovereign wealth fund.
So I think Mr. Bessent is deluded in thinking that — and Mr. Trump as well, in making those statements — this would strengthen US credit.
It is mad, clearly mad, by the definition of credit first laid out by Thornton, because it breaks confidence. Breaking confidence — and carrying out seizures, or threatening to do so against countries which are your creditors — is not going to result in a strengthening of your credit. If you believe that, it may be because you were just an execution monkey — in a big hedge fund maybe — but still just an execution monkey.
Now if Mr. Bessent wants to see the US curve yields continue to rise he should continue to hurt the US creditors. That should work beautifully.
You can watch the augmented media link here.
https://docutalk.education/execute?task=NavigationPage&g=efb3b36c-0c88-43f2-bd20-5b8e4e0ea8bc