A $95 Billion Boondoggle

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The big news this weekend is that the House passed a long-anticipated $95 billion foreign aid package.

About $61 billion will go to assist Ukraine in its war with Russia. About $26 billion will go to Israel (with some humanitarian aid for Gaza) and around $8 billion will go to supporting allies in the Indo-Pacific region, most notably Taiwan.

The package will go to the Senate this week, possibly as early as tomorrow, where it’ll certainly be approved. Joe Biden will then sign it into law.

Biden desperately wanted this package to shore up his prospects in this year’s election. He can’t afford for Ukraine to collapse and suffer another foreign policy disaster like Afghanistan — not in an election year.

Biden doesn’t care how many Ukrainians die as long as he prolongs a Ukrainian collapse until after the election. That’s just the cynical reality of it.

The bill’s cheerleaders want you to believe that the Ukrainian aid will finally free up massive weapons transfers that’ll turn the tide against Russia.

Don’t believe it.

All the Money I Want, but Nothing to Buy

First of all, money isn’t the problem. Hardware’s the problem. There’s not a massive stash of arms and ammo sitting there for the U.S. to give Ukraine. We’ve already sent them most of what we could reasonably give them. There’s just not much more to give. You can give them all the money you want, but it does no good if there’s nothing left to buy.

Meanwhile, the U.S. defense industrial base is simply incapable of rapidly ramping up production. This isn’t WWII when the U.S. had a massive industrial base that could be converted to wartime production. Production is already hampered by labor shortages and supply chain issues. It’ll take years to meaningfully increase defense production to the required levels. Ukraine doesn’t have that kind of time.

Yes, Ukraine will receive some new supplies through this package, but they won’t do anything to change the course of the war. They’ll simply prolong the conflict for a while longer, which will only get a lot more people killed, mostly Ukrainians, without changing the final outcome.

These arms shipments will cost the Russians, but Russia can replace its losses, as Russian industry is cranking out ever-increasing numbers of tanks, armored vehicles, artillery shells, missiles, drones and combat aircraft. The West can’t hope to match that production without going on a war footing and undertaking a major overhaul of its production models.

I wouldn’t count on that.

And despite Western claims that the war in Ukraine is sapping the Russian army, it’s actually larger now than it was before the conflict. It’s also battle-hardened and is pioneering inventive strategies to adapt to today’s changing battlefield.

Backfire!

So the Western scheme to weaken the Russian army in Ukraine has backfired. It’s also clear that the unprecedented sanctions campaign against Russia has backfired. It’s been a spectacular failure. The Russian economy is actually booming.

It grew at an annualized rate of 5.5% in 2023 and 7.0% this year so far (according to the latest data) while the U.S. economy is growing at about 2.4%, according to the Atlanta Federal Reserve Bank GDPNow estimate.

The Russian economy currently has an unemployment rate of 2.8% while the U.S. unemployment rate is 3.8%. Russia is also growing at full capacity and has spot labor shortages.

The ruble is steady at about 92:1 (compare this to Biden’s claims from 2022 that “the ruble will be rubble”). Russia’s debt-to-GDP level is 17.2%, compared with the U.S. level of 131.0%. Russian bank profits for 2024 are projected to exceed the record profits in 2023.

In other words, Russia’s economy is outperforming the U.S. by almost every measure, and is doing so on a more sustainable level from a debt perspective.

The aid package to Ukraine will mostly benefit the military-industrial complex. In fact, Biden and others pushed for Ukraine aid on the premise that nearly two-thirds of it, about $40 billion, would go to U.S. defense contractors.

War is great for business!

Why Aren’t They Talking About This?

But there’s one provision of the foreign aid package that’s not getting much attention. It should because it has potentially enormous consequences for the dollar. I’ve been warning about it for months.

The House passed the “REPO Act” this weekend, which authorizes the administration to seize about $20 billion worth of Russian assets sitting in U.S. banks, mostly Treasury securities. It would then transfer that money to Ukraine.

The securities were legally purchased by Russia using dollars earned through the sale of oil prior to the war. They were frozen in early 2022. That means the securities are still legally owned by Russia, but they can’t be sold or pledged, and Russia can’t receive the interest or cash at maturity.

But this legislation goes one step further and authorizes the actual seizure of these assets. This is outright theft and a violation of the Sovereign Immunities Act, but no one seems to care about that.

That’s only a small portion of the roughly $300 billion of Russian assets that are presently frozen in Western banks, mostly in Europe. But seizing that $20 billion outright would be a major development.

Europe has been hesitant to seize the Russian assets (there are still some sane people out there). But if the administration proceeds to seize Russian assets, it’ll pressure the Europeans to do the same. They’ll probably cave to U.S. pressure.

Blowback

Of course, if the Russian assets are stolen, Russia will retaliate by seizing over $300 billion of mostly European assets located in Russia including energy, mining and telecommunications projects. Russia won’t be hurt financially, but international direct foreign investment will.

There seems to be no realization that this theft will destroy the creditworthiness of the United States. It’s almost like the U.S. government is full of Manchurian candidates, under the influence of a foreign power, who are intentionally trying to sabotage the dollar.

Countries with large Treasury holdings such as China, Taiwan, Japan, South Korea, Brazil and Saudi Arabia will start moving their reserves to physical gold, which cannot be seized (one reason gold prices have been surging lately).

The bottom line is that the war is going badly for the U.S. militarily, financially and politically. This aid package will do nothing to change that. It’ll only add more debt and jeopardize the dollar if the administration seizes Russian assets.

Investors should prepare for a financial meltdown as this plays out. Physical gold and cash are the best go-to assets in an environment like this.

Be careful, things could happen fast.

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