Three Predictions For The New Year

Date: 01/13/2022
Author: Mr. X

New Year’s predictions, like New Year’s resolutions, have a way of being forgotten quickly. Things don’t always work out the way we want. When that happens, we may want to seek excuses, or pretend we didn’t say what we did. I don’t want to leave myself a way out. So I’m putting myself on the record with three major predictions for the New Year – and am giving you my reasons why.

Things that are “unthinkable” can happen quite often in geopolitics… and economics. So I will start off with my most shocking one – Russia will move into Ukraine.

Russia Marches

It’s worth noting that Russia has already sent troops into Kazakhstan in what appears to have been a successful intervention. Russian and allied forces have propped up that country’s government against a popular insurrection. The Collective Security Treaty Organization (CSTO) has completed its mission and according to the current government of Kazakhstan, the troops can leave.

This is not the first time Russia has backed an autocratic government against insurrection. In Belarus, a massive protest movement with Western backing took place after President Alexander Lukashenko claimed victory in an election that some observers claimed was fraudulent. (Sound familiar?) Protestors brandished a new national flag, Western press outlets widely covered the dissent, and Lukashenko was even met with open defiance by blue-collar workers, whom he clearly thought would be on his side. Nonetheless, with Russian support, he outlasted the protest movement.

Supporting it may have been a critical blunder by the West. Belarus and Russia, in theory, are bound by a “Union State” treaty protocol that would eventually lead to formal reunification. Of course, in such a union, Lukashenko would be all but powerless. He appears to be grooming his son to take over and had nothing to gain from such a union. For that reason, Belarus was moving away from Russia and towards engagement with the European Union. After the protests though, Lukashenko rationally concluded that the West would demand internal revolution as the price of engagement. Lukashenko is now firmly back in Moscow’s orbit, and arguably more dependent than ever. Russia doesn’t need a formal union – it already has Belarus in its sphere of influence again.

Russia has become obsessed (not without reason) about the danger of American-backed “color revolutions” taking place in its near abroad. The “Maidan” protests in Ukraine, which overthrew a pro-Russian government in favor of a pro-European government, represents the deepest fear of the Russian state. While Russia annexed Crimea in the aftermath and provided (thinly veiled) support to two breakaway “people’s republics” in the east, the Maidan was a massive loss of influence for Russia. Though Vladimir Putin speaks of the collapse of the USSR as a “geopolitical disaster,” Russia does not want (and probably couldn’t afford) outright annexation of most former Soviet territories, probably not even Belarus. It may not even want the two breakaway republics. What it wants is veto power over Ukrainian membership in NATO.

Here, we enter disputed diplomatic territory. Supposedly, near the end of the Cold War, Mikhail Gorbachev told then Secretary of State James Baker that Russia would agree to German reunification only if NATO would not spread east. NATO then promptly spread east, including into the Baltic states.

Ukraine is where Russia says this far and no further. It was Vladimir I (“the Great”) of Kiev who converted to Eastern Christianity, essentially establishing Russia’s civilizational identity. Vladimir Putin has rejected nationalist demands for a “small Russia” that would jettison his country’s vast Central Asian territories and consolidate around the Russian ethnic core. Instead, he defends Russia’s identity as an empire and a civilization unto itself. That civilization began with Vladimir I. To lose all influence over Ukraine would be, in some sense, to acquiesce to further Balkanization. To borrow a phrase from Charles de Gaulle, it would be to betray a certain idea of Russia.

Russia and the United States are technically negotiating but are talking past each other. Russia is demanding a full guarantee that Ukraine will never enter NATO. NATO can’t give such a guarantee without ending its “Open Door” policy. The negotiations are, in some ways, a complete waste of time. While Russia says it is not imposing an ultimatum, it clearly is. Meanwhile, the United States and its allies are putting Moscow in an impossible position.

With COVID-19 far worse than official statistics suggest in Russia, public fury over corruption increasing, and further Western sanctions likely, the Kremlin needs something to keep its grip on power. That something is likely to be a foreign policy triumph. While this will be outrageously expensive for Moscow, some in the Kremlin likely see sanctions as inevitable anyway. President Joe Biden has already ruled out an American military response, so there is no fear of that. Russia has secured its eastern flank by building a strong alliance with China. Long term, China may be a far greater threat to Russia than the United States could ever be, but Western diplomacy, for better or worse, has forced these two governments into an unlikely partnership. America’s governing class has reversed President Richard Nixon’s accomplishment, reuniting Russia and China diplomatically.

I think Russia will go into Ukraine, not because it wants to, but because it must. Like the governments of Belarus and Kazakhstan, the government of Russia will not put economic prosperity or “democracy” over its own survival. That said, I don’t expect Russia to annex Ukraine. It would be impossible anyway. The real goal will be to secure the eastern provinces and take by force what it has failed to gain via diplomacy – influence over Ukraine. Of course, what’s left of Ukraine will likely be more anti-Russian than ever, but Moscow will have its buffer.

While Russia appears to be on the march, it’s actually losing in slow motion. It faces major demographic, economic, and diplomatic obstacles. Yet Vladimir Putin is playing Russia’s weak hand rather brilliantly. This will be his riskiest move yet. It will project strength but it is actually coming from a place of weakness. He’ll make this move because he’s been forced into a corner, and he’ll put his own political survival above anything else. He may also have a misguided view of American weakness because of America’s defeat in Afghanistan and the political divisions on display following the January 6, 2020 riot.

What he is forgetting is that if the GOP takes power in 2022, it will probably pursue a more anti-Russian line than President Joe Biden.

The Republicans Will Take Back The House Of Representatives

When I said “if” the GOP takes power, what I really mean is “when.” Historically speaking, the party in opposition tends to win the midterm elections. The Republican party has actually bungled an opportunity by failing to pursue gerrymandering with the kind of single-mindedness that it could. Some conservative states will actually be losing seats and incumbent Republicans are already facing the prospect of running against each other.

Still, the Democrats are likely to lose the House, not because of GOP strategy, but Democratic divisions. Senator Joe Manchin of West Virginia has proven to be the Republicans’ best friend, torpedoing President Biden’s “Build Back Better” legislation. He’s been given a major assist by Arizona Senator Kyrsten Sinema, who along with Joe Manchin is defending the filibuster. That means an end not only to Build Back Better but also the president’s voting rights push. The president did himself no favors by comparing opponents of his voting rights legislation to segregationists, which led even those like Senator Mitt Romney to blast him for being divisive. At the same time, progressives are not motivated to turn out for a party that they don’t see delivering for their pet causes.

In which Caesar Sinema Dooms The Biden Agenda

The Democrats and their media allies may try to change the conversation to January 6, but the fact is that many voters simply don’t care. Over the past year, the percentage of Republicans who believe that those who entered the Capitol shouldn’t even be prosecuted has increased. Democrats could also try to whip up fear of controversial former president Donald Trump, but The Donald isn’t even on Twitter anymore. It’s hard to believe that a man who would be nearly 80 when 2024 rolls around is just about to begin a period of authoritarian rule. He couldn’t even keep his social media accounts.

Far more importantly, President Biden has failed to contain COVID-19 and inflation. Acting FDA commissioner Janet Woodcock’s blunt assertion that “most people are going to get Covid” nuked any Democratic argument they could make about Republican mismanagement of the pandemic. Inflation is now at the worst rate in almost 40 years. Supply chain disruptions continue, which is why Americans are flummoxed at what seem to be random shortages of food at grocery stores.

The omicron variant of COVID-19 will compound these problems, as labor shortages and failures in basic services will continue to increase. Liberalizing immigration policy could go some way towards ameliorating the labor shortage – but congressional Republicans would have to be insane to go along with any such proposal and risk infuriating their base.

I’m not blaming President Biden for inflation, COVID-19, or many of the other problems the country faces. Had President Trump retained office, we would probably be facing the same inflation and COVID-19 infection rates, and, if anything, the media criticism would be even more virulent. Nonetheless, President Biden is the man in the Oval Office, and he will inherit the blame for everything that is going on. Quinnipiac’s new poll showing him at just 33% approval and the 26 House Democrats who are not running for re-election this year clinched the suspicion in my mind that the president would not be able to defy history.

Does President Biden have hope? In the long run, yes. After all, the last time inflation was this high, it was 1982 and Ronald Reagan was in the White House. He came back to win a crushing re-election victory in 1984. President Biden may be able to turn his political fortunes around, but unless Senators Manchin and Sinema suddenly bend the knee, it won’t happen by this fall.

The World Computer

It says something that predicting a military invasion may seem less outlandish than making a bullish case for crypto. Cryptocurrency is in crisis. The stablecoins that underpin much of the cryptocurrency market have a highly questionable basis. Federal regulators are eager to impose more requirements on crypto traders. The International Monetary Fund recently found that cryptocurrency tends to track stock market performance, rather than defying it. This undermines the argument for “digital gold.”

I’m more optimistic about cryptocurrency’s future – and I would hardly expect the International Monetary Fund to be saying favorable things about crypto. The whole point about decentralized finance is to replace these institutions altogether. The 2007-2008 financial crisis, and the fury many people felt about seeing the same institutions that created the crisis get bailed out, is one of the main reasons cryptocurrency was created. As institutions continue to flounder, we could see another politically driven push back into cryptocurrency.

Yet that’s not why I see ETH, the underlying token on the Ethereum blockchain, reaching $4,000 this year. Two key problems with Ethereum are that it relies on Proof-of-Work and can’t process transactions quickly. Proof-of-Work means that Ethereum requires massively powerful computers to perform complicated transactions, leading to large power requirements. At a time when the world is trying to pursue clean energy and focus on climate change, this is hardly attractive. Ethereum is also just not very fast compared to other blockchains. For example, Solana can handle about 50,000 transactions per second (or more) while Ethereum can handle… between 15 and 45.

Anyone in the crypto environment knows the frustration when high “gas fees” hit and transactions become almost impossible. While you could argue that bitcoin’s whole point is to be a currency that can’t be controlled or cut off by central banks or governments (and even that is questionable), the Ethereum blockchain is supposed to allow an entire ecosystem of decentralized applications. While the vast majority of DeFi and other decentralized applications operate off the Ethereum blockchain, Ethereum simply isn’t fast or efficient enough for it to be used on a large scale.

That should be changing this year. Ethereum has already been undertaking a series of upgrades, switching over to a Proof-of-Stake model and introducing “shard chains,” a way for transactions to be processed more quickly. Ethereum is already working with a kind of “shared” model between Proof-of-Work and Proof-of-Stake. The full transfer to a Proof-of-Stake should come this year. Shard chains and other changes that will make the Ethereum blockchain more useful should be coming in 2023, but incremental improvements can be expected this year.

All of this means that Ethereum will finally be used for something other than speculation by ordinary people. Currently, the world of decentralized finance and applications is obscure and somewhat unsafe. The boom in NFTs (Non-Fungible Tokens) has led to more mainstream acceptance, but it’s also furthered the perception that it is simply today’s version of the Dutch tulip mania. Following Ethereum’s upgrade, we’ll see more realistic and practical applications for art, finance, gaming, social media, and everything else that can be imagined. It will be a massive step forward into making Ethereum the “world computer” that so many have dreamed of… and that will help ETH increase in price.

Those are my three big predictions for 2022. I have no particular moral judgment attached to any of them, and I especially hope I am wrong about the first one. Yet to me the signs are clear, and if the last decade has shown us anything, it’s that investors can’t rule anything out, no matter how earthshaking it may first appear.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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