The Curse of an Exorbitant Privilege

 

The 5 weeks ended on December 12, 2025, interesting news items to look at from the past periods are:

The Curse of an Exorbitant Privilege: In the first James Bond film, Sean Connery in his role as James Bond sarcastically remarked to Dr No (the villain in the movie) “World domination. The same old dream. Our asylums are full of people who think they’re Napoleon, or God”. (Fig. 1).

It was 1962, I was in my junior high school and such phrases made a profound impact on my young mind about power struggles of big and mighty nations. 63 years has since come and gone and sadly, the world’s elite and its folly never changed, only the lead actor got replaced. As 2025 is drawing to a close let us wrap up this tumultuous year with reflections of the triumphs and tragedies of 2025 that we may all move forward with lessons learn and be prepared to face the challenges of 2026.

(i) National Security Strategy of the United States of America: Released on December 4, 2025, this document is intended for both US domestic political consumption as well as a signal to the international audience. (Fig. 2).

Some call it a document of US strategic retreat from the role of the ‘World’s Enforcer”, but I rather frame it as a pragmatic approach to a temporary cease fire.  US needs to regroup and rearm until she is certain to successfully reassert herself as the Alpha. A summary of the document, with apologies for the smaller fonts, is found in Fig. 2. The gist of the message is if the Atlantic and Asian allies want to deal with regional rivals, US is no longer capable to lead the charge but be quite willing to take a back seat and sell them US made weapons. US will concentrate on her own backyard and will first subdue lesser defiant countries like Venezula, Honduras, El Salvador, Pabama and Columbia, then bigger fish such as Mexico and Brazil to check China’s influence.  

(ii) Japan Militarism: Knowing US must lean more on Japan to face the China threat, Prime Minister Takaichi and her right wing supporters is pushing the envelop to free the shackles imposed upon Japan after the WWII defeat - to rebuild her military and an independent voice as a middle power.  (Fig. 3).

Takaichi’s tactic is to provoke China and hope with an overreaction by China, US may give Japan a longer leash and elbow room to grow her military.  Sensing Japan’s miscalculation, China FM Wang Yi, with over 40 years experience in diplomacy, immediately seize the moral higher ground of the post WWII world order enunciated by the Yalta and Potsdam Accord. This has boxed Japan in and bind all members of the UN Security Council to the established rules. Unlike the US Democrats fabricated mantra of “Rules-based International Order”, there is no ambiguity to the world order towards Japan and consequently US, UK and France are silenced from lending support to Japan. Please find key terms of the Potsdam Declaration in (Fig. 4).

The Catch 22 for US is if the Potsdam Declaration is not uphold, US has no more rights to station her military in Japan at all. Then with a combination knockout punch, China moved unrelentingly onto escalation dominance over the incident with both a projection of power over previously disputed territories as well as an economic and technology Full Nelson. Kind of nip Japan Militarism in the bud.

(iii) The Coalition of the Unwilling: With Trump quickly distancing Zelensky to keep his gun powder dry at home, all the four European stooges (Macron, Starmer, Merz and Zelensky) could do is to sing “Can’t Buy Me Love” in front of 10 Downing Street. (Fig. 5).

Out men, out gunned and out of funds, the quartet is still trying to pirate Russian funds from Euroclear to bankroll a bloodbath tinted with graft and corruption. Poor Europeans, when will they ever wake up to make their elected political leaders accountable. For over 20 years, since 2004, these politicians have continued their expansion eastward into former Soviet satellites in total disregard to Russia’s plead and warning. Now with immanent defeat they want a pause and regroup and rearm. People died, homes, families and energy infrastructures destroyed and nations are d-industrilized yet no one has been brought to account. May be that is how true democracy works because we all get the type of leaders we deserve.

(iv) The Curse of an Exorbitant Privilege: "Exorbitant privilege" refers to the special financial advantages the U.S. gains from the U.S. dollar being the world's primary reserve currency, allowing the U.S. to borrow cheaply, run large trade deficits, and finance its spending by selling debt to other nations, a term coined by French Finance Minister Valéry Giscard d'Estaing in the 1960s. Essentially, the world needs U.S. dollars for trade and reserves, creating massive demand for U.S. Treasury bonds, enabling lower interest rates for America even when it spends beyond its means, which other countries can't easily do. The license to print money at will has lured theUS elites  to protect this privilege above all economic and security considerations. US has devoted all her resources to expand her military industrial/technology supremacy to nurture this Exorbitant Privilege and in the very process emptied her Treasury and incurred huge debts. This myopic vision was adopted by every elected official even at the expense of hollowing out national support infrastructure, industries, STEM education and engineering efficiencies and skills on a false pretext that US can always print and buy whatever she needs. This thinking came about because the elites are delusional that there is no alternative to the USD. After 25 years of rampant abuse of global finances from the dotcom bubble through the sub-prime fiasco to the Covid Modern Monetary Theory, the day of reckoning came in December 2025. On December 12 2025, the Federal Reserve was finally forced to start monetizing Federal Debt again by buying short term Treasury bills, knowing fully the world is watching a scenario of print or default and bankruptcy. I have given readers of this Blog a heads up on my last post published on November 8, 2025. With Fed’s renewed printing, the Dollar Hegemony is officially finished. One by one, we saw the three pillars that propped up the USD faded away, the US Economy, US Technology and the US Military. One may say. the concluding chapters of this saga is documented precisely by the aforementioned National Security Review under point (i) above.

Market reaction to the Fed’s rate cut and printing is one of frustration:

(a) Interest Rates - Fed Funds Rate is only used when banks are out of overnight funds and need to borrow on an emergency basis. (Fig. 6)

US Yield Cure shows from one month to 5 years, interest rates only marginally dropped by a few basis points, much less than the 25 basis point cut by the Fed, whilst longer duration rates actually rose (bond prices lowered) implying the Fed’s action will have a negative impact on the economy. In fact, Jeffery Gunlach, the New Bond King said, the Fed decision is late by one year of what the market has been saying since December 2024 judging by the yield of the 2YR Treasury Note. (Fig. 7)

(b) Exchange Rate: DXY dropped as a result of the Fed’s rate cut and commencement of the forever QE. (Fig. 8).

(c) Stock Market: Nasdaq initially reacted to an increase in liquidity by the Fed’s action but quickly turned to profit taking in fear of an AI bubble burst. (Fig. 9).

Given the forgoing, perhaps the best way to sum up progress and setbacks in the market place in 2025 may be to just simply look at what was being championed respectively by US and China in 2025. In the former case, US Tech stocks and crypto currencies. For China, it was precious metals as reserve assets and a Chinese alternative to technological Innovations. The result, in order of performance for the year 2025, was as follows: Silver (+114%), Gold (+64%), Shenzhen Technology Innovation Index (+43%), Russian Ruble (+37%), Nasdaq (+20%) and Bitcoin (-3%). (Fig. 10).

Yet, irrespective of whether one correctly picked the winners, life remains a struggle for the majority in the global village because as nations tried to trick one another to stumble in intense competition, commerce hibernate in defensive posture. For 2026, we should expect as many false starts and misadventures as in 2025.  So long as politicians vested with self interests dominate the leadership of developed economies, inflation and high unemployment will be the new normal. AI will likely see a K type development and it is obvious where the up-line and down-line will be located. The trend on asset class performance we witnessed in 2025 will continue but none will rejoice because they just represent currency debasement than productivity gains. Cost of living burden will become worse for the majority. The fourth turning will be in full bloom and civil unrest will be a common occurrence. Military tension between super powers should eased, but sadly they will be replaced by armed conflicts between regional and middle powers as diversion tactics from domestic problems and for opportunistic gains. All in all nothing to cheer about. My prayers are for your resilience and inner peace in the midst of these interesting times and that your connection with wisdom and love from on High will shine through.

Ecclesiastes 12:1  Remember now your Creator in the days of your youth, Before the difficult days come, And the years draw near when you say, "I have no pleasure in them": 2  While the sun and the light, The moon and the stars, Are not darkened, And the clouds do not return after the rain; 3  In the day when the keepers of the house tremble, And the strong men bow down; When the grinders cease because they are few, And those that look through the windows grow dim; 4  When the doors are shut in the streets, And the sound of grinding is low; When one rises up at the sound of a bird, And all the daughters of music are brought low. 5  Also they are afraid of height, And of terrors in the way; When the almond tree blossoms, The grasshopper is a burden, And desire fails. For man goes to his eternal home, And the mourners go about the streets. 6  Remember your Creator before the silver cord is loosed, Or the golden bowl is broken, Or the pitcher shattered at the fountain, Or the wheel broken at the well. 7  Then the dust will return to the earth as it was, And the spirit will return to God who gave it. 8  "Vanity of vanities," says the Preacher, "All is vanity." 

If you can’t take the heat, don’t poke the Dragon

The fortnight ended on November 7, 2025, interesting news items to look at from the past two weeks are:

1. If you can’t take the heat, don’t poke the Dragon: The Trump Xi APEC meeting ended in a temporary ceasefire as both sides want a respite. From the pre-meeting US pressurized posturing, Trump’s body language in the presence of Xi and finally Trump’s absence from the actual APEC meeting, it was plain to see the U.S. needs a truce and an orderly retreat to fight more urgent fires at home. US and China initially set a ceasefire period of one year but in my opinion, the timing has more to do with election engineering of U.S. midterm politics than methods and tactics for the next combat. We are going into the 7^th year of the US China contention and bearing in mind the US Soviet Cold War lasted 44 years, we certainly have not seen the endgame. In my previous Blog I time-lined the series of events US instigated just before the Trump Xi meeting. This has always been US’s tradition to put a loaded gun on the conference table and negotiate from a position of strength. What was unexpected was China’s quick draw of the rare earth revolver and as a result the US bluster became a whimper. If you can’t take the heat, don’t poke the Dragon (Fig. 1).

In the following paragraphs, let us see what else follows after the APEC encounter.

(i) Nexperia blow-back and Netherlands Ensnared by US - With a suspension of US Bureau of Industry and Security of an overreach sanction against Chinese affiliates on the Entity List, Netherlands suddenly found herself in solitaire to fight China without US backing. There is added pressure by EU as the global auto industry is being furloughed on account of a supply interruption brought on by the Dutch expropriation of Chinese owned Nexperia. (Fig. 2).

Whilst a new Dutch coalition  government is being formed after the October 29  election, the care-take sitting Netherlands government has taken a step to reinstate Nexperia Chinese CEO on November 7 and to unfreeze Nexperia’s assets on November 11. However the Dutch far-right Wing cabinet continued to cause disruptions by withholding supply of  processed silicon wafers to Nexperia China factories for final assembly and packaging. They have also not revoked order vesting the voting rights of Chinese owned shares with a single Dutch national. This highlighted two points I mentioned in my previous post. The first is “no nation is to be trusted farther than it is bound by its interests” hence US only took care of her own interests and left her minions dangling. (Fig. 3 -Sep 20, 2025 Blog ). 

 The second is stubbornness that prevails with old European elites meant only extreme pain and “guillotines” can cause a  change in the ideological jaundiced European political environment.  (Fig. 4 - Aug 29 2025 Blog).

It will be interesting to look at how China can finesse a restoration of all her legitimate entitlement without alienating a majority of EU countries.

(ii) State Directed Capitalism -The success of the Chinese State Directed Capitalist System in industries, resources, supply chains, technologies and the military has forced the West to replicate China’s playbook. Washington has taken stakes in 5 public companies. (Intel-10% and 15% each in MP Materials, Lithium Americas Corp, Trilogy Metals and a golden share in US Steel). (Fig. 5).

Netherlands did it on the cheap by administrative expropriation of Nexperia.  Sadly, in my opinion the West only took the carcass but not the soul of the Chinese success story. Reason - none of the US investee companies were self sustaining before Washington’s stake. Remember Margaret Thatcher’s privatization were to introduce efficiencies into state owned businesses. In all probability, the reverse should happen if the bureaucratic culture has not changed. We all can recall how technically ignoramus US Congressmen were at the Congressional Inquiry of Tik Tok. On the contrary, the Chinese system is more like a giant Venture Capital Fund. The State identifies particular sectors and technologies to be encouraged. Municipal Governments, State Enterprises and Private Businesses  take the risk to invest with help from public and private venture funds. These VC funds has the same vigor and vigilance as any VC in developed economies. (Fig. 6)

 A thousand ventures got launched with a typical yet measly 2% success rate, the process of “involution” ("內捲") ensures the survivors of these thousands upon thousands Chinese ventures all pass the test of  “the Law of the jungle”. To be honest, Chinese are not anymore intelligent than other ethnicity, so innovation or a lack thereof are never racial. If there is a difference in the pace of development, I ascribe that the Chinese experienced more failures simply because the Chinese face more hurdles and obstacles. They were not supposed to win under the “Rule Base International Order”.  As an illustration SMIC (“Semiconductor Manufacturing International Corporation” of Shanghai) would not dream of taking an ASML Eur 130 million worth NXT2000i DUV lithography machine apart for emergency repairs had not in June 2024, there was a machine breakdown in the midst of production. Against a total ban on software upgrade, maintenance service and parts and components supply been globally enforced by US since Jan 1, 2024, a breakdown means a permanent seizure. The cost of each hour of machine down time potentially cost SMIC CNY 3 million of production value and a consequential avalanche effect of hundreds of millions down the supply chain. Before that time the NXT2000i was just a black box to SMIC as the machines were monitored remotely by ASML and all service and parts supplies are proprietary to ASML under a vendor locked system meaning a total information blackout. In desperation, SMIC called in the best of China’s engineers in electronics from Shanghai, optics from Changchun and materials and control from Harbin to embark on an emergency rescue operation in the next 48 hours. Without plans and circuit diagrams or even what the flashing error message meant from ASML the rescue team instead armed with sophisticated laser measuring devices and 3D ceramic printers . The rescue squad was able to identify the error code as an misalignment in a few hours. What followed was around the clock calibration and DIY 3D printed parts and the issue was resolved and production resumed. Having crossed the Rubicon, there was no return but a migration to full self repairs and preservation mode to overcome every error code, parts and materials in a semiconductor manufacturing life cycle. What is the take-home value of this particular episode and the mystique of the term “China Speed and Innovation”. Well, I can identify at least five: (a) It was born out of necessity. (Fig. 7)

 (b)  the 996 work culture in the Chinese Tech environment meant by simple arithmetic, the Chinese cut short the time requirement by 50% as compared with a standard 40 Hour work week of a western economy  (Fig. 8)

and (c) A united front and kinship in “National Problem Solving” that cut across all discipline, specialization, class and profession. As Professor Martin Jacques said “China, with 5000 years of history behind it, is not a Nation State but a Civilization State” (d) Elaborate use of AI in modelling of composite materials cocktails to narrow the range of materials mix formulation in improving operatiinal aspects of parts and components and (e ) China has complete manufacture capability under the United Nations Standard Products and Services Code (UNSPSC) and a scale larger than G7 combined.

(iii) AI Competition: In a FT piece titled “China is going to win the AI race” published two days ago, Jensen Huang CEO of Nvidia lamented US is loosing on account that China has an electric power and cost advantage and there were too many burdensome regulation in the West which hampered AI deployment. (Fig. 9).

Last month in a “real money, real market showdown” DeepSeek out distanced all other western LLM models  including ChatGPT, Gemini and Claude Sonnet. DeepSeek led the race all throughout the competition with western LLM all lost money. The other LLM competitor that turned a profit was Alibaba’s QWEN3 MAX. (Fig. 10).

My take is DeepSeek with an open source code strategy proved its learning curve is steep and broad as compared with just brute computing power of US models.

2. Red Financial Market Alert: Red lights are flashing in G7 financial markets as a liquidity crisis has finally arrived.

(i) Liquidity Crisis is Here: US Secured Overnight Financing (“SOF”) edged up to $3,237T on Thursday night (Fig. 11)

and Emergency lending by the Federal Reserve through the Discount Window triggered and up to $30 billion. (Fig. 12).

This had not happened since the Repo Crisis in late 2019 when US Depository Institutions ran out of cash and the Fed immediately flipped and restarted QE.  Two Fed Governors, Lorie Logan of the Dellas Fed and NY Fed President John Williams in the span of a week opined that the Fed may expand the Balance Sheet (Fig. 13).

The Fed was neither omniscient nor quick as it was only one week ago that Lorie Logan said there were ample liquidity for a safe and efficient banking system. (Fig. 13).

(ii) Fathom Buyers of US Treasuries: In my previous Blog I already reported Synthetic Demand through derivatives and swaps accounted for the majority of buying of new issues of US Treasuries between 2022 and 2024. Allow me to plainly predict QE will begin before end of the December 2025 and the Fed will be forced to raise interest rate by February 2027. (Fig. 14).

Reason: The US Debt Binge will exhaust money supply M1 in December 2025 and M2 by February 2027. In all probability the money printing machine will run hot non-stop and hyper-inflation will become the new normal.

(iii) China De-dollarization is a success: With agricultural, energy, metals and other commodities largely settled in CNY in 2025, the final loop would be CNY settlement in semiconductors. This is the ongoing tug of war which arose from the Nexperia saga.  BMW was the first to concede and VW likely to follow. In March 2010 settlement statistics of China was CNY-0.3%, USD-84.3% and Other Currencies-15.4%. By March 2024 they were CNY- 52.9%, USD - 42.8% and Other - 4.3%. (Fig. 15)  . I expect there will be a quantum leap by March 2026.

3. Precious Metal Volatility: Since September 2025, precious metals had shown a fair bit of volatility with a 15% swing in the price of silver and an 11% swing in gold. (Fig. 16).

The culprit of the machination is the extreme leveraged and high frequency derivative algorithm driven CTA Funds (“Commodity Advisory Trading”). If readers recalled I reported in my previous Blog that these funds are disguised fronts of the US Exchange Stabilization Fund as a distraction to the weakness of the USD. The sad truth is LBMA and Comex do not have the physical metals to backup the Bullion Banks naked short selling., in particular, every 378.1 ounce of paper silver claim is backed only by one ounce of the physical metal. Market intelligence suggests the Industrial and Commercial Bank of China has to lease out 150 tons of silver at a lease rate of 30% to temporarily bailed out the LBMA bullion banks from a default (failure to deliver). This together with significant borrowed silver from the silver ETF- SLV would all need to be repaid by early 2026. Well at least while the US Government is in shut down mode, the mouse can play. This game however won’t last long as the Chinese Government will tighten control of Tungsten, Antimony and Silver from 2026 (Fig. 17).

Contemporaneously USGG has added Silver and Copper to its critical minerals list. The critical minerals list serves as a basis for which commodities the Trump administration will invoke a Section 232 probe for potential tariffs and trade restrictions, as it had done with copper earlier this year. (Fig. 18).

In my last Blog Post in December 2024 (27/12/2024), I wrote: The Year 2025 will be a watershed year. A global recession is all but guaranteed and truth and integrity is very much in short supply. All asset class representing a promise to pay will suffer. Supply disruption is a certainty and credit based commerce will shrink. The best investment advice I can give is an investment in oneself through skills upgrade, education and health rejuvenation. Be thankful for what you have and show love to people who cross your path. Last but not least get to know your Maker and pray to be carried to His vantage point.

I will be taking a short break to China and Hong Kong from November 23 to the second week of December. The next update in December will likely be the final one for 2025.

Matthew 17:14  And when they had come to the multitude, a man came to Him, kneeling down to Him and saying, 15  "Lord, have mercy on my son, for he is an epileptic and suffers severely; for he often falls into the fire and often into the water. 16  So I brought him to Your disciples, but they could not cure him." 17  Then Jesus answered and said, "O faithless and perverse generation, how long shall I be with you? How long shall I bear with you? Bring him here to Me." 18  And Jesus rebuked the demon, and it came out of him; and the child was cured from that very hour.19  Then the disciples came to Jesus privately and said, "Why could we not cast it out?" 20  So Jesus said to them, "Because of your unbelief; for assuredly, I say to you, if you have faith as a mustard seed, you will say to this mountain, 'Move from here to there,' and it will move; and nothing will be impossible for you. 21  However, this kind does not go out except by prayer and fasting."