Economic turbulence accelerating
“The only element in the universe more common than hydrogen is stupidity.”
The whole “sanction regime”, imposed by the US and the EU, is backfiring now: skyrocketing inflation, energy crisis, fertilizer and agricultural production crisis, supply chain crisis, tumults and riots on the streets and so on and so on. Worldwide Big Picture seems to be more than ominous. We are entering on uncharted waters.
World financial system facing troubles
Due to heavy rate hikes by Fed, the value of US dollar has increased so much that Bank of Japan (BOJ) and Bank of England (BOE) were forced to resort to emergency intervention measures to stabilize the value of their currencies and to balance bond markets, which were facing risk of collapse. European Central Bank (ECB) has announced about the emergency plans already in August.
Just few days ago, it came out that the western financial system is again on the brink of collapse, when the Bank of England (BOE) was forced to enact, de facto, a bailout of the pension funds of the United Kingdom. Without the BOE intervention, mass insolvencies of pension funds (and thus most likely other financial institutions) could have commenced that afternoon. It’s obvious that if one of the major financial hubs of the world, the City of London, would face a financial panic, it would spread to the rest of the world in an instant.
It looks as though the global financial system was pulled from the brink of collapse by central bankers. However, this was only a temporary fix. It’s now clear that an outright financial collapse threatens all Western economies, because if pension funds face a threat to their insolvency, it can happen to any other financial institution.
The expected financial crash
When two experienced economy and finance analysts, who both correctly predicted the derivative crisis of 2008, again warn of an imminent crash, it is better to listen carefully.
Yves Smith (the pen name of Susan Webber, Harvard- graduated economist) writes about the now Inevitable Financial Crisis: “For months, I have been confident that Europe would suffer a financial crisis and a depression, as in a real economy catastrophe accompanied by a market crash. And it also seemed apparent that the US would be pulled into the maelstrom, perhaps not as far, but contagion, supply chain dependencies, and the importance of Europe as a customer would assure the US would suffer too.”
The second warning comes from “Dr. Doom”, professor Nouriel Roubini of NYU, who predicted the 2008 financial crisis, says the current recession will be “long and ugly” depression.
There are signs a debt crisis has already started and the economy is headed for a hard landing, he says predicting a deep recession and a 40% fall in the stock market by the end of the year. He has warned that a wide range of shocks will have dire effects on global economies. He predicted it would lead to a Frankenstein-style recession by the end of 2022, mixing the worst aspects of 1970s stagflation and the 2008 financial crisis.
“Signs of strain in debt markets are mounting … the crisis is here,” Roubini said, referring to recent moves by central bankers to stem market volatility. Roubini’s headline in Project Syndicate is the message: The Stagflationary Debt Crisis Is Here.
Everyone now recognizes that these persistent negative supply shocks have contributed to inflation and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.
The central banks have misdiagnosed the reason for the currently high inflation rates. They were caused not only by too much stimulus provided by governments and the central banks but to a large part by the lack of supplies, which is to the consequence of the pandemic and the western sanctions. This storm will be rough and the consequences will be severe.
Broken European banking system
Banking is a business of trust. If the trust in a bank or in the unlimited support of authorities for the bank disappears, the whole banking business is facing troubles. During financial crises, a large number of holders of banks’ financial liabilities, such as deposits, want to cash out. The main point is that as liabilities are withdrawn in whatever form en masse, the bank eventually runs out of assets to pledge/sell to fulfill the withdrawal requests and the bank fails.
The biggest risk of a systemic bank failures most likely lies in Europe. European companies and households have been and continue to be decimated by ravaging inflation, fast-rising interest rates and spiking energy prices. Banks are also currently being hit by heavy declines in the value of government bonds, which they use as collateral. These may easily lead to series of losses on banks.
The global financial system, which broke during the 2008 financial crisis, has never really been healed. The global economy has been kept standing merely by continuous central bank and government interventions and nearly unlimited provisions of credit. The emergency measures by BOE, on September 28, were the final confirmation that this truly is the case. Europe is facing horrifying troubles.
Problems with current monetary system
The current monetary system is on its way out. Even the central bankers running the system can see that. That’s why they are preparing for what comes next as they attempt to “reset” the system. Nobody knows, what the next international monetary system will look like but the central banks know, what they want it to look like and are working hard to shape that outcome.
Yet, there may be three alternative outcomes. The first one is: Central bank digital currencies (CBDCs) and the International Monetary Fund’s Special Drawing Rights (SDR) replacing the US dollar as the world’s new reserve currency. This is the central bankers’ preferred outcome. The second one: a re-monetization of gold; central bankers are reluctant to go back to gold but they will have no choice if their fiat system collapses, forcing their hands. The third one: Bitcoin (or other similar) is the “wild card”. Bitcoin is an entirely new asset people are adopting as money because of its superior monetary properties, notably its total resistance to inflation. A Bitcoin standard could spontaneously emerge regardless of what the central bankers want.
Despite all the hype, CBDCs are nothing but the same fiat currency scam with a new label on it. It’s doubtful CBDCs can save otherwise fundamentally unsound fiat currencies. The IMF creates the SDR out of thin air. The SDR is simply a basket of other leading fiat currencies. The US dollar currently makes up 42%, the euro 31%, the Chinese renminbi 11%, the Japanese yen 8%, and the British pound 8%. In other words, the SDR is a fiat currency based on other fiat currencies. To sum up, SDR and CBDCs are not workable but nonetheless the central bankers are pushing hard for them.
In order to revitalize the current system, the central bankers have to find a way to restore confidence or risk the entire monetary system disintegrating. It appears now that they have no choice but to go back to gold as the foundation of the international monetary system. Gold is a far better form of money than the rapidly inflating paper and digital currencies that central banks are peddling.
Yet, there are strengthening speculations among the finance world that the international monetary system is on the verge of collapse. “It’s possible to have more than one reserve currency.” These are the recent words of Jerome Powell, the Chairman of the Federal Reserve. It was a stunning admission from the one person with the most control over the US dollar, the world’s reserve currency. Reading between the lines, Powell’s remarks are a strong hint that the current international monetary system based on the US dollar is on its way out… and obviously soon.
Re-monetization of gold
Central banks and governments are the largest holders of monetary gold in the world. Gold holdings per country as of February 2022 (source: World Gold Council).
Central bankers are not willing to go back to gold but sooner or later they will have no choice, if their fiat system collapses. Russia and China have been purchasing as much gold as possible for many years. China is the world’s largest producer and buyer of gold and Russia is number two.
Russia’s and China’s gold gives them access to an apolitical neutral form of money with no counterparty risk. Gold represents a genuine monetary alternative to the US dollar.
New reserve currency
Russia and China have been accumulating and using gold to bypass various US financial sanctions. Their gold holdings could form the foundation of a new monetary system outside of the control of the US, which is so intensively discussed in the context of SCO and BRICS formats.
The issue of creating an international reserve currency based on a basket of currencies of BRICS countries is being worked out. This currency basket, in turn, is based on relative weights of commodities in trade and obviously on gold holdings. Russia has been very active developer in this project, together with China. As known, Russia has been cut off from the SWIFT system but is now using the SPFS, the Russian equivalent of SWIFT, developed by the Central Bank of Russia since 2014.
Russia has also proposed a new international standard for trading in precious metals: the Moscow World Standard (MWS), which will become an alternative to the London Bullion Market Association (LBMA). According to Russia’s Finance Ministry, this new, independent international structure is necessary for “normalizing the functioning of the precious metals sector”. Russia is actively working for this in the context of SCO and BRICS. The foundation of a new currency system is being built together with trade being conducted outside of Western financial institutions and centers.
Gas for Europe
NS 1 and 2 pipeline explosions, Cui bono?
The reaction to the sabotage of NS 1 and 2 pipelines in four places on Monday, September 26, has focused on speculations about who did it and whether NATO will make a serious attempt to discover the answer. Those pipelines were located in the area fully controlled by Sweden, Denmark and the NATO & the US.
Who benefits from the death of both NS pipelines? CUI BONO? Certainly not Germany. Der Spiegel lays out the coming catastrophe “The economy is sliding almost uncontrolled into a crisis that could permanently weaken the country“. That was written, when the possibility that the gas would come back was still there.
After the incident, Russia announced that the gas pressure is falling in three of the four pipelines and the infusion of salt water will irreversibly corrode the pipes. This Russian investment and business project, up to over $ 10 billion is going to waste. It is fully illogical and against common sense to assume that Russia itself would have purposefully destroyed its own long-term business and money-making machine, worth of tens of billion dollars.
However, the majority of western “neocons” appears to put forth this topsy-turvy idea and western MSM is, naturally, following with. Their arguments simply confirm that they never meet a severe problem, without blaming on Putin about it.
Just hours after the incident, Poland’s ex-minister of defense and foreign affairs, Radek Sikorski, was thanking the US for blowing up NS pipelines. He simply tweeted “Thank you, USA”. This tweet was removed some days later. President Putin for his part also strongly implied US and British culpability, stating: “It’s obvious to everyone who benefits from it… Those who benefit are the ones who have done it.”
So, who did it? If not Germany or Russia or Poland or the US, who then? Nobody knows and it is highly likely that factual proofs will be never disclosed.
I will return to this issue (in details) in my next articles.
European winters with insufficient gas supply
Next winters (1-3) are going to be very challenging for all of Europe’s gas consumers: households, businesses and industry but moves are in play that will fundamentally change the continent’s position in global gas markets.
The good news for supply to Europe is that its other sources of pipeline gas – Norway, North Africa and Azerbaijan – are all flowing normally, so far. Europe’s ability to get through the winter without a gas supply crisis will depend in large part on the weather: not just how cold it is but also how sunny and windy, as gas backs up renewable power generation in many countries.
If, by 2027, Europe no longer imports Russian gas of any kind, then it will have to compete with Asia as a center of demand. How long it will take for the LNG market to increase supply to meet Europe’s new demand is unclear but the global market will rebalance sooner or later. Yet, the most crucial issue will be the price level of gas, which will stay permanently much higher than Europe has been used to.
Economic outlook for 2022-2023
US economic outlook
According to US statistics and assessments of number of US economists like Dr. Jack Rasmus, the contradiction of the US national economy started from the 2nd quarter and recession increasingly continued in the 3rd Q. The speed of inflation, on official statistics, exceeds 9% but is up to 15% in reality, stock market is in turbulence as well as bond markets. Fed rate hikes will rise to 4,5%-5% this year, which means deep recession.
In September, after two weeks of mostly steady losses on the US stock market, the Dow Jones Industrial Average confirmed it has been in a bear market since early January. The Dow is now down 20 percent from its record high close on Jan. 4, meeting the rule-of-thumb definition for a bear market.
Morgan Stanley’s Chief US Equity Strategist, Michael Wilson said that he’s convinced a corporate earnings recession is coming and that it could be worse than a “normal” recession. He said that “we’re in a cyclical downturn for growth and that’s the fire and ice scenario,” referring to the Fed hiking rates at the same time as growth slows.
Separately, in an analytical note cited by Bloomberg, Wilson and his team of strategists said the soaring dollar was creating an “untenable situation” for stocks and this, combined with central banks tightening policy “at a historically hawkish pace,” means that odds are growing for “something to break.”
Latest data of the report by Wall Street analysts estimates US housing prices to collapse soon, worst only during the Great Depression. US bank mortgage corps are pulling out of the market in expectation of emerging price collapse of housing.
EU and UK, economic outlook
In the UK, new prime minister Liz Truss is now tasked with trying to get the country’s economic house in order. Truss recently proposed a plan to cut taxes, while raising spending but it does not resolve any of the UK’s structural economic problems. Truss’s economic proposals worsen the country’s fiscal situation and will only further ignite inflation. UK bank economists estimate UK inflation amounting up to 17% by the end of the year.
As recession and even depression haunts the EU, in the post-Nord Stream world, the UK in turn has its own problems. Prime minister Truss’s budget (£45bn) was presented last week. The markets did not respond well, investors’ reaction was to sell the pound and to offload government bonds, thereby increasing the interest bill paid by the British Treasury.
All hell broke out, the pound fell to a record low against the US dollar, banks unprecedentedly pulled thousands of mortgage products from the shelves (thereby hurting Britain’s housing market), gilts sold off quickly. The Bank of England in turn even launched an unprecedented £65bn emergency bond-buying program to stabilize government debt markets and to stop pension funds collapsing.
All such imbalances have really been driven by energy costs, as the British import a lot of energy. Therefore, when such costs rise, they are passed on to consumers and thus follows inflation. This is a European crisis but, according to Irish economist Pilkington, it only took longer to hit the UK and merely because it does not rely so much on manufacturing like Germany, for instance. Now it is Britain’s turn and Brexit could not avoid it. Economic and other experts fear the collapse of European economies may have just begun, starting with Europe’s “weakest economic link” namely, the UK.
High energy costs have everything to do with a financial warfare against Russia, which has backfired. Moreover, Washington has campaigned heavily against Nord Stream 2, the German-Russian project which could have helped to overcome (or at least minimized) Europe’s energy crisis; a crisis that has served American interests well.
The energy crisis in the EU has always been pushed by American interests. Moreover, the US has been engaging in economic warfare and even weaponizing the dollar for long, but now its current economic and financial war against Russia has backfired and once again, mostly upon Europe.
After Nord Stream pipelines are gone (in all likelihood as a result of sabotage), there is no going back now on removing Russian sanctions to solve the situation and energy prices are to remain high. The hard truth is that beneath today’s Europeans and British troubles, lies the cost of sanctions that is taking a heavy toll on Europe.
The EU and euro, without German industry?
Germany’s industrial exports and attraction of foreign investment inflows were major factors supporting the euro’s exchange rate. To Germany, the great attraction in moving from the deutsche mark to the euro was to avoid its export surplus pushing up the D-mark’s exchange rate and pricing German products out of world markets. Expanding the eurozone to include Greece, Italy, Portugal, Spain and other countries running balance-of-payments deficits prevented the euro from soaring. That protected the competitiveness of German industry.
After its introduction in 1999 at $1.12, the euro sank to $0.85 by July 2001 but recovered and indeed rose to $1.58 in April 2008. It has been drifting down steadily since then and since February of this year the sanctions have driven the euro’s exchange rate below parity with the dollar, to $0.97 this week.
The major deficit problem has been rising prices for imported gas and oil and products such as metals and chemicals requiring heavy energy inputs for their production and as the euro’s exchange rate declines against the dollar, the cost of carrying Europe’s US-dollar debt rises, squeezing profits. To make matters worse, the eurozone’s economic rules limit its budget deficits to just 3% of GDP. This prevents its national governments supporting the economy by deficit spending.
One curious detail has come out: “Germany is contractually obligated to purchase at least 40 billion cubic meters of Russian gas a year until 2030 and Gazprom is legally entitled to get paid even without shipping gas.” A long court battle can be expected before money will change hands and Germany’s ultimate ability to pay will be steadily weakening.
German industrial competition with United States is ending, helping the US trade balance. But euro’s depreciation will reduce the value of US investments in Europe and the dollar-value of any profits will shrink so that reported global earnings by US multinationals will fall.
Looking at how this will reshape the relationship between the US dollar and the euro, one can understand why the seemingly obvious consequences of Germany, Italy and other European economies severing trade ties with Russia have not been discussed openly.
The first German companies have begun throwing in the towel and consumption is collapsing in response to the fallout from exploding energy prices. The economy is sliding almost uncontrolled into a crisis that could permanently weaken the country and the whole EU.
German company CEOs and union leaders are now speaking openly about their fears. “The worst is yet to come,” is the comment by majority of directors. If the government doesn’t take swift countermeasures, there is a risk of domino effect that could lead to the de-industrialization of Germany, which would be a disaster.
As German industry top management express their fears, this tragedy has five acts and it begins with the energy price shock. This entails freezing production in those branches that are highly dependent on electricity and gas like paper manufacturers, fertilizer producers, steelmakers and other heavy industries.
Companies usually have no choice but to pass on the price increases to consumers, who are already having to save money to cover their skyrocketing electricity and gas bills. This in turn raises the curtain on the third act, the consumer crisis (consumer sentiment is now worse than it has ever been in postwar German history). The next act is the wave of bankruptcies in the business, which in turn cause problems in the labor market turning into mass unemployment.
The final outcome is a German and indeed Europe-wide economic crash. The next years and even the whole decade will be a disaster. There may be recriminations against the price paid for letting Europe’s trade diplomacy be dictated by the US&NATO but there is nothing that Europe can do about it anymore. What is expected is for its living standards to plunge into abyss.
From now on?
The ability of many countries to pay their foreign and domestic debts already was reaching the breaking point before the anti-Russian sanctions raised world energy and food prices. The sanctions-driven price increases have been compounded by the dollar’s rising exchange rate (due to Fed’s heavy interest hikes) against nearly all currencies (ironically, except against the ruble, whose rate has soared instead of collapsing as US strategists tried in vain to make happen). International raw materials are still priced mainly in dollars, so the dollar’s currency appreciation is further raising import prices for most countries.
The rising dollar also raises the local currency cost of servicing foreign debts denominated in dollars. Many European and Global South countries already have reached the limit of their ability to service their dollar-denominated debts and are still coping with the impact of the Covid pandemic.
Philip Pilkington, an Irish economist, who works in investment finance, has made quite interesting observations about the deindustrialization of Europe as a consequence of economic warfare. He remarks on how in the post-pandemic world debts in the West have been accumulating and the current conflict in Ukraine has brought extra energy costs.
After the conflict ends, Russia could start to once again supply gas to Europe as usual – this was how many analysts reasoned.
However, now that the pipelines are gone, the price of energy in the continent is to remain tremendously high for years to come. With permanent high energy prices making manufacturing not economically viable anymore (thus decreasing European purchasing power) and high energy costs will make the European industry largely uncompetitive because manufacturers will have no choice but to also raise the price of goods, which in turn, will not be able to compete with cheaper foreign goods.
The economist goes on to argue that, in this scenario, with many manufacturers out of business, the result will be the loss of key jobs, with less employed people spending money and a new economic depression.
This crisis will thus affect Americans too, because as exports to Europe fall, US workers also lose their jobs. What could EU states do in such a scenario? The Irish economist concludes that raising tariffs would be the most obvious solution. The result of that can only be more economic chaos for the West, while Europe “shuts itself off” and becomes a kind of a “black hole”, in a repetition of the 1920 events which resulted in the Great Depression, writes Philip Pilkington.
However, the global situation today has changed much, with the BRICS+ alliance, apparently aimed at “decoupling from the Western economy.” The rise in commodity prices has been perceived as a result of Western sanction policies and this has forced the Global South to look for parallel mechanisms and alternatives meaning the West would suffer the most from the current economic chaos.
Obviously, all of this has political implications. The economic crisis will bring back protectionism and it might come accompanied by a 1930-like political climate. This in turn can only strengthen the populist movements and so-called “far-right” tendencies in Europe.
To sum it up, in the worst post-Nord Stream scenario, one can then expect a deindustrialized and isolated Europe going through a serious political and economic crisis. European and British political elites should take responsibility of their misleading policies but a way out of the economic and political crisis seems far away, even hopeless far away.