By Yves Smith
Dominic Stone: So do you know what’s going to happen?
Eric Finch: No, it was a feeling. But I can guess.
– V for Vendetta (“Beginning of the End”)
During the runup to the financial crisis, your humble blogger pointed out that financial time moved faster than political time. Market players often had better and more comprehensive access to important information than officials did and had strong incentives to act on it.
By contrast, regulated entities were motivated to shuffle their feet and mumble until problems became undeniable…and then the regulators themselves would too often hope gunshot wounds would magically heal themselves, rather than risk having to answer embarrassing questions by going into emergency response mode.
Compounding these institutional and behavioral issues was the fact that decades of deregulation had produced a financial system that was tightly coupled. That means, in layperson-speak, that when a problem starts, it propagates thorough the system too quickly to be stopped. There aren’t enough natural or man-made firewalls to arrest the cascade.
With the Ukraine conflict, commentators have fixated on the timetable for prosecuting the war, trying to argue that the fact that Russia has not already “won” (whatever “won” means) implies Russia is losing, despite Russia and its allies having taken over 20% of Ukraine and continuing to gain ground with a mere peacetime expeditionary force. Russian officials have also made clear that they aren’t following a timetable. Some analysts have even argued that the seemingly slow pace is to Russia’s advantage. It does not merely allow them to continue the conflict without resorting to a general mobilization. It also appears to lead Ukraine to bring the war to the Russian front line, facilitating the destruction of the Ukraine army and equipment away from major cities, where civilian casualties would be greater. And the front line is not all that far from Russia, facilitating resupply.
However, there is also a big difference between when a war is won or lost versus when the vanquished is finally prostrated. For instance, Germany’s World War II fate was sealed in the Battle of Kursk, but it was nearly two full years more before Germany surrendered.
Some Western military experts have argued that Ukraine lost within weeks of the start of the Russian forces’ attack. For instance, Larry Johnson contended Ukraine was a goner as soon as Russia took out its radar, air force command and control, and most of its fixed wing aircraft. Ukraine could not mount a counter-offensive against a military using a combined arms operation when it lacked air support. Colonel Douglas Macgregor also stated publicly that Ukraine had lost a month into the conflict; the only open question to him was how long we kept the fighting going to try to weaken Russia.
In other words, while officials, armchair generals, and the press have been paying at least intermittent attention to the calendar for the military campaign, they’ve not paid much heed to the timeline for the economic war.
We will be so bold as to posit that not only has the sanctions war against Russia backfired spectacularly, but the damage to the West, most of all Europe, is accelerating rapidly. And this is not the result of Russia taking active measures2 but the costs of the loss or reduction of key Russian resources compounding over time.
So due to the intensity of the energy shock, the economic timetable is moving faster than the military. Unless Europe engages in a major course correction, and we don’t see how this can happen, the European economic crisis looks set to become devastating before Ukraine is formally defeated.
Now that European leaders are returning from summer holidays, it appears only now to be dawning on them that Europe is entering a severe and almost certainly protracted economic crisis.
Mind you, they were worried enough in late July to Do Something in the form of agreeing to 15% voluntary energy use cuts starting August 1. The lack of any planning or implementation time, even before getting to the “voluntary” uselessness, confirmed that this measure was a hand-wave.
Emmanuel Macron rattled pundits last week by telling France it faced the “end of abundance,” as in they need to accept a permanent reduction in their standard of living. As Agence France-Presse translated it:
This overview that I’m giving – the end of abundance, the end of insouciance, the end of assumptions – it’s ultimately a tipping point that we are going through that can lead our citizens to feel a lot of anxiety.
Faced with this, we have duties, the first of which is to speak frankly and very clearly without doom-mongering.Frankly, more doom-mongering is in order. Despite spot market electricity prices sending a dire warning of the consequences of reduced supplies of Russian gas, and citizen and business desperation over recent and expected near-term energy price increases, Macron depicts that as something voters should accept because Ukraine. And that’s before getting to the other stressor that Macron mentioned, food price increases due to droughts and fires.
We’ll stick to the energy crisis for now. As we’ll explain, this shock will be so severe if nothing is done (and as we’ll explain, it’s hard to see anything meaningful enough being done), that the result will be not a recession, but a depression in Europe.
The 1970s oil embargo produced a rapid four-fold increase in US prices, which led to both a serious recession and inflation, the now-infamous stagflation. By contrast, at the end of last week, the one-year forward contacts for electricity in France and Germany were more than ten times higher than a year ago. And that was with the underlying inflation rate in EU countries already being high (9.8% year to year as of July for the European Union).
See the rest of this article here
Also see China Is Aggressively Reselling Russian Gas To Europe at ZeroHedge
