"Putin Has Pushed Europe Into An Inflationary Depression And Currency Collapse"
Borrowing or printing money to pay for imported energy (in dollars), while running rising twin deficits is a great way to destroy one’s currency...
TUESDAY, SEP 06, 2022 - 09:27 AM
By Michael Every of Rabobank
"Truss-itory" Inflation and Soviet Planning
With US markets closed yesterday for Labor Day all the action was in Europe – and given that Nord Stream 1 had been shuttered and the European Commission had floated war economy style regulations, and Russia then made clear that unless sanctions on it are dropped, no gas will *ever* flow through Nord Stream 1 again, it was no wonder Eurostoxx were down and EUR dipped below 0.99 for the first time in 20 years, as the Dollar wrecking ball momentum continued. (Forcing China to slash banks’ FX reserve requirement ratios from 8% to 6%, which won’t do anything to stop the ongoing slide in CNY for long, sitting at 6.9340 at time of writing this morning in Asia.)
Benchmark Dutch TTF gas was up hugely at first before closing ‘only’ 17% higher on open recognition that while much bad news is now priced in, Europe is really in the economic war I have been warning of.
As pointed out on Twitter, Russia’s move is so blatant there is no way Europe can fudge an agreement with it the way some might have over ‘technical issues’ with the pipeline. (As was Russian President Putin also approving a new foreign policy doctrine backing a “Russian world” covering all Russian speakers, including some in the EU, while building up relations with all the countries the USSR was friendly with to boot.) This is a gun to the EU’s head. So was OPEC+ agreeing on a token 100,000 barrel a day cut to production. So was Iran saying no to the nuclear deal unless the IAEA backs off from investigating the serious breaches of the last nuclear deal it didn’t stick to.
Assuming Europe cannot retreat, that means a severe recession with very high inflation, and if anything were to happen to gas flows via Ukraine, which could easily occur, Europe would need to make swinging cuts to demand in order to avoid unplanned ‘gas outs’. German Economy Minister Habeck just said: “Expect the worst.” As mentioned yesterday, existential choices now need to be made, because there may not enough energy to go round. The choices are obviously unappetising.
First, Germany is to delay mothballing some nuclear reactors – so common sense at gunpoint.
Yet Europe and the UK will not ration energy by price because it means the staggering bills already being seen, and then stagflation, incession, or ‘inpression’ (an inflationary depression). They will instead subsidize businesses and households even if that means wholesale energy prices march even higher. Germany’s latest EUR65bn energy bailout will do just that; so will Sweden’s and the Netherlands’ measures, and France’s and Spain’s: and Brussels is talking about an EU-wide energy price cap. Only part of these subsidies will flow from windfall taxes (which also remove the industry capital needed to invest in new energy supply). New UK PM Truss, just selected with an underwhelming 57% mandate of a tiny Tory electorate, has also floated Covid-furlough sized spending to cap business and household energy bills; and huge tax cuts; and a 2.5% trend GDP growth rate target. Good luck with the latter.
Borrowing or printing money to pay for imported energy (in dollars), while running rising twin deficits is a great way to destroy one’s currency – which means ‘Truss-itory’ inflation, not transitory. So, we must then ration by diktat: but how?
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