Russia Sanctions Blowback Only Beginning: Globalization in the Crosshairs, Russian Retaliation Coming?

It’s surprising that the business press has not gotten to be apocalyptic about the worst case downside of the economic war on Russia. And by that we are not including nuclear winter. Due to the fact that financial and real economy effects occur in very different time scales, we are in a phase similar to the runup to the global financial crisis, where it was clear Something Bad to Horrible was underway, yet the press and pols were largely sanguine. I gasped out loud in May 2007 when Bernanke declared that subprime was contained.

The reason the blowback from the sanctions could be cataclysmic is that trying to isolate one of the biggest commodity producers in the world, with significant market share in many critical ones, will soon hit Covid-stressed supply chains. And if the economic brinksmanship isn’t dialed down soon, we’ll see tightly-coupled systems start to go critical. Because the hollowed out business press is much more fixated on finance than nitty gritty real economy operations, some bad outcomes will be noticed quickly because they affect visible companies, while others could be just as detrimental but not be picked up until the effects were advanced.

And recall that the defining characteristic of a tightly coupled process is that a shock moves through the system so quickly that it can’t be interrupted (or may not be reversible at all. Mind you, that does not necessarily mean it moves quickly in clock time.

Another characteristic of tightly coupled systems is that moves to reduce risk once the system is spiraling out of control are virtually assured to make matters worse, since participants don’t understand the system well enough to know how to intervene. The only measures that do help are ones that reduce the tight coupling, like trading halts.

Admittedly, the Something Bad to Horrible that is now occupying center stage is the prosecution of the war itself. That plus the West’s desire to punish Russia, combined with its unwillingness to do so militarily, has led to unprecedented economic measures, like preventing Russia’s central bank from using $300 billion of its foreign exchange reserves. Even the Financial Times politely pointed out that that move would focus the minds of other central bankers. As Michael Hudson and other commentators have pointed out, this move alone is a strong impetus of the heretofore slow-moving trend for China and other major non-Western economies to move away from the dollar, which has been a powerful tool of American economic and increasingly foreign policy.

So far, Russia has not imposed much in the way of counter-sanctions, although Russia-friendly websites report that Putin signed a series of measures early this week, to be announced Thursday. Since that shoe has yet to drop, we’ll go over only a few examples of how sanctions aimed at Russia are set to do a great deal of harm outside Russia. (Yes, it is theoretically possible that the US could de-escalate and swallow a peace negotiated by Ukraine, but given the press-induced blood lust and Biden Administration’s ego investment, that seems vanishingly unlikely).

One way Russia has been naughty is in seizing commercial jets under lease. According to Bloomberg, it’s managed to hang on to all but two dozen of over 500 planes. I had assumed Russia would keep them for domestic-only use; they can’t run much of a commercial airline service otherwise. If things ever get back to sort of normal, Russia probably won’t be able to lease planes for a very long time again and might have to make large deposits on service contracts, but count on the profit-minded to find a way.

It doesn’t appear that Russia is even trying to pretend it has no option: “Oh, gee, we understand you want your planes, but we can’t find a safe way to do that given the givens” or “Gee, we’d love to return those jets, but we are entitled to lease termination payments. How about gold for equipment?” From Bloomberg:

Technically, lessors have until March 28 to retrieve the planes under European Union sanctions. But state-owned Aeroflot PJSC and other Russian airlines have already gathered the vast bulk of them back inside the country, out of reach of their owners. The government aided the effort by instructing carriers to stop flying internationally and return the jets to Russia by Tuesday….

In telexes over the weekend, Russian authorities urged the nation’s airlines to restrict flying to domestic routes and friendly Belarus to prevent their jets being grabbed by repossession crews lying in wait, Emily Wicker, a partner with law firm Clifford Chance, told the lessor conference. The Russian government also advised operators to re-register foreign-owned aircraft in Russia from their traditional base of Bermuda, another move that could thwart efforts to revoke an aircraft’s certification — or track its maintenance and upkeep.

Lessors are now weighing their next steps…they’ve hired lawyers to parse insurance and re-insurance policies as they gird for long, costly fights and try to recover their losses….

Russia’s recent actions raise questions about another aviation staple: records documenting every detail of a jet’s upkeep, from maintenance visits to the remaining life for key parts. Without such paperwork, a jet’s value rapidly diminishes, said Chris Sponenberg, a vice president at Wilmington Trust.

However, at this juncture, the vast majority of harm to the non-Russian world is not due to retaliation. For instance, Biden appeared to up the ante by banning Russian oil imports earlier this week. However, Biden may simply have been taking credit for the state of play. It’s not clear how much oil was able to come into the US due to barring Russian ships from ports,1 shipments from Black Sea ports being halted due to war risk, and oil buyers being unable to get letters of credit.

Admittedly, the Reuters Feb 24 story does not parse out how much of the freeze on letters of credit was due to war risk, as in fear of destruction of tankers, versus fear of sanctions, which the US had said it would impose:

At least three major buyers of Russian oil have been unable to open letters of credit from Western banks to cover purchases on Thursday, four trading sources said, citing market uncertainty after the Russian invasion….

Letters of credit from the bank of the buyer are standard practice in commodities trading and guarantee the seller’s bank that payment will be made in full and on time.

Keep in mind that the latest report we have seen says Russia was still sending gas to Europe consistent as stipulated.

Another source of pain we’ve mentioned more than once is fertilizer. Russia and Ukraine provide roughly 40% of global supply. Fertilizer was already expected to be in short supply before the war. It’s hard to ship it given the inability to use the Black Sea and difficulties in getting paid. A lack of fertilizer means greatly reduced output of grains and famine. That will be compounded by reduced wheat exports from Russia and Ukraine.

Similarly, Russia is a critically important supplier of aluminum, necessary for airplanes and other equipment, and metals used in non-electric cars. It was possible to work around chip shortages to a degree. Metals are a much more binding constraint. And car prices were already a big driver of headline inflation.

We are already seeing market upheaval in terms of the massive nickel short squeeze. Matt Levine provided great one-stop shopping, describing how a huge Chinese producer, Tsingshan Holding Group Co., the world’s largest nickel and stainless steel producer, got caught in a short placed by its owner, Xiang Guangda. Levine pointed out how a producer could be net long yet still not having enough ready cash to meet on a margin call on his hedge. Levine described how some people, apparently officials at the LME, decided to intervene on Guangda’s behalf, no doubt arguably to protect market integrity. From Levine:

There is a sense in which this is all a bit unnatural. Yes, nickel prices should go up for geopolitical reasons, but arguably they should not go up that much; arguably the extent of these moves is driven by technical factors (margin calls on short sellers who are “really” long) that, in some sense, shouldn’t count. I mean. You could think that. You don’t have to; you could instead think “no, market structure is part of the real world, and if prices go up because of a short squeeze then prices go up, that’s life.” But some people certainly think that these price moves shouldn’t count, either because they are generically unnatural and unfair, or more specifically because they might blow up some traders and destabilize the market.

One way to reduce this sort of pressure is to suspend some of the margin calls, which happened:….

Another, more drastic way to reduce this sort of pressure is to suspend nickel trading, which also happened:…

A third, even more drastic way to reduce this sort of pressure is to retroactively suspend nickel trading, by canceling trades that already happened. That happened too; from the LME today:

The LME have been monitoring the impact on the LME market of the situation in Russia and the Ukraine, as well as the recent low-stock environment observed in various LME base metals. With immediate effect, and following the suspension of the LME Nickel market announced in Notice 22/052, the LME (acting where required through the Special Committee) has determined that it is appropriate in the circumstances to take the following actions in respect of physically settled Nickel Contracts: (i) cancel all trades executed on or after 00:00 UK time on 8 March 2022 in the inter-office market and on LMEselect until further notice (Affected Contracts); and (ii) defer delivery of all physically settled Nickel Contracts due for delivery on 9 March 2022 and any subsequent Prompt Date in relation to which delivery is not practicable (as determined by the LME and notified to the market) owing to a trading suspension in line with the process in this Notice.

Obviously that’s bad! You don’t want to break trades! The whole point of an exchange is that it is a transparent and predictable place to agree to trades. On the other hand if price moves are too wild, and if they are driven too much by margin calls, you’re going to blow up enough exchange participants to undermine predictability anyway. (If a lot of traders go bankrupt, it is hard to avoid breaking trades. If some of those traders are nickel producers, bankrupting them due to soaring nickel prices is an especially bad idea: You need them to make some more nickel!)

So you shut everything down for a while, including retroactively, and hope that everyone can get their financing in order to make for an orderly reopening. In theory, if the people caught in the short squeeze are in fact largely big nickel producers, this should work. If you’re a nickel producer your nickel should be worth more now, and probably someone will give you some money for it.

On the other hand if you’re a retail investor who was three times short nickel, this was not your week.

Oh, and in a later story, Bloomberg reported that Tsingshan also got emergency bank loans.

What Levine does not say explicitly but strongly implies is if you blow up enough big traders, you could blow up the exchange. If traders fail to meet margin calls and their liquidated position leave a loss, the exchange has to plug the hole from its reserves, or failing that, capital calls to members or other backstops. We’ve repeatedly pointed out that derivatives central counterparties are systemically under-reserved because charging enough to properly reserve would render derivatives economically unattractive. Volatility is certain to continue. How long before we see a CCP or exchange bailout?

Mind you, these are just first order effects. There are going to be plenty of second-order ones due to “for the want of a nail” supply chain problems propagating, as well as businesses failing due to Russia effects, even just exposure to suddenly high energy prices.

The Russia-friendly press has highlighted additional Russian gambits. One sounds potentially very powerful, the other isn’t, as described. The first, from RT, contends that Russia could withhold chip substrates as a quid pro quo for being denied advanced chips. From RT:

The ban on technology exports to Russia, in response to the war in Ukraine, could backfire on global manufacturers of computer processors and semiconductors, as many crucial components for their production are made exclusively in Russia, an industry expert has warned….

While global tech majors are announcing their split from Russia, Izumrudov says potential Russian retaliation moves “would leave almost the entire world without microelectronics.” [Oleg Izumrudov, head of the Consortium of Russian Developers of Data Storage Systems (RosSHD), says.]

According to the expert, Russia accounts for 80% of the market for sapphire substrates – thin plates made of artificial stone, which are used in “every processor in the world,” including those manufactured by AMD and Intel.

“Our position is even stronger in special chip etching chemistry using ultra-pure components. Russia accounts for 100% of the world’s supply of various rare earth elements used for these purposes,” the expert states…

He says the timeframe to ensure the quality of sapphire substrates, required for microchips, for instance, is 30 years of continuous production. Plants at which they can be made have to be located in conditions of almost zero seismic activity, which means the products of enterprises similar to those in Russia in seismically active California or Taiwan “are noticeably inferior in quality and volume to the level required in the industry.”

The key question is whether the second-best sources are workable, and what the cost is in terms of reduced reliability and performance.

Izumrudov also asserts that Russia has work-arounds for the loss of tech imports. He does not mention a large laundry operation through non-banned countries.

Pepe Escobar claims Russia is about to announce a work-around for the banking restrictions. I’m dubious about this one:

Moscow has not even announced a package of what could be defined as “counter-sanctions from hell”. Yet a decree on “foreign exchange obligations to foreign creditors” which allows Russian companies to settle their debts in rubles is already an eye-opener.

Economist Yevgeny Yushchuk defined it as a “nuclear retaliatory landmine”.

It all revolves around a new presidential decree, signed last Saturday: “On Temporary Order of Obligations to Certain Foreign Creditors”.

It works like this: to pay for loans obtained from a sanctioning country exceeding 10 million rubles a month, a Russian company does not have to make a transfer. They ask for a Russian bank to open a correspondent account in rubles under the creditor’s name. Then the company transfers rubles to this account at the current exchange rate, and it’s all perfectly legal.

Payments in foreign currency only go through the Central Bank on a case-by-case basis. They must receive special permission from the Government Commission for the Control of Foreign Investment.

As I discussed with Michael Hudson, what this means in practice is that the bulk of the $478 billion or so in Russian foreign debt may “disappear” from the balance sheets of Western banks. The equivalent in rubles will be deposited somewhere, in Russian banks, but Western banks, as it stands, can’t access it.

Sorry, this is silly, except possibly as a talking point for debt cramdown negotiations: “You know we are prohibited from paying you the usual way. This is much better than nothing, which is what you’d get otherwise.” It cannot be forced on lenders. The question is how many, if any, would bite.

This idea would work only if the debts in question were subject to Russian law. This is almost certainly not the case. The reason Cyprus was a huge center for investment into Russia was that Western companies and investors structured those deals as subject to English law, which could be adjudicated in courts in Cyprus, which used English law.

If not, Russia cannot unilaterally change payment terms. If a Russia borrower agreed to pay as of certain dates in dollars or euros, tendered to a certain account or address, those payments are still due. Depositing a foreign currency in a new account does not cut it.

Due to time constraints, as well as this situation still evolving, I have not begun to adequately articulate how much havoc widespread commodities shortages will inflict in an overly-interdependent manufacturing and trading system. The fact that the harm hasn’t show up much does not mean it won’t become baked in very soon.


1 I have no idea how much Russian oil is carried by Russian tankers….any informed reader input?

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    1. Yves Smith Post author

      That’s a very helpful factoid, but the Credit Slips article is about Russia’s sovereign bonds. The law is instructions to non-sovereign borrowers. So a completely different matter.

  1. kemerd

    It appears law does not matter anymore, so why should law on international deals they simply ignore it and grab what they can as what west seems to be doing now, It appears they simply want an orderly way of swapping foreign reserves with foreign debt of Russian companies

  2. DJG, Reality Czar

    “There are going to be plenty of second-order ones due to “for the want of a nail” supply chain problems propagating, as well as businesses failing due to Russia effects, even just exposure to suddenly high energy prices.”

    Guido Maria Brera, a funds manager and renegade economist, published an op-ed in LaStampa in which he pointed out that no one knows what the weaponization of finance, the use of these financial structures in war, would lead to. I guess that we are getting hints now.

    He thinks that it will lead to stagflation and used the U.S. term. The war in Ukraine has already wiped out GDP growth in much of Europe. The rises in basic commodities like natural gas are already pushing up prices.

    Although esteemed Yves Smith doesn’t see the U.S. coming to terms soon, Massimo Cacciari had an op-ed on Tuesday’s opinion page in LaStampa in which he indicated that the Europeans had to acknowledge Ukraine’s hurt and negotiate with the Russians, too. He included such heresies as guaranteeing Ukraine’s borders plus giving autonomy to the Donbas especially with regard to the use of Russian there.

    I see squibs there today that Zelenskyy issued some not-so-veiled threats against Ukrainian politicians who are conciliatory toward Russia (ahhh, let’s recall that assassinated negotiator), told Die Zeit that his threat to go nuclear made in Munich was just a “bluff” (the word in used in LaStampa), and won’t negotiate Ukraine’s borders. And he’s considered a serious politician on a charm offensive.

    Meanwhile, either the Biden administration has lost its mind (a possibility) or so morally undermined by the manipulations of war criminals like Victoria Nuland that the U.S. is suddenly making moves to get cozy with Venezuela and Iran. They have the petroleum.

    Heck, I may be a reality czar, but I’m not an ayatollah. And I have an idea that the ayatollahs aren’t going to be buffaloed by Biden.

    Really? After U.S. administrations weaponized sanctions against both of these states?

    As this post points out, the globalization of supply chains plus the globalization of exchanges and credit have had unintended consequences. Maybe globalization wasn’t a great idea and only served an elite.

    And I’m reading that Amazon and McDo’s are shutting down in Russia. And now for the second-order effects, such as reduction in profits for U.S. companies from overseas operations, let alone all of that real estate sitting idle with rents to the owners still due (and how to pay them?). As Lambert Strether often writes, That’s a damn shame.

    1. Yves Smith Post author

      I hope you are right about the US getting over it and sulking because the Europeans will make some sort of reconciliation. But the Dems have dialed Russia hate up to 11 after the Trump win, and managed to find a new register with the invasion. I don’t see how Biden backs down on the sanctions or at least not much.

    2. The Rev Kev

      I read a few days ago that not only is McDonalds keeping the leases of the buildings that they own in Russia, but that they are still paying the wages of their staff. If this is correct, then obviously they are planning ahead for a comeback to Russia. They must recognize that if they pulled out altogether, then a local chain would literally eat their lunch and they would never be able to re-establish themselves back in Russia again. I wonder if they are the only corporation doing this.

      1. NotTimothyGeithner

        I figure one aspect is the US fp elites are convinced the thousands of people across Russia who protested are this close to toppling Putin. They don’t even bother with Moscow anymore. Then there are the nuts outside the elites who believe this nonsense. A cousin is going on a bike tour of Eastern Europe to raise awareness of Ukraine.

        Rationally, the US side lost on day 5. Now we get to listen to Zelensky tributes for the rest of our lives.

        1. Kouros

          Oh, I remember the sweet days of the past, when American missionaries landed in Romania trying to bring Romanians the good gospels and the word of Christ the Savior, to a nation that has organically transitioned to Christianity prior to 500 AD.

          As for the horrible stories of the Red Army and the Russians, was their propensity to drink to stupefaction or even death and their obsession to wristwatches: “Davai ceas!”

    3. ISL

      Stagflation is a failure of imagination. Stagflation does not include massive demand destruction – its in part because workers can demand and get higher wages. if the factory is closed for want of a nail – the worker aint getting a paycheck, much less a raise. There is no historical equivalent.

      1. Susan the other

        I think we are talking about plain old recession. Recession with no effort to correct it at all. Stagflation is chronic recession whereby the factory cuts back to half its production. So the bargaining power to demand higher wages is killed but the demand for goods goes up because there are now too few goods. Brilliant if you are in the 1%. Makes me think about something Gail Tverberg said – that one of the most effective ways to mitigate global warming is recession. One would think that the best way to create an effective global recession would be to shut down commodities and manufacturing to some level sufficient to keep things going economically but in a half-dead manner. And the silver lining might be that we are too smart to allow stagflation to take off so we will begin to do sovereign spending to keep our social economics in balance. MMT. I imagine it would be hardest on the commercial banks and the stock traders.

        1. Irrational

          Normally I would agree with you that recession will help mitigate global warming. However, we are also talking about a major pivot away from Russian gas to coal and O&G from fracking, although nuclear might get a chance. With that I reckon we can kiss 1.5 and 2 degrees C goodbye (1.5 degrees was unrealistic as it was).
          In addition, militaries are not low emission and don’t carbon offset them and there will be a whole lot more military spending. This will also crowd out other climate mitigation and adaptation spending.
          By the way, I find it hilarious that the EU is so gung-ho that they will find a way to cut reliance on Russian gas imports. Do they think Russia is just going to lean back and say “oh, OK then”? Surely they will close the taps tomorrow.
          Maybe it is just me, but I find it a little short-sighted.

          1. Skip Intro

            I’m not convinced switching (back) to coal is as bad as imagined, since the impact of gas has probably ben vastly underestimated, due to production and consumption release of straight methane, a GHG much worse than CO2.

        2. Mikel

          The supply will be there for the right price and for those that already have the most emissions or bigger carbon footprint.
          And it currently is not a supply issue as much as it is supply chain issues/disputes.

    4. Amfortas the hippie

      i heard the news about the sudden pivot regarding iran and venezuela on the NPR…and did not see that coming,lol.
      thought i had misheard some important caveat, as i was flying down I-10 at the time with the windows down.
      i laughed out loud, waking up wife.
      the utter hubris, there!
      oh…yeah…about all those sanctions and coup attempts and that Guido thing…and even sending in missiles to kill that general….well…we were jess funnin…
      those 2 moves alone speak volumes about where the rubber meets the road.

        1. Amfortas the hippie

          strangely absent.
          as is the ongoing massacre in houthistan.
          syria, etc.

          what’s in our wake doesn’t matter.
          “we’re an Empire, now”, and all…

        2. MG

          It’s posturing and they are certainly talking through unofficial channels.

          Saudis and UAE have been upset about Biden’s policy on Iran across the board including removing the State Dept removing the Houthis in Yemen from state-designated terrorist sponsor list recently to appease Iran in the nuclear talks.

          Saudis (and arguably most of Africa and South America) seem to be carefully hedging their bets and not committing strongly to the West or the Chinese since the Ukraine invasion.

          Smart thing to do from their vested interest and only pick a side if a clear winner emerges or more likely play both sides as best you can in a multi-polar world which is rapidly emerging.

    5. Maxwell Johnston

      For the benefit of those who aren’t familiar with Italian media: La Stampa (based in Turin) is right-of-center, pro-business, anti-Russia, and generally toes a pro-government line. La Stampa worships at the altar of Draghi, which annoys me but I read it daily as it’s well-written and gives broad coverage both domestically and internationally.

      The fact that La Stampa is running such articles indicates that Italian business interests are deeply unhappy about current events. UniCredit (Italy’s largest bank) has huge operations in Russia. I really wonder how long EU sanctions solidarity will last as the pain starts to hit.

      1. Colonel Smithers

        Thank you, MJ.

        La Stampa is largely owned by the Agnelli family, also the majority shareholders in the Economist.

        The family’s FIAT had investments in the former Soviet Union going back to the 1960s. Italian firms were bidding to revamp Russian railways and lobbying to get that sort of thing exempted from sanctions.

  3. The Rev Kev

    I would add titanium to the list of what Russia exports and here Boeing and airbus need it to manufacture airplanes with for a start. Apart from that, titanium has a long list of applications through many industries and here is a Forbes article talking in depth about this oncoming train wreck-

    It won’t be so much as waiting for the other boot to drop but an ‘I’ beam.

    1. Louis Fyne

      and add all the platinum group metals.

      Need an industrial catalyst to clean air or refine petroleum? you need palladium or platinum

      1. John Wright

        At least catalysts are not consumed during use, so if demand drops there won’t be a lot of requirements for adding new capacity.

        I wonder if the Biden administration will promote the easing of USA’s air pollution laws by allowing cars to be built without catalytic converters to save platinum/rhodium/palladium for “national security”..

        That would take some design changes to new cars and might cost Biden and the Dems some votes with environmentalists.

        It is difficult to believe the backstory that Team Biden was looking at this Ukrainian operation as a foreign policy triumph to put the Biden Presidency back on track.

      2. Amfortas the hippie

        i’ve heard tell about “sapphire beds” as well…altho i have no idea what that means…..
        something about a quiet seismic environment.
        and chips.

        maybe this whole “globalisation” thing was not such a cool idea, after all.

    2. ChrisFromGeorgia

      Another problem for Boeing is that they have not sold a single MAX 737 plane in China since the 2 disasters and subsequent grounding. With China on high alert for US pressure to make them comply with western sanctions, any further purchases are probably in jeopardy as it would be a nice leverage point to say, “Yankee imperialist, back off!”

      i.e. no more MAX purchases until the jingoists drop their objections to China trading with Russia.

      Probably a plus for the safety of Chinese air travelers, though.

    3. paul.w

      Corporate jets use thousands of tiny titanium screws to hold all the exterior access panels on. The screws slots wear out and they need to be replaced during maintenance. A lack of available new screws would have a jet sitting waiting for back ordered screws.

    4. nippersdad

      I saw a discussion with an energy expert yesterday who pointed out that diesel fuel has urea additives, and that the largest producer of urea just happened to be in Russia and Belarus. So if we manage to get any fertilizers out this year, the price paid will be in competition with the transport of getting them there and spreading them.

      We appear fated to learn a lot of esoteric little details that turn out to be not so esoteric.

      1. Louis Fyne

        that is diesel emissions fluid. DEF. all modern diesel engines require some urea in a urea tank otherwise a module in the engine will crank the engine due to emissions laws.

        As with everything else, the world does not have much spare production capacity. Will there be a shortage in the US? The answer should be easy to crunch, but no one is asking the question,

        If I had a truck that needed DEF, I would buy 1 year’s worth tonight, which isn’t that cost prohibitive when compared to the alternative of being unable to use the vehicle

        . no DEF, your diesel engine is a literal brick.

  4. JohnA

    Re unilaterally changing payment terms. How broad a concept is force majeure in such cases? That usually covers wars, strikes, lockouts, riots etc., outside the control of the parties.

    1. Louis Fyne

      payment terms are generally not put under force majeure kitchen sink clauses, unless one has an good imaginitive lawyer.

      The concept of contract law breaks down when your own government is purposefully breaking ties w/the other country and one has zero means of enforcement.

      The Chinese are probably waking up to the idea that sending $500 billion worth of stuff to the US but only getting US paper and digital ledger entries on an account in NYC isn’t the best long-term idea

      1. Yves Smith Post author

        I have never had to look seriously at a force majeure clause but my impression for the most part they contemplate only payments being late or a few missed due to The Event, not a default. Is that correct?

        1. Bugs

          Force majeure suspends the obligations of the parties for the duration (We started adding pandemic in around 2003…)

          Payment is the one obligation that’s always carved out.

          Funny, with all the crazy stuff going on, I’ve only seen renegotiations and amendments, not a single invocation of force majeure.

  5. Colonel Smithers

    Thank you, Yves.

    Further to your reference to central bank reserves, soon after his retirement from the Bank of England, but before becoming an advisor to Citigroup, Mervyn King was invited to lecture in China, both students and officials. He also held talks with the Chinese government and addressed this very issue, privately and, at a conference, publicly, and warned about keeping investments in a potential adversary state. No countries were mentioned, but it was clear what he was referring to.

  6. Thuto

    As the collective worldview of most people in the west was outsourced wholesale to the msm over the last two weeks, western companies raced to grab hold of the shiny “exiting the Russian market” social marker and bragging rights without thinking through the immediate implications, to say nothing of higher order effects. Being “on the right side of history”, as these companies are wont to say when justifying pandering to populations whipped into a rage lather by the press and chest thumping politicians, is about to become a really fraught affair.

    The inherent tension in foreign policy between idealism and realism, currently heavily weighted towards idealism because of propagandists having full spectrum dominance over the war narrative, will soon have to swing towards realism and a modus vivendi of some sort with Russia, but will the big egos in western capitals allow pragmatism to save the day? Meanwhile, down the road in Venezuela, a US delegation landed in Caracas and Guido woke up to the sting of duplicity as the door has now been left ajar for Maduro to step back into the good graces of Washington to substitute all those oil imports that Biden banned (and Bloomberg is waxing lyrical about Venezuela ditching socialism and embracing capitalism), you really can’t make this stuff up.

    1. Louis Fyne

      I don’t know if the media can swing to realism—the full spectrum wokism is intoxicating.

      For media to change their tune, it will take titantic Democratic losses in Congress, European gasoline prices at US pumps, and voters turning to Trump or Trump-lite Republicans in 2023 polls.

      But those three things may make the media environment even more toxic.

      1. PlutoniumKun

        You may have seen it on twitter, but one of the funniest examples of full spectrum wokism at work was on International Women’s Day when NATO tweeted a pic of a smiling Ukrainian female soldier. It needed others on twitter to point out that she was wearing a prominent Black Sun pendant – an unambiguously nazi symbol.

        While you might say that they’ve gone so far, we’ve seen copious examples of how the collective liberal mind hive can do a 180 degree turn on any topic within a matter of hours. They make goldfish memory seem like that of an elephants. Its quite a skill.

        1. The Rev Kev

          Thanks for that PK. That is the first laugh that I have had all day long. Having that tweet on the NATO account was just the cherry atop the Sundae.

          1. DJG, Reality Czar

            Paleo: Center of her chest, below the khaki sash. It is black, which makes it hard to see.

          1. David

            Rhyd is excellent and well worth following, not lest because he’s a reformed wokeist who writes eloquently about the dangers of that religion.

          2. Ignacio

            Thank you for the link. I seemingly live in another planet didn’t I have heard or read about black suns, or wokeism which I find for the first time here.

        2. Steve H.

          > They make goldfish memory seem like that of an elephants.

          One word: “Afghanistan.”

          Memory-holed. Russia invaded less than six months after the final failure of our twenty year war. Zero mentions on the front pages of MSNBC, CNN, Foxnews.

      2. nippersdad

        I am wondering how toxic the full spectrum wokism of our mediaverse will become when people find out that they have been advocating for a bunch of Nazis. I am so old I can remember when the only valid function of a Nazi was to provide target practice, and I am pretty sure I am not alone in that world view.

    2. Carolinian

      will soon have to swing towards realism

      Clearly that is what Putin was always counting on. Doubtless the Russians are stunned by the Western hysteria over “country 404” as they call it.

      And to NC please more articles like this. If our elites think they are going to lose their money they may come to their senses. If you look at the history of this crisis it seems to have come about for no other reason than that Biden needed a distraction from his poor poll ratings. The fact that a confrontation was brewed up last year and then dialed back shows that the US is pulling Ukraine’s puppet strings. Some even claim the Ukraine government was being run out of the US embassy.

      The founders didn’t want a king. Boy do we have one if one addled old man can turn the world upside down. It’s on all of DC–Versailles–of course. But he had the power to say no.

      1. cocomaan

        The unspoken story is what involvement the CIA/intel agencies had in the current conflict. We just won’t know for a few decades.

        I agree, more articles like this. I am getting that quivery feeling that I had before the GFC and Bear Stearns etc. The hyper focus on the wrong things is profound.

      2. tegnost

        If you look at the history of this crisis it seems to have come about for no other reason than that Biden needed a distraction from his poor poll ratings

        I differ with you on this. The plan, such as it was, was disrupted (uh-oh, that word again) by trump. Remember the TPP was a contract to separate and isolate China, and Ukraine is meant to isolate Russia. Hillary’s private position on these items was full support, had she been elected we would have” had no choice” but to enact these contracts which no country could leave. Think about that last point. Once you signed up there was no mechanism to leave. And obviously Ukraine is our own very special basket case. It was pretty much a bullet dodged when hillary lost, and the concomitant Rx3 hysteria was used to keep the fire burning, but those control attempts (TPP, Ukraine) failed and now the timing is wrecked. Too bad, so sad…

        1. lance ringquist

          correct. that is why they hate trump and putin so badly. they both dared to say no to fascism.

        2. Skip Intro

          This war was originally slated for 2018, to give Hillary a bump for the midterms. It was a simple matter to predict, during the 2020 primaries, that war in Ukraine was an unspoken campaign promise from Biden that would really be kept, especially Hunter needing some clean up, and CrowdStrike and Chalupa gaining influence in the DNC.

      3. lance ringquist

        ” in a Counterpunch piece Aug. 21, 2020, explaining why I could not see Biden as the “lesser evil” than Trump.

        It seems to me quite likely that Joe Biden will be elected in November. He has stated that Ukraine will be at the top of his foreign policy priorities. He continues to focus on Ukrainian corruption. Why? And why was he so involved in that issue as vice president? Because a too-corrupt Ukraine can’t join NATO! The plan is: clean up corruption, get Ukraine into NATO, and then (as is the norm) join the EU.”

        the hysteria and illogical policies are only beginning. this has taken the free traders many generations to achieve global dominance, and they are not about to give it up.

        you can see it by listening to the dim wit Trudeau in canada, empty suit hollowman obama, and nafta billy clinton. really three generations, and what they say and do is almost identical.

        so we know they were groomed.

        so if you understand that a mosquito or a wood tick if allowed to feed uninterrupted, they will feed till they die, or as lenin said, its the rope thingy.

        so the free traders will do everything imaginable to keep feeding, even as the rope tightens till they can no longer feed and live.

        and the parasitical free traders have nukes and the dollar. so watch out.

        i am not worried that the russians cannot build state of the art passenger plane yet, they have built state of the art aircraft for decades now, and they will get this one down to.

        then the west can get there worn out aircraft back held together by chewing gum by then, with a great big kiss.

        i guess i underestimated russia yearning for autarky which will expose the empty hollow shell nafta billy clintons disastrous policies have left america in its deepest bind yet.

  7. Polar Socialist

    According to John Helmer’s latest the “On Temporary Order of Obligations to Certain Foreign Creditors” decree is, indeed temporary. For the next 6 months, Russian companies are blocked from repaying debts in foreign currency. Instead they have to transfer the sum in rubles to a Russian account registered to the debtor.

    And this goes only for debts to nominated Hostile Countries.

    1. Yves Smith Post author

      Sorry, a default is a default. Non-payment for six months is a default and offering to pay in another currency is at best a negotiating position in talking about said default. And why should Russian companies be able to pay in dollars in six months if the sanctions are still on?

      I suspect everyone in the West largely or entirely wrote off the idea that they’d be paid, save perhaps by Russian companies with presumed dollar holdings, but the flip side is they likely had to shutter operations outside Russia or had Western partners in Russia abandon their JVs. They of course want to sell them but no one will buy them except the Russian partners….after some delay at a nominal price.

      1. Desai

        Yes it would be still a default and you seem to miss my point entirely. What I mean is after default Lender will have absolutely no recourse to underlying asset/collateral of borrower. Important part is not reserves(which I believe are just for optics) but uselessness of courts after default. Not only office building but asset/collateral can be also be shares, mining rights, airplanes, etc. You have already mentioned airplanes part. Now a chinese or Indian airlines or leasing company ( or some western party routing through India, China,etc) may want to buy this debt at pennies from European parties and than try to get their hands on collateral aircraft through courts. I think decree is intended as a protection from this kind of scenario. Further even Russian railway has euro denominated bonds:

        It is not unreasonable to think that underlying russian assets are collateral.

        Just see here that even a company like yandex has convertible dollar notes on verge of default:

        Thus “Banks in Russia would be the go-to place for loans against Russian assets” is highly questionable. (When we have alibaba, a company with absolutely zero US business, trading on NYSE,I find assertion like this unbelievable.) I suspect that a lot of dollar/euro denominated bonds of Russian companies has underlying Russian asset collateral. This assets has to be protected not only from West but from hands of russia-friendly countries ,too.
        This scheme is not avoid default but safeguard russian asset in event of default.

        1. Yves Smith Post author

          Your comment makes clear you have no idea what you are talking about. Your remark about Alibaba shows you don’t even understand the difference between debt and equity!

          And you also demonstrate you don’t understand the difference between a loan and a bond, or what “collateralized” means.

          Had you bothered to do even basic research, you would have found out that Eurobond is a green bond, not collateralized.

          It’s for new construction. You can’t use assets that don’t yet exist as collateral (more technically, you can’t perfect the security interest).

          And the borrower is a state owned entity. With the Russian government on the hook, more so than with our Fannie and Freddie, there’s not much reason for the credit enhancement of collateral, even if this project were suitable.

          Russia cannot by edict impose new contractual terms on financings that are not subject to Russia law. The issuer is an Irish entity set up for the sole purposes of raising funds for its parent, Russian Railways. There would be no point in using an offshore entity for a Russian law deal.

          Better trolls, please.

  8. timbers

    This war could be over fairly soon IF Russia sticks to what she announced earlier: 1). Disarm. 2). De-nazify.

    The disarming is a good deal done, but I’m confused why she hesitates to complete the cauldron she has many Ukraine troops trapped in. She needs to decide what “de-nazify” means as in what will she do with the ultra-nationalists, and then do it. She also needs to eliminate any oligarchs known to fund them, like the Azov Battalion…if she can identify them and they have not fled. Best guess is “de-nazify” must include the trapped troops, and taking Kiev and Mariupol.

    That done, she should make her best choice on drawing new borders and weigh weather making Ukraine land locked is worth having some sections that are mostly Ukraine instead of Russian.

    The West will try to re-nazify and arm Ukraine. She must have a plan for that.

    Finally…why hasn’t see gotten rid of her trillion or so Treasuries? Sure the West can’t do as much to her as she can Russia without inflicting pain on the West too, but there is so little to gain for her holding Treasuries.

    1. Yves Smith Post author

      The Treasuries and other dollar bonds and deposits were held in accounts outside Russia and were expropriated. The Financial Times story linked to in the post has a good explanation of “because reasons”.

  9. Patrick Donnelly

    The pretence that these will prevent Russia’s war machine is an obvious lie. Russia depends on no other nation or corporation for that.

    The real purpose is to rearm.The total war economies needed for that are impossible under the globalization policies cultivated until recent times. This means disengagement from China, as well.

    Starvation, disease etc all acceptable, if the pretexts plastered across the media are heart rending.

    I think this will no longer suffice, unless the false flag damaging the USA is truly horrendous…. take care!

    1. Mikel

      “The real purpose is to rearm…”
      I’m also thinkiing of all the new military tech they get to test.

      The article says:
      “While global tech majors are announcing their split from Russia, Izumrudov says potential Russian retaliation moves “would leave almost the entire world without microelectronics…”

      War economies do nothing if not plan for war. I would assume militaries would have back up supply or other plans. Shortages vs an actual shortage?

  10. Louis Fyne

    –surprising that the business press has not gotten to be apocalyptic–

    we are in the middle of a full blown info war.

    then add that journos have the vaguest idea of how much stuff and inter-connections goes into everything in the First World.

    They don’t teach basic chemistry in journalism school. Russian industry touches nearly everything on the periodic table

    then add DC-NY hubris as the napalm to this dumpster fire.

    Oceania will always win against Eurasia!

    1. vao

      The business press did not go apocalyptic during the protracted non-preparation phase for Brexit either, so…

  11. Louis Fyne

    Lavrov says in a news conference that Russia will no longer depend on Western companies,

    Russia knows that they crossed the Rubicon even if there was peace today. Buckle up.

    one may think future supply chain issues are a known unknown, but to most people we are sleepwalking into unknown unknown territory

    1. MG

      Yeah because you should Lavrov at his face value word too. He is this generation’s Molotov.

      We are walking into a financial global calamity and we’ll see how long both sides are willing to endure. My bet is not very long but especially in the West.

      This idea that we can quickly decouple from a system built up over 30 years with no almost excess capacity is insane. It is already a supply system fracturing due to 2+ years of COVID too.

      Almost no one is alive who remembers true and sustained mass hardship in the West though from the late 1920s through the mid-1930s. Historical lessons have to be retaught and relearned with lots of pain in the process apparently.

  12. David

    What interests me is the time factor.
    Sanctions normally last years, and are expected to have a cumulative effect, eventually leading to a change of some kind. (I know it doesn’t work that way in practice, but that’s the theory.)
    If we accept that the Russians are quite close to achieving their main objectives (weeks, rather than months) then by the time the sanctions are fully in place and the blowback has started, the Russians will be leaving, or preparing to, and the situation on the ground will have changed fundamentally.
    At which point, the further justification of sanctions becomes a real problem. They can only be presented as punitive, because it’s not possible to tie them to any foreseeable political or military change. You couldn’t, for example, demand that as the price of lifting them the Russians give up control of the Donbass republics if the Ukrainians have already conceded on that point. If that’s the case, then the West is going to be faced with the horrible choice of (1) climbing down, having failed to achieve its objectives or (2) continuing to cut its own throat and cause havoc around the world without really being able to explain why.
    A political class with an IQ greater than its shirt size would never have got into this position.

    1. PlutoniumKun

      I think the stupidity of how sanctions are applied goes back further. When the build up was occurring it was obvious that the West had little leverage simply because it had already maxed out most of the reasonable sanctions. In crude terms, the West shot its load over Crimea and found it had nothing more to give.

      It hardly takes a master strategist to work out that effective sanctions have to be systematic and phased in, partly so you always have something in reserve as a ‘stick’, and also so you can phase them out steadily as a reward.

      Instead of course, we have these random announcements that make everything worse if anything. And of course what we will also see is countries quietly dropping those sanctions that are causing too much domestic pain. I’m pretty sure most governments are now subject to a lot of quiet but relentless lobbying by business pointing out how so many of these represent shots to the foot.

      1. David

        Oh, indeed. But such objectives could never be publicly acknowledged, much less defended, and it’s that point I was commenting on. If things go on as they have begun, then you’ll have mass hunger later this year in countries like Egypt and Lebanon, and someone will have to argue that that’s a price worth paying for … well, punishing the Russians for their incursion which will have been terminated by then. And the difference from most other sanctions is that these will hurt the West as much if not more. In my opinion, it simply isn’t sustainable for a western politicians to stand up and say “sorry you can’t heat your house but we do need to punish that awful Mr Putin for what he did last year, or the year before last or whatever.” Sanctions will have to be lifted quite quickly, or governments will start falling.

        1. Ignacio

          I think your point on time factor is a good one and that the leadership seems to be thinking only about today and tomorrow. Might have them fallen prey of instant satisfaction in social networks?

    2. CG

      To borrow from the latest Radio War Nerd about this very topic, far more likely than not the sanctions that have been imposed are envisioned as being similar to the sanctions imposed on Iraq after the Gulf War. The objective there wasn’t to obtain a change in policy, but barring full on regime change to simply wreck the country as much as possible so, as it was justified at the time, Saddam would never become a threat again. We can’t actually bomb Russia, so we’ll do the next best thing and so cripple Russia’s economy over the medium to long term that it will fade into irrelevance. At least assuming the Chinese don’t have anything to say about that of course.

    3. DJG, Reality Czar

      David: In the op-ed by Massimo Cacciari that I mention upstream, he said to use the sanctions as bargaining chips. Like you, he points out that after a ceasefire sanctions don’t have much use and are poor tactics.

      So the US of A, if it is led by rational persons, would remove sanctions as the ceasefire holds and as the agreements go into effect.

      Yes, “rational persons” is a major assumption that I am making.

    4. britzklieg

      We’ve seen the triumphalism associated with having correctly “predicted” the invasion, despite Putin saying, back in 2007, that Ukraine in NATO would never happen. So the west had more than a decade to figure out what it would do, including sanctions, as it pushed Putin to a brink he had clearly established and which the west knew to be a clear red line. Being surprised by the bind it has put itself in doesn’t look like an accurate “prediction” when considered against the ongoing chaos.

      The west can not have “predicted” the invasion correctly if the response to it is so transparently disastrous and ill-considered.

      “We knew the commies would invade but we made no real plans to counter it in a way that wouldn’t turn the gun back on ourselves” is not something we hear from the pie holes of western war pigs these days. Instead we get wag the elephant scale media deception coupled to a pathetic political class which has drunk its own koolaid.

      1. praxis

        I don’t think the Biden admin seriously thought Russia would invade. Maybe it was hubris and arrogance against good intel or maybe the intel was bad. Or maybe they are just incompetent. Or some combination thereof.

      1. Ignacio

        Interestingly not a word about this at our unofficial CIA bulletin (El Pais). Hide what can go against your narrative…

  13. KD

    I am probably missing something, but isn’t the Russian “payment” law basically saying that Russian debt in foreign denominations will be paid in Roubles or we default. Further, wouldn’t a massive default on Russian debt cause some instability in the financial system?

      1. The Rev Kev

        Is it possible for Russia to do a “partial” default and use their list of enemy countries as a guide? It may be unprecedented but that is all that we have seen the past few weeks. A lot of countries will scream blue murder about this and threaten to take Russia to court but I believe that not long ago that Russian law in such matters takes precedence over courts like that in the Hague. Looking at the 22 countries on Russia’s enemy list, most are only small countries anyway-

        1. Yves Smith Post author

          No, these are contract law matters and they specify which law governs.

          On further thought, the point seems to be to require any companies that might be able to continue paying in dollars or euros not to. How large a universe that is is over my pay grade.

          1. The Rev Kev

            Thanks for that as I have little knowledge here on the mechanics of how this is done. I’m willing to bet that a lot of lawyers are keeping the lights on at night working out all the ramifications of the contracts that their firms signed with Russia and going through them line by line.

          2. Susan the other

            So the contracts do not cover certain events like war? And that would be the perfect time to pull this off? If true, it just goes to show how deliberate the Russians have been.

          3. Grebo

            Neil Wilson has an interesting take on this. The key point I think being that the Russian government will give the foreign creditor a credit note for their reserves in the appropriate foreign bank. Technically they will have been paid. Practically the sanctions will have been transferred to them.

            1. Yves Smith Post author

              He does not get that an edict by the Russian government has no legal effect whatsoever on the rights of creditors who made loans or bought bonds that elected governing law outside Russia. They can still enforce their rights.

              This law cannot force creditors who never agreed to take payment in roubles to accept roubles, or even have to go try to claim funds from an account they did not create.

              I have no doubt Russian lawyers and judges are clever enough to come up with many legal theories to justify why a Russian court should refuse to enforce a money judgement from a Western court while sanctions are on. So I don’t see this legal fig leaf as making any practical difference.

              I believe the point is political: Russia is making sure its companies don’t use the money they aren’t having to pay to lenders, and then come up short if the sanctions are dropped and they are asked to pay. They want to have the funds segregated so Russia can tell lenders the funds are on account and could be exchanged for dollars and transferred to Western companies if the sanctions were dropped.

              1. Grebo

                I understand NW to be saying Russia will write a cheque in dollars or euros drawn on their account at the Fed or ECB. No roubles involved. All contractual obligations met. If the Fed/ECB don’t pay the creditor has no claim against Russia.

                Maybe too clever by half, I dunno.

                1. Yves Smith Post author

                  No, not too clever. Clueless. It’s tantamount to pretending the sanctions are not on.

                  The creditor most assuredly still has a claim. He has not been paid.

              2. Peter Beattie

                I had been struggling to see what this mini-debate was really over, and this I think clarified it. It’s a political offramp, or a piece of an offramp: “foreign creditors, our nationals are defaulting, but we have your money in rubles in Russia ready to pay you once we’re back in peacetime.” You’re saying that this will likely be scoffed at by courts adjudicating creditor claims, and then we’re back to possession being 9/10ths of the law (and 10/10ths during wartime). Then the question is what Russian-owned assets outside of Russia might be seized. And this rubles-in-Russian-accounts likely won’t mean anything to the courts determining whether assets in their jurisdiction can be attached by foreign creditors whose Russian debtors aren’t paying as per contractual terms. Or am I off?

          4. Jessica

            Once the West seized Russian foreign currency reserves, hasn’t law been rendered largely a moot point? Didn’t that shift us into a world of “because we can”? If so, I would assume that the Russians will “oh yeah, well because we can” right back.
            I ask because I may well be missing something in all this.

            1. Yves Smith Post author

              See this Credit Slips post, Are Russian Sovereign Bonds Now Worthless?

              The author assumes whether clauses in Russia’s sovereign debt issues cover the current situation. The author expects the matter to be litigated:

              That is the question Mitu and I discuss in the latest Clauses and Controversies episode. We were prompted by a Bloomberg story quoting Jay Newman (formerly of Elliott Associates), who expects Russia to default and points out that its international bonds lack waivers of sovereign immunity. But this doesn’t mean investors can’t sue. To the contrary, investors probably can convince courts in New York and other places to accept jurisdiction and enter favorable judgments. It won’t be quite as easy as in cases where the bond includes a waiver of jurisdictional immunity and related provisions, such as appointing an agent for service of process, that ease the path to the courthouse. But it’s certainly do-able.

              The harder problem is finding attachable assets. Having a waiver of the sovereign’s immunity from attachment and execution makes things much easier, but it’s possible to attach assets even without a waiver, and especially so when the foreign state lacks the support of the U.S. and most other governments.

              It turns out that Russia’s international bonds have all kinds of interesting clauses. Some are very investor-friendly, including a super-broad pari passu clause. Some aren’t investor-friendly at all, such as a very short, three year prescription clause. And others are just weird, including a clause in a subset of bonds that potentially allows the Russian government to pay in roubles.


  14. WhoaMolly

    Thanks for a superb explainer, Yves.

    The “Joe Biden” administration seems to me to be marching into this situation with a stunning amount of ego involvement, arrogance, and hubris. But I might be wrong.

    1. Hayek's Heelbiter

      Rumor has it that people at the US State Department consulted the Oracle, who echoed the response to Croesus’s question, “Proceed as planned, and you will defeat a great empire.”
      And thus they seem to be proceeding.

      1. Susan the other

        Last nite on PBS Newshour Judy Woodruff was doing an interview about the Russian bombing of a “maternity hospital” and she indulged the speaker’s hysteria about all the women and children who were at risk – and then she said in an out-of-character way (for her) “but none of them were hurt, is that right? well that’s a relief.” Right, Judy – since when do you editorialize like that? Umm, never. And the facts turned up this morning ( that the fearless and brave Azov Battalion had made that maternity hospital its headquarters! Betcha Judy Woofwoof doesn’t even mention that tonight. So, my point is that this is choreographed from somewhere way over Judy’s head. And probably over Biden’s too. But how to connect the dots? I give up.

  15. RobertC

    Sanctioning the Internet at The Register Ukraine invasion: We should consider internet sanctions, says ICANN ex-CEO Keep Russia’s citizens online but block its military networks

    “We call upon our colleagues to participate in a multi-stakeholder deliberation using the mechanism outlined above, and decide whether the IP addresses and domain names of the Russian military and its propaganda organs should be sanctioned, and to lay the groundwork for timely decisions of similar gravity and urgency in the future”

  16. PlutoniumKun

    A lot of the pain that is likely to be inflicted on the world economy will be additive to an already strained system. There were already deep shortages of fertilisers and other base products on the market thanks to last summers energy crunch in China, not to mention covid reducing stocks of my manufactured goods. While things like shut downs of car plants make the headlines, what is potentially a lot more damaging is things like a shortage of spare parts for power stations (these have already been a major problem in Europe for nuclear and gas plants).

    The shortage of fertiliser even before this was resulting in many farmers worldwide reconsider their plans for 2022. It can be as simple as switching from one crop to a less input heavy crop, or simply reducing herd size for dairy cattle in response to less nitrogen application (bearing in mind that nitrogen for fertiliser is very sensitive to energy prices).

    I suspect also that a lot of primary manufacturers may well be slowing down already in the face of enormous energy price hikes. So much depends on their projections over the next 2 years. Many industries may calculate that reducing output may not lose them money as scarcity value puts them in a sellers market. They may take their cue from the way the big oil producers are not bothering to increase output as they see the potential for huge profits from shortages this year.

    Whichever way you look at it, we are looking at very big trouble coming for the end of the year (assuming we are not in nuclear winter by then). Even if a miracle occurs and a settlement is reached over the next few weeks, decisions made now will have repercussions for years.

    The only chink of light seems to be that there are some indications that its sinking into the consciousness of European politicians that they are right in the front line of blowback from economic sanctions. For all the public sympathy for Ukraine, I think governments know this will not help them if there is an economic crisis later in the year. Voters will not blame Putin, they will blame their governments. I do think that as Russia is finding Ukraine tougher than it expected, there is potentially a deal available on the table that could save at least some face for most of those involved.

    1. Colonel Smithers

      Thank you and well said, PK.

      Yesterday, it was announced that the BMW assembly plant at Cowley (western suburb of Oxford for readers not familiar with the area), putting together Minis, is looking at a temporary suspension, but without saying how long temporary will be.

      With regard to farming, it’s odd how quiet the Thames valley countryside is. There are fewer fields than last year in production, even allowing for rotation, and livestock out in the spring sunshine. I have not seen cattle for months. There are few sheep out, which is odd as lambing season is nigh.

      Add that to the Brexit and Covid uncertainties, it’s looking grim.

      @ the NC community. It’s not all bad news, though. Christmas has come early for the CEO of Shell. We should be happy for our masters.

      1. PlutoniumKun

        Thats interesting – it could be that farmers had made the decision over the winter to go for the least input intensive option available to them for the land, given energy/fertiliser costs and uncertainty over markets. It wouldn’t surprise me if some decided just to let the fields lie fallow for a year, that rarely costs anything. Good news for butterflies I guess, as well as the Shell CEO.

        1. Ignacio

          I dunno about this but what about cultures that demand less energy input? For instance, soybean or wheat versus highly demanding maize or sorghum.

    2. Thuto

      I think the “Russia is finding Ukraine tougher than expected” bit is fraught with analytical pitfalls for the uninitiated, running as it does the entire gamut from the “dude Russia is losing” pronouncements apparently popular on the twitterverse to the “Russian commanders are failing strategically” gloating advanced by retired generals happy to be hauled back into the spotlight on CNN, Fox, Msnbc et al. Most of these analyses are predicated on ascribing to Putin something that, unless I missed something during his announcement of the invasion, he never explicitly stated I.e. expected swiftness or timelines for the completion of the mission.

      I listened to an analysis of an western expat living in a Ukrainian city encircled by Russian troops and he basically said Russia has the obvious firepower to send Ukraine back to the dark ages if it so desired, but is being deliberately very careful about minimizing civilian casualties. According to him during the livestream, the paramilitaries are undeniably deploying military hardware in civilian areas and using said civilians as human shields, and what in the west is perceived as the slowing down of the invasion is really Russia walking a barbed tightrope of meeting its objectives without razing civilian infrastructure and leaving an antagonistic population reeling from mass civilian casualties. This is not to suggest of course that the Russians are having it all their own way, no such thing ever happens in a hot war.

      1. The Rev Kev

        I think that you are right here. Classic Russian doctrine would be just to level those cities flat and then move through but they are not doing it, They are going slowly to avoid this and are accepting losing good men in doing so. I saw one city that they had taken and as they moved through, you had a small crowd waving little Ukrainian flags and the Russians could not care less. They are telling the local authorities to just keep on running things like normal and have shown no interest in running things through the local authorities. This was in the north-west of course but in the south-east, they are being treated as liberators.

        1. Thuto

          Yes Rev, the man even said “we are encircled by an invading force yet here I am talking to you live, I have electricity, I have internet and I have running water”.

        2. Polar Socialist

          In the south-east it’s the Donetskians recapturing the area Ukrainian army forced them to yield in 2014-15. In the north-east it’s the Luhanskians recapturing the area Ukrainian army forced them to yield in 2014-15. The front from Mariupol to Severodonetsk is pretty much between Ukrainians and those-that-used-to-be-Ukrainians.

          1. Skip Intro

            And presumably these troops, as locals, not only know the people and territory, they are also probably hoping to inhabit it. They are also, I assume, well informed about the identities of the local nazis, and will be able to cull them in a more precise way.

      2. PlutoniumKun

        The strategic situation is very difficult and most analysts seem to be seeing what they want to see. The best any of us armchair strategists can do is read as many good sources as possible and try to get some outline of what is happening. Its the classic blind men and the elephant situation.

        There is no doubt in my mind but that Russia is slowly achieving its broader strategic objectives, but I do think they had high hopes that the early pressure would cause a collapse. The focus on wiping out communications centres for the Ukraine military was very successful, but the use of ‘thunder runs’ in the early days seems to have been far too optimistic and resulted in big losses. The problem is that the OSs of command and control clearly hasn’t stopped individual Ukrainian units fighting on. It may even have been counter productive as it prevented the Ukrainians from organising a retreat to Kiev. This had delayed the Russians in diverting resources from the east of the country to the area around Kiev. I think the failure of the Ukrainians to mount any kind of meaningful counter attacks is very telling. They are clinging on by their fingertips.

        Russia has also failed on a number of important tactical issues. They haven’t entirely suppressed Ukraines anti-aircraft systems which is a major failure and this has constrained operations significantly. There are a number of reasons for this, but much comes down to the generally poor interservice co-operation thats been very visible. However, I think the supposed ‘failures’ of the air force have been very over-exaggerated. In truth, the Russians have never given air support the same importance as the west has done. The air force has done what has been asked of it, which isn’t actually very much.

        As you say, its unambiguous that the Russians are taking a very light touch to urban areas, which has made them seem to be failing, when the reality is that they are doing their best not to damage infrastructure or kill civilians unnecessarily. In the longer run this may well be a major military/economic advantage, but its severely constraining them in the short term. They clearly want to persuade the Ukrainian military to surrender intact – presumably intending to convert them into the defence force as part of whatever type of government they want to leave behind. Whether this works or not… well, its anyones guess.

        I think the key question in how long this lasts is whether Russia can quickly maintain full control of Eastern Ukraine – if needed completely bottling up any resisting cities and leaving them to the local militias. If so, they can put their entire manpower into throttling Kiev and pushing into the west. That will end things quick quickly (assuming there isn’t a major turn to insurgency warfare). If they can’t do that, they will continue to struggle.

        But ultimately, I don’t think they will be able to take Kiev without destroying it. I’m sure they don’t want this, so much depends on how long the government there thinks it can fight on without doing a deal. And much of this depends on the various puppet masters. Its not impossible that we could see a siege of Kiev going on for years.

        1. V. V. Gerasimov

          And what exactly will all those millions of Ukrainians in Kiev be subsisting on all those years? Hopium? Unobtainium? “Glory to Ukraine!” delusional propaganda? or Bill Gates fake meat and Klaus Schwab insects??

        2. Thuto

          The puppet masters want a protracted war, and Zelensky has probably had it whispered in his ear that he’s a shoo in for the Nobel peace prize provided he keeps up the bravado and lays down the lives of as many Ukrainians as possible so he’s a lionized as a hero.

        3. tegnost

          doing their best not to damage infrastructure or kill civilians unnecessarily. In the longer run this may well be a major military/economic advantage, but its severely constraining them in the short term

          I think it’s a good tactic, the longer people are used as human shields, the more likely they are to turn on those using them as such, and the russians are not helping by not going after the shielded forces.

          Yes, I am sitting in an armchair.

      3. RobertC

        Thuto — I’m kinda stretching here but I think one of the reasons Putin is being careful is that Xi watching. Xi wants an orderly society not a destroyed one. Plus being careful helps Modi edge back towards the RIC Primakov: The man who created multipolarity
        So I believe Putin will retreat before he goes “Classic Russian doctrine.”

      4. Oh

        You’re quite correct. How do we know what the expectaions were on the part of Russia or others with regard to this operation? Too many armchair QB’s, IMNSHO.

    3. Dave in Austin

      The price of oil stocks and copper companies have gone up but not as fast as the stock of fertilizer companies. See MOS (Mosaic)

  17. Tom Pfotzer

    Trade flows. The big impact is the baked-in shift in world-wide trade flows.

    The West forced Russia to turn East, and turn East (and inward) they did. Most of the turning-in is done, and the turn East is now vastly accelerated due to the all-out fin-war the West is conducting and continues to escalate.

    The reason this fin- and proxy-war and encirclement happened in the first place – the durable reason – is to open Asia fully to the West for rent extraction. That is no longer possible; that Rubicon is thoroughly crossed. Both Russia, China and the rest of the non-West can see this crystal clear given the past few weeks’ embargo moves.

    All the discussion about trade, about markets, about supply-chains between West and Asia (Russia up front, China shortly) is about sorting out the rubble of trashed and – in the case of Russia – now abandoned trade flows.

    Sorting it out will take time, it’ll involve disruption and issues on all sides, and this article points out some of the awkwardness, but the macro trend for Asia is to substitute inter-Asian trade for West-East trade. That is a permanent macro shift.

    Russia and China will now concentrate on Russia-China (R-C) trade at a level and pace way beyond what it would have been before last week’s nuclear fin-embargo.

    To me, this is the West’s gamble – can it disrupt R-C enough to stop that integration?

    Looks to me as though that answer, short of nuke exchange, is “no”.

    The short-term big loser in this is the EU. Boy, are they in for some pain. It’s their economy and security that’s being most immediately sacrificed.

    The West is still doubling down on “prevent the other guy’s success” instead of “build your own success”.

    This is what our NeoCon / last-stage-of-Empire Big Bet is costing us: we stopped investing in “us” a while back, and we’re still – still! – frittering away what remains of our economic, social and world-wide political capital trying to co-opt / squash the Asian integration project.

    It’s bad policy, all the way around. I don’t see a Western winner in this. Even – and maybe even especially – the NeoCons are going to take a trashing as this plays out.

    Project for the New American Century, indeed. Remember to keep that stinking, rotting Albatross wrapped securely around the necks of the PNAC constituency.

    1. Oh

      The US has no right to sanction any country that is not involved in hostile activities with the US. Yet, we have seen this arrogant sanctions game that has been played starting with Cuba, Iran, Iraq, Libya and now Russia. It’s about time most trading partners in the world take notice. Selling their goods to the US in exchange for soon to be worthless US Dollars is not a smart idea. All these countries should demand gold as a medium of exchange.

  18. John

    The sanctions are a declaration of full scale economic war. Russian Central Bank reserves have been blocked and if the fate of Afghan reserves is any indicator will be expropriated, which I, untutored in the intricacies of high finance and contract law, see as theft. Jets are sitting is Russia. Ships have been seized on the high seas.

    Read the western press and online sites and there is one situation. Go to the other side and there is another. Truth is a casualty either way. Raving hysteria feeds on itself.

    There has always been a way out of this entire situation, but the USA and NATO have been unwilling to hear the legitimate concerns of Russia. If one is insecure, all are insecure. That is easy to understand if you are willing to do so.

  19. David Jones

    The closest analogy in the UK I can think of re: Ukraine v Russia with regard to language and culture is for the English to invade the Welsh.Something we have not done for many years and I think a country that we would be a little hesitant in adopting “a total war” mode towards.

  20. Mr.Phips

    Just read “Dylan Grice, a UK hedge fund manager at Calderwood Capital, speaks for many when he says he’s “never seen weaponization of money on this scale before.” And then, the kicker: “You only get to play the card once,” Grice warned. “It’s a turning point in monetary history: The end of USD hegemony.” Yep. The WFD that we see now in regards to Russia won’t be available with China, that’s for sure.

  21. Desai

    “Sorry, this is silly, except possibly as a talking point for debt cramdown negotiations”

    I think Yves is giving less credit to
    Russian planners than they deserve. As I see it purpose behind this decree is not change payment terms but change terms regarding collateral as far as collateral concerned is within russian borders. None of the legal authorities in russia will help lenders enforce a cypriot court’s or any other foreign court’s order against Putin’s direct order. This is simply total security to any russian debtor, who does not have any property outside Russia, against ALL foreign lenders as far as they can pony up rubles and Rubles can simply be provided by russian government to debtor. Due to this decree, in effect, all foreign lenders will be unable to sieze collateral post-default. Ofcourse cypriot courts can and will order in favour of lenders but Russian authorities will not entertain any such order . Thus lender will be on debtors mercy . In simple terms this decree is just direct communication from government to legal authorities on how to behave with foreign lenders nothing more, basically safeguarding asset within Russian borders from foreign hands.

    Now it will be no longer be possible for someone from China, India, etc. (or someone from west maneuvering through China, India) to grab Russian asset at throwaway prices.

    1. Yves Smith Post author

      No, these reserves do not cure the violation of the lenders’ agreements to corporate borrowers. A default is a default. They were due to be paid X amount in Y non-ruble currency on Z date…and to a particular address or account too. There is usually a certain amount of time (on the order of 90 days) before a failure to pay becomes a default.

      And tell me how a Western lender could seize collateral in Russia in current conditions, even if there were collateral (a collateralized loan is against specific assets). If there were collateral, like an office building, it would presumably be outside Russia. Banks in Russia would be the go-to place for loans against Russian assets.

  22. The Rev Kev

    Been thinking about how the Russians will launch their counter-measures. I will say now that I was wrong in commenting that Russia would not invade all of Ukraine but based on what has turned up the past two weeks, I can see why they pulled the trigger on this. But getting back to Russia, they have several options. They could lower the boom big-time but that would push the world into recession which would help nobody, least of all themselves. So they will probably time-phase it in as part of a long term plan. They could, for example, halt all shipments of uranium to the US as much of America’s nuclear reactors use Russian fuel. This would make the cost of electricity in America shoot up but the Russians would figure that this would be a problem for Biden and the Democrats to deal with. I would suppose that like weapons, each commodity exported would have to have an end-user certificate attached. What that would mean is that might deny titanium to the US but would sell it to other countries with the proviso that they do not re-ship it to the US.

    But I do not think that Europe will be psychologically ready for their turn in the barrel. About eight years ago in 2014 the EU hit Russia with a whole raft of sanctions and they were pretty smug about it. But then the Russians launched their counter-sanctions and the EU was shocked. They did not expect it and did not know what hit them. And the markets that they EU lost in these counter-sanctions they never got back as suddenly in Russia, it was economically feasible to set up their own production of the same goods. This time with the EU acting so bellicose, they will have no idea what to do and already they are making up fairly tales about not needing Russian gas by the end of this year. Delusional. Simply delusional. Here is an article about the last time this happened back in 2014-

    1. Louis Fyne

      just look at Iran, Venezuela. US sanctions only go one way. And history is littered with unilateral US withdrawals from treaty agreements.

      Russia probably will be selective with the EU, but I believe that they have written off the US and Biden admin

    2. lance ringquist

      shock doctrine. whats good for the goose(that is the rest of the world that wanted to keep their civil societies)is good for the gander.

      why would they give a hoot about nafta joe biden, and the neo-liberals, after all, it was nafta billy clinton that pummeled them with shock doctrine which killed millions, and then he slaughtered yugoslavia, then ran nato up to russias borders.

      this time the hammer must pound the nail as hard as possible. if the hammer lets them stay in power, the neo-liberals will surely try try again.

    1. Glossolalia

      The story is a bit vague. It says

      China has refused to supply Russian airlines with aircraft parts, an official at Russia’s aviation authority was quoted by Russian news agencies as saying on Thursday, after Boeing and Airbus halted supply of components.

      It’s not clear whether China is not sending the parts in order to comply with sanctions or whether China needs the parts its self or simply doesn’t have enough on hand.

      1. Bill

        Yes, agreed. Good catch. The headline makes it seems like it’s because of sanctions when it may not be.

  23. Tom Stone

    The automotive and chipmaking industries are going to take a big hit,Turkey will take a big hig because they won’t be milling and shipping grain,the MENA countries will be facing famine, western european farmers won’t get fertilizer with which to grow crops…
    And prices for everything in the USA and W Europe will go up.
    In the midst of a pandemic, as climate change becomes an existential threat too obvious to ignore.
    This might not be the best time to further destabilise the world…
    Here in the USA we’re going to continue to have 1,000 to 1,500 deaths from Covid every day, prices for everything will continue to go up for Months and the Southwest and West are in an historic drought.
    Historic Wildfires are a near certainty this year, more than one 1 Million acre wildfire would not be a surprise and neither would the loss of 5,000 or more homes and 100 or more people in one fire.
    The Ukraine clusterfuck and the even larger clusterfuck caused by the sanctions are extremely de stabilizing.
    And it will take a while before the consequences become clear, we are talking about an extremely complex and dynamic series of systems, Military, Political and Financial.
    Probable outcomes vary from “Oh, shit!” to Nuclear Winter.
    I suspect that Brandon will decide to spend more time with his family sometime this Fall, perhaps before the mid terms.

  24. Heathcote Pursuit

    Gonna miss out on some incredible real estate development investment opportunities. New hospitals, new schools, new luxury apartments, shovel-ready projects in the new revitalized Ukraine. For the engineer-minded investor, shares of newly marketable mineral rights in strategic metals. New mergers within aircraft manufacturing sees Sukhoi acquiring new facilities in the near abroad.

    You can plaster right over all the fragmentation bursts covering the buildings a la Chechnya. An entire generation was starved so Russia could gentrify there. Ask the Red Cross about their mission tracking calorie deficiencies.

  25. Eureka Springs

    I don’t see any reason to think the American public focus or opinion on things like Russia, Ukraine (who?) cannot be changed as quickly as a yanked dog on a chain with a choke collar. A missing white chick and some scenes of people crossing the border under the new wall could do the trick these days. My grocery check out clerk yesterday said to me – You know Putin wants to nuke us. I just said I wish we would get out of his face, we have no good reason to be messing with them all the way over there. And we have been doing so for a long time. I don’t like who we are and what we’re doing at all.

  26. Dave in Austin

    I’ve been reading up on 1914. I don’t mean the armies moving to-and-fro; I mean the tearing up of the fibers which linked the nations of the world and the attempts to limit national damage by unplugging from the world. The US closed the stock market from August to December 1914.

    Today we are facing 1914 without the marching armies. Yet.

    Recently I had the opportunity to see two young Austin professionals with a dead car look under the hood and say “What is all that stuff?” For then, a car was a magic pumpkin to take them where they want to go… until it didn’t. When they told me the engine “almost turned over”, I took out a pocket knife and stuck it between the battery post and the cable going to the starter and said “Try now”. The car started right up. They looked at me like I was a magician because I knew that wires, voltage, amperage and resistance mattered.

    Likewise people before August 1914 said: “War is unthinkable because we are too tightly linked by trade”. They barely thought about it. But by 1915 the century of links had all been ripped out and a century of treaties had gone with them along with the questioning national press.

    In 1914 the British declared a blockade on neutral Netherlands and Sweden because trade with them would go to Germany. That was a violation of international law; during the US civil war we didn’t dare stop British ships going to Mexico with arms for Dixie; that would have meant war with Britain. During WWI submarine cables were torn up to cut German communications with the US. To stop German messages using neutral Denmark’s cable from Copenhagen to the Danish Virgin Islands, the Danes were “encouraged” to sell the Virgin islands to the US. All American mail to Germany was routed through Bermuda by a joint US-British agreement. All mail from the rest of the world was simply stopped by the British blockade.

    By 1941 and 1942 the US was blithely invading Danish Iceland while we were at peace and the north African colonies of France, which we weren’t at war with, without a murmur in the US press.

    Neutral rights? International law? Contracts? As the old pre-1914 joke went “Britain rules the waves and Britain waves the rules”.

    This “what happened in 1914 is happening now” is taking people by surprise. It shouldn’t. All blocs and nations will now be asking “How can we protect ourselves and have a measure of security in a world where trade may be cut off?” One likely consequence will be strategic stockpiling like China is doing and the US did after WWII. That will put a great deal of pressure on grain supplies, strategic minerals and the like. Poor Third World countries will not be amused by the new price of wheat, corn and rice.

  27. Brooklin Bridge

    How is Biden and his snake pit going to avoid a blood bath in the midterms with the pain his administration is inflicting on all. USA USA, always right in every way jingoism may run high, even now, but melts pretty quickly when food on the table becomes scarce and people start loosing their jobs, then homes, and retirees even with comfortable nest eggs get letters saying their retirement account has to be adjusted due to “the recent turmoil” and that monthly checks will be significantly lower for a time or until additional funds are made available to the account.

    People I have spoken to, even though they have all the hatred for Russia that a lifetime of distilled propaganda can pump into them, take a serious moment to think about it when one points out Cuba and Kennedy and Khrushchev in the tale of, “Shoe On The Other Foot,” and how easy this would have been to avoid. And then added on that a mention of how hard it is to take seriously a country that goes to war due to weapons of mass evaporation and knowingly lies to the public about it until even the drooling media bobble-bone-air-heads can’t contain it any more.

    These are not many, I’ve been hunkered down, but the few I’ve spoken to are hard core democrat party people who have long ago decided that thinking about it hurts; just vote dem cause, well, just cause.

    1. Brooklin Bridge

      Come to think of it, if we are still around at all, I doubt Biden will run again. He has made, or been led to make too much of a mess and he really is old. In the sense of a country meeting it’s own self created fate, Biden was the perfect president for the moment.

      1. Matthew

        In future history books — though that may be assuming too much — Trump and Biden will absolutely be written about as symptoms of the same disease.

        1. drumlin woodchuckles

          Clintonitis? Malignant metastatic clintonoma? Yersiniobama pestis?

          With a secondary co-morbidity of hillarrhoids?

  28. John k

    There are now many cases of reserves being confiscated. Iran, Afghanistan, Russia, Venezuelan gold.
    I assume these reserves were earned by the respective countries’ trade surpluses?
    This would seemingly reduce the incentive to run a future surpluses.
    Us finances it’s trade deficit with reserves, no?
    Might China decide they should shift to balanced trade, or even a deficit until they spend reserves that might not have future value? Export tax maybe used to cut internal prices? This would mean their workers get to consume what they make. Their standard of living gets a nice boost.
    And would limit our consumers to what they make, lowering our standard of living. Balanced trade!
    Similarly, why would oil exporting countries pump more to replace Russian oil? Would those countries running surpluses want even more reserves for a rainy day?
    What is the value of the dollar if exporters don’t want it?
    Begging for oil from Iran and Venezuela is rich.
    Globalization looks to be taking a hit.

    1. lance ringquist

      it never has worked in the past. why would anyone think today is different? all free trade does is increase prices, debts, poverty, strife and war.

      the only ones that make out are the oligarchs, and in the end most of them lose something, like their heads.

  29. Tom Bradford

    The ban on technology exports to Russia, in response to the war in Ukraine, could backfire on global manufacturers of computer processors and semiconductors.

    Dammit, a PS5 was already hard enough to get hold of. If I have to wait even longer for mine this damn war will be a real kick in my goolies.

  30. John k

    As a food/fuel exporter, and as a country that already adjusted to sanctions, Russia would seem to be ok for a while. Maybe ROW, as importers, not as much.
    Must be tough for the masters of the universe to find there’s nothing they can do to vent except starting ww3.
    And when do dems realize Pelosi/Schumer will be minority leaders.

  31. ChrisPacific

    The sapphire substrates point is interesting. I was not able to find validation of the market share assertions via Google (it was mostly market reports behind paywalls) but this deep dive article quoted the same source as the RT article and didn’t seem to have any disagreement with the position. It highlighted gases like neon and helium, also important for semiconductor manufacture, as likely to have supply impacted due to the war. Of the two neon seems the bigger issue as about 50% of it comes from Ukraine, and there are no shortage of sources confirming this problem.

    The Semiconductor Industry Association was quoted as saying they didn’t expect problems (“…the semiconductor industry has a diverse set of suppliers of key materials and gases, so we do not believe there are immediate supply disruption risks related to Russia and Ukraine”). However there was no discussion of details or numbers on specific markets and no attempt to rebut the specific claims made by Russia. So I’d characterize that as blowing smoke for the investors.

  32. Tom Christoffel

    Spreadsheet thinking concludes that The Godfather Putin must win, even though he overplayed his hand? Autocrats kill messengers who say what they don’t like to hear. Putin can’t tolerate a democracy on his border, so kill it. The brutality of the attack on civilians is just business for his protection racket. If the world lets him get away with this, where will it end? His long game is clear. Business and City-building require peace. The various Military-Industrial Complexes prefer saber-rattling. Putin pushed his over the line. WWII was the last time American consumers had to sacrifice to win a war. My parents explained that. Are the US economists who helped post-Soviet Russia “liberalize” at fault?

  33. George Phillies

    What appear to be demonstrated is that globalization, world trade enhancements, and tight coupling are a good idea, until they blow up in your face. The virtues of tariff walls to protect domestic manufactures are made more apparent. We would appear likely to move a considerable distance away from tight coupling a process as unpleasant as shipping manufactures abroad was, though to a different group of people.

  34. Sound of the Suburbs

    2008 was the wake up call, we slept through.
    A thorough investigation of 2008 has revealed an awful lot.

    How do we leave the financial system in a precarious state that can easily collapse?
    Neoclassical economics still has its old problems.

    What goes wrong with neoclassical economics?
    1) It makes you think you are creating wealth with rising asset prices
    2) Bank credit flows into inflating asset prices.
    3) No one notices the private debt building up in the economy as neoclassical economics doesn’t consider debt.
    4) The banking system and the markets become closely coupled, and as soon as asset prices fall it feeds back into the banking system
    5) The money creation of unproductive bank lending makes the economy boom as you head towards a financial crisis and Great Depression.

    The economics of globalisation has always had an Achilles’ heel.
    The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics.
    Not considering private debt is the Achilles’ heel of neoclassical economics.

    What could possibly go wrong?
    The inevitable.

    1929 and 2008 stick out like sore thumbs.
    At 18 mins.

    In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
    It’s that neoclassical economics they use Ma’am, it doesn’t consider private debt.

    That’s why they only worry about public debt.
    Not considering private debt is the Achilles’ heel of neoclassical economics.

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