Europe’s Economic Controlled Flight Into Terrain

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It is extremely hard to understand the mass psychosis at work among European leadership. A huge energy crisis, driven by the great reduction in Russia gas supplies (to become 100% if the EU proceeds with its idea of a gas price cap) and set to be compounded by the G7 bright idea, which they are refusing to drop, of a cap on the price of Russian oil. To the extent that idea works, it will work in reverse. For instance:

The planned enforcement mechanism is for UK and EU insurers to be barred from insuring Russia oil. Recall that the UK currently dominates maritime insurance. That won’t last with respect to oil. Aside from the fact that the incumbents do not want to be enforcers/inspectors, Russia, China, and other countries are perfectly able to step up. Bye bye London market share.

As we and other have mentioned, and now the mainstream media is confirming, Russian oil was already being laundered either by going through various ports and ship before getting to the EU, and also by going to places like India to be refined and then sold on. Everybody gets fat and happy at Europe’s and to a lesser degree, the US’s expense

OPEC will not let the G7 break its cartel. OPEC just announced a modest reduction of output in light of softening prices. Mr. Market took it worse than it should have given that OPEC signaled it would likely tighten and the output cut was modest. But OPEC is quite capable of turning the pain dial up if it needs to to make a point

As much as I am not a fan of trying to put officials on the couch, one way to think about the problem facing Europe is the speed of propagation of the energy crisis versus not one but three constraints: the reaction time of businessmen, the time it would take to make short term adaptions, and the time for any more meaningful remedies. Again, as we stressed in the global financial crisis, the timelines are badly mismatched.

European leaders are refusing and/or unable to recognize the severity and speed of decay There is simply no fix that will meaningfully alleviate the loss of access to so much cheap energy so quickly. It doesn’t matter what combination of subsidies and prohibitions the EU tries to implement. The economy can’t absorb electricity and gas prices at their expected levels. Yes, the shock is made worse by an EU spot pricing regime, which likely facilitates some Enron-esque gaming.

But charitably assume this picture is distorted a full 3x by bad market structure. You still have a 10X increase. By contrast, the US oil shock was only a 4x increase:

Let us again be clear. First, this is a massive inflationary shock in economies already suffering high rates of inflation. It doesn’t matter what experts do. The actions they can take will only somewhat effect whose ox gets gored most badly.

Second, the currencies will get weaker….which will also only make the energy and import terms of trade worse.

Third, ultimately the end for higher energy prices is that they do kill demand. But to kill demand enough to lower energy use to available supply will kill most of these economies stone cold dead.

Again, the only way to prevent devastation is to make up with Russia, which the pols, press and pundits have made impossible soon enough to prevent terrible outcomes. If we are to stoop to psychological models, the most apt might be Elizabeth Kubler-Ross’ five stages of grief. Western officials are in either the denial or anger phase, which is a long way from acceptance of loss, which here is loss of US/European dominance as well as their personal reputations.

It seems at best that these officials are grasping at straws like one widely circulated but analytically rotten analysis claiming the Russian economy is on the verge of collapse1.

The only solution would be to make some sort of peace with Russia, and the current crop of officials are simply too deeply invested, emotionally and politically, in Russia/Putin demonization to do that. The UK and EU economies will be bleeding out before voters can turf out this self-serving bunch.

And mind you, it is already become too late to stop damage. Most of you have seen images, either in news stories or on Twitter, of UK and European small business proprietors showing photos of massive increases in their power bills. Many are saying they will have to shutter if this keeps up. There’s no reason for them to think it won’t. Consider this sighting from DJG, Reality Czar, from northern Italy:

First:
I go to a bakery each morning for a cornetto (croissant) or slice of focaccia (an excellent way to start a day, lots of olive oil). The bakery is well known, is very serious about bread, and has many regulars. I am a regular, and they have decided that my name is James. (That’s what the J in DJG stands for.)

They posted their bill in the window (seems to be part of a protest by middle-sized and artisan businesses):

Year on year: July 2021 = 4,700 euro. July 2022 = 12,700 euro.

A bakery cannot survive skyrocketing energy costs. I will check for more such signs as I make my daily rounds.

Second:
Reported in Fatto Quotidiano this morning. Assoutenti, which is a consumer-advocate group whose mission includes utilities, has created a stir: The association announced that in fact the stocks of gas that the government claims to have in place can last only 45 days. So chaos is forecast for January. This 45-period of provisioning is something that Yves Smith pointed out the other day. So we are going to hear much more about 45.

Alert readers may have noticed the percentage price increase the Italian bakery is upset about is much lower than the ones show by UK and some EU businesses in other countries

Even though the EU is having an emergency meeting on September 9, any action on energy subsidies will have to take place at the national level. Those schemes will have to be designed and then almost certainly voted through, and implemented. Households and “essential” businesses will come first. But how will that be defined?

Many energy-intensive businesses, such as aluminum smelters, stainless steel foundries, and a lot of Dutch greenhouses, have already “suspended” operations. They aren’t going to reopen at anything like full capacity until energy costs fall way back…which will be a very long time. It might be possible to mothball plant safely, but those jobs will be lost. If the workers are skilled, restarting will be easier said than done. And in the meantime, households will suffer and could slip into poverty, tax receipts will fall, mortgages and rents may go into arrears…a whole cascading down cycle.

And if you don’t use market prices to ration, you need physical rationing instead. I would assume the EU will go about that in the worst possible way, with unplanned or at best rolling blackouts. That also can be devastating…for instance, to continuous process manufacturers like papermakers who run 24/7/365 except for scheduled maintenance, and individual who rely on power to run a CPAP machine at night.

Aside from the difficulty of devising subsidy and rationing schemes on an emergency timetable which will at best only slightly blunt and forestall economic pain, there’s also the wee problem of the European electricity pricing scheme. I have yet to give it a hard look, much the less master it, but a new INET paper, Navigating the crises in European energy by Michael Grubb, has informative data and suggests some remedies. It also does a good job of unpacking the marginal v. average price/cost issue, which is a fundamental in how to think about pricing, not just in energy markets but industry generally. For instance:

Mind you, UK gas includes gas from the North Sea. But this serves to illustrate, if nothing else, that renewables can’t come close to filling energy needs. From the paper:

Expressed in term of power, the average annual demand of 33.5 GW far exceeds the average available output of low-carbon electricity sources, so gas plants are essential to meet demand for almost all the year – and, consequently, set the wholesale price, then at around £150/MWh. In theory, the operating profits for all the non-fossil plants, to the left in the Figure, are intended to cover their higher investment cost.

But the bigger issue is this paper offers supposed remedies for the European energy crisis. The word Russia (actually “Russian”) appears only once, in an in-passing mention of the conflict.

None of these solutions can be implemented before a lot of European businesses have died. For instance, the one that ought to be the easiest would be to reform the EU electricity pricing mechanisms so that among other things, participants didn’t have incentives (or good reason, depending on your point of view) to bid up future contracts as much as they have. But any such change would require debate over alternatives, negotiation with incumbents, and changes in IT to implement the new approach. The IT issues alone means that two years would be heroically fast, and that’s clearly not even remotely fast enough.

So don’t bet on happy or even not too bad outcomes.

_____

1 Yes, I should name and shred it but my going after it won’t change the belief in it of anyone who counts and the effort might get me on more of the sort of list that we really don’t want to be on these days. Suffice it to say that plenty of economists aren’t buying it either. I mentioned the paper to someone who is the head of economic research at a major institution and he snorted as soon as I mentioned the name.

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96 comments

  1. Foy

    I was saying something similar to a friend today, the speed of spread of problems generated from the increasing energy/electricity cost problems has taken off the last 1-3 weeks and feels its going exponential really suddenly. People running small businesses in countries all over Europe taking photos of their before and after electricity bills with x 10+ increases posting to twitter, $2000 to $20,000, not knowing which way to turn and no idea how they can run their business any more.

    As Gail Tverberg mentioned in her recent article, economies are dissipative structures, like hurricanes when they run out of energy resources they can stop and collapse pretty quick.

    I wonder if EU economies could stop faster than anyone expects. And not sure what happens to the rest of us then either.

    Reply
    1. Colonel Smithers

      Thank you, Foy.

      You are right to wonder. I do, too, and, working in the City, wonder about the impact of defaults and contagion in the banking system.

      Having worked on the post 2008 banking and related reforms, as a bankster lobbyist, I thought that the new rules were compromises and there’s not enough bank capital to absorb losses, leverage is too high and circuit breakers like bank structural reform too weak to prevent a repeat of 2008.

      When the Basel Committee on Banking Supervision (part of the Basel based Bank of International Settlements) addressed these issues a dozen years ago, two camps soon emerged, the hawks (UK, USA, Netherlands and Sweden) and doves (France, Germany, Italy and Spain). The latter saw no need for reform at first and then sought to delay until 2025, knowing how true state of the Eurozone and their banks.

      I often wonder when and how the missed opportunity would come to bite us.

      Reply
      1. Foy

        Thank you Colonel, that’s intriguing information, glad I’m not the only one thinking like this. Looks like we are going to find out about our wonders soon unfortunately.

        Reply
      2. Ashburn

        I know nothing about the mostly unregulated derivatives markets but with sharply rising interest rates, rising general inflation (especially fuel and food), shortages of other industrial raw materials, strikes and civil unrest, how long before something snaps? In a tightly coupled global marketplace I don’t foresee a gradual decline, rather a sudden drop off the cliff.

        Reply
  2. fresno dan

    It is extremely hard to understand the mass psychosis at work among European leadership.

    I think we are in an era where the will of the majority is not just being discounted, but where rationality is being opposed. I saw the Netflix movie Don’t Look Up and I didn’t think it was very good, but I have to say that the tag line, don’t look up does seem to capture the obstinate unwillingness to accept reality, and the consequences of reality. It really is quite remarkable.
    I think the truth of the matter is we forget how bizarre Europe* behaviour has been historically – from midieval church rule and war after war, until WWI and WWII. A few decades of sensible goverance, and we think these people are logical…
    * yeah, all humans

    Reply
    1. Steve H.

      Interview with Mattias Desmet:

      Tucker Carlson Today – “Mass Formation Psychosis”

      There’s overlap with John Robb and gleichschaltung, tho Robb might say the Object is determined by the Swarm and is not necessarily singular.

      I’ll disagree with Desmet about generalized anxiety arising spontaneously. It’s hard to decompose when our kto has all kogo’d us that there has been any difference in administrations in the last half century, in implementing the slope of the primary driver of social instability:

      Figure 3. Temporal dynamics of relative wage in the United States, 1780–2019

      Reply
      1. Keith Newman

        @Steve
        Ummmm… what do “kogo” and “kto” mean? I googled them but still couldn’t figure it out.
        Thx (!)

        Reply
    2. Foy

      Yes fresno! It is exactly Don’t Look Up, good chance that line will turn into the definition of it after all this is over. That film with completely incompetent, in denial leaders spouting stupid stuff while the earth goes boom coming out less than 12 months before what looks like a massive economic collapse caused by completely incompetent, in denial leaders spouting stupid stuff while the earth (as we know it) goes boom will tie those two things together forever.

      Don’t.Look.Up.

      Reply
        1. Tom Stone

          It was 106 Degrees when I drove through Sebastopol at 11:15 this morning.
          It’s warmed up since.
          A nice day for the beach…

          Reply
          1. Laura in So Cal

            The problem isn’t the high temp during the day, but the higher nighttime temps. I live on the edge of the high desert and normal summer is a high of 100F+ and a low of maybe 68F. We normally turn off the AC about 8pm and open all the windows overnight. We close everything up including the blinds when we get up in the morning. The AC which is set at 78F will come on mid-afternoon and run for maybe 5 hours off and on. Last night the LOW temp was 79F so my air came on about 8am. It has been like this for days.

            Reply
        2. Scramjett

          115 in Sac today. Since 1877 (start of temperature record), it’s never been more than 109 in September in Sac until yesterday (113). SMUD, who has one of the better California utility reputations, is contemplating rolling blackouts for the first time since I’ve lived in Sac (15 years).

          Reply
    3. sulfurcrested

      Taking a step back, I see this mass psychosis of EU etc leaders as a deep, semi conscious child-like attachment to the US.
      It’s the US which has been pushing the Russia denomination. Absent the US, I like to hope European leaders would have acted more rationally.
      Regardless, it’s past time to cut the apron strings.
      If Europe can’t /wont cut the strings it is literally doomed. It’s hard to imagine the consequences should Europe continue on this suicidal commitment to sanctioning etc Russia.

      Reply
    4. jobs

      That’s because our “leaders” are by and large insulated from the consequences of their decisions. The feedback loop is broken.

      Reply
  3. peon

    What is not to like about putting all the European mom and pop bakery, restaurants,coffee shops, etc out of business and then replacing them later with McBusinesses?

    Reply
    1. HotFlash

      Well, since energy bills, rent, mortgages, food, inflation, and unemployment hit through society, where will those McBusinesses find McCustomers?

      Reply
      1. Polar Socialist

        The families of all those migrant workers sending money back from Siberia where they are in horrible conditions extracting natural resources for Russian companies?

        Reply
      2. Norm de plume

        After a decent interval, long enough to allow a satisfactory percentage of useless eaters to die, the desperate remnant will jump at the chance to be given free money in CBDCs accessible only thru digital passports, only accessible to the fully vaccinated, so that they can shop for essentials at the few McBusinesses set up to take them. The McMedia will hail this as Deliverance and wont so much as mention the gulags holding the holdouts.

        Reply
  4. vao

    Apart from the aluminium and steel foundries and Dutch greenhouses, fertilizer plants have been throttling their production or stopping it for some time now (with a secondary effect on agricultural production itself), paper mills are being shut down, while the glass industry has been seriously affected already since the end of 2021 (e.g. Murano glass makers).

    Historically, periods of hyper-inflation were caused by the sudden disappearance of substantial productive capacity, for instance:

    a) Germany: the Franco-Belgian occupation of the Ruhr in 1923;
    b) Austria and Hungary: cut off from the industrial heartland of the Austro-Hungarian empire that was Czechoslovakia after WWI;
    c) Zimbabwe: expropriation of commercial farms and industries, subsequently transferred to incompetent cronies who rapidly ran them down.

    The logical measure should be to stop the nonsensical sanctions, and let Russian gas, oil and coal flow again unimpeded. However, the reaction of governments is to open the spigot of subsidies — €65B in Germany alone — while they scramble to find other providers of energy (with meager results so far, or only medium to long-term prospects).

    Could Europe be heading to hyper-inflation because the dearth of affordable energy is leading to the rapid, massive reduction of industrial and agricultural output across the sub-continent, while governments simply pour money into the demand side without being able to restore the supply?

    Reply
    1. Yves Smith Post author

      Yes, I neglected to mention paper and fertilizer as also energy intensive (yours truly is a paper brat). We have had links on fertilizer plants slowing/shuttering operations. Paper is continuous process, so a shutdown is a big deal. You don’t turn papermaking off and on.

      I told the checkout guys in the local grocery store last Saturday to stock up on toilet paper and paper towels again. They’ll likely go way up because US operators will supply Europe at a huge markup.

      The guy at the register said he’d heard Russia had shut off EU gas the day before. I filled in the details but was impressed that he had heard.

      Reply
      1. Dave in Austin

        “Paper brat”. Growing up around real industry makes one suspicious of spreadsheets.

        I’ll avoid the Pulp Fiction and “Sweet smell of sucess” jokes for now.

        Reply
    2. Ignacio

      With subsidies they buy time. Time to keep the populace quiet while the leadership waits for the fantastic collapse of Russia to come tomorrow… will it be the day after tomorrow? On the other side, the populace may probably expect that, at some point, with or without Russian collapse, something will be worked out. There must be a plan B or something. For what we can see: oil caps, NG caps, cost redistributions etc, in reality there is no plan B but some foolish search of options in the world of fantasy.

      On these for instance in Spain the fools around are wandering about the MidCat NG pipeline from Spain to the rest of Europe as a big business opportunity, which doesn’t make much sense and, if anything make gas prices in Spain more volatile in 4-5 years to come when it is finished. Ya know? we can even make it compatible with H2 transport! Idiotic to the extreme. The French are doing us a favour by saying NO.

      Reply
  5. BillS

    Some in Italy are starting to wake up to the reality. Yesterday, the weekly TV program “Presa Diretta” featured a warning from the president of Confindustria that leaders must act now to avoid a disaster without precedent in Italy and Europe. He stated that Europe must enter into negotiations to restore energy supplies before the destruction of European industry becomes permanent.

    https://canavesenews.it/news/il-presidente-di-confindustria-piemonte-marco-gay-in-tv-a-presa-diretta-energia-e-un-dramma/

    https://www.raiplay.it/video/2022/09/Presa-Diretta—I-signori-del-gas-84513ee2-b32d-4f16-8e19-3f680b2eb933.html

    Reply
  6. Kristiina

    Finland joined the european electricity market a year ago, and I knew it would take prices higher. Having a common market in energy is really an ideology I do not understand. Most of Italy can just put on a sweater when electricity is expensive, but in Scandinavia heating is needed just to be able to have running water. Of course, baked bread will be a problen everywhere. Raw food anyone? Oh, the greenhouses are closed…well, I hear paleo is popular. Catch a rabbit by running and drink the blood – that is a warm meal for you. Cannot help wondering if the enormous profit-taking of energy producers and market hustlers is a feature, not a bug? Maybe madame vanderleyen has some inverstments in the energy sector, too, besides the well-known pharma interests.

    A weird symptom of these times is that mobbing behaviour is assumed to destroy the victim. (“This mean behavior may include tactics like backbiting, ostracizing, rumor-spreading, and manipulation, which can cause serious psychological harm to their targets.  The result often leaves those targeted feeling bewildered and upset” https://www.verywellfamily.com/signs-of-a-mean-girl-460512 ). The thing is, just like with mobbing, consequences vary, and sometimes the mobbers get their just deserts. But obviously the psychological involvement will make the perpetrators very averse to reality-checks. And twitter makes all of the rumour-spreading, manipulation etc. so easy! As the main drivers of these insane politics are totally insulated from consequences, it looks like we, the great unwashed, are on our own. Bailouts for the TBTF will be served, but what difference does that make for the smaller businesses that keep the economy alive?

    Reply
    1. LawnDart

      Most of Italy can just put on a sweater when electricity is expensive, but in Scandinavia heating is needed just to be able to have running water.

      Same is very true in USA. In the South, one can burn candles and throw an extra blanket over the mattress; in the North, if the landlord hasn’t found you first because of late rent, they’ll find you in March or April because neighbors are complaining of the smell.

      Reply
  7. Lex

    The historical moment is too big for the people who created it. And it’s a trend in western governance which was shown clearly in the early part of Covid. The leadership class simply doesn’t know what to do right now and the things it might do are ideologically impossible, including both negotiating with Russia or even forcing the private industry energy companies recording record profits to dial them back.

    It is fascinating to watch western leaders attack free markets from one direction (putting price caps on Russian energy) while letting them run rampant to the detriment of their citizens from another (the massive profits). They’ve tried nothing and are all out of ideas. While events are moving too fast for them to react, partly because nothing suggests they’re very intelligent and partly because they’re trapped by ideology and politics.

    I’m not strong on deep economic questions, so the one that keeps coming up for me is whether economic chaos in Europe can be contained or does it trigger cascading effects in the US too?

    Reply
    1. nippersdad

      When I read that two thirds of the country lives paycheck to paycheck it seems clear that the US never actually recovered from the ’08 crash, and COVID only exacerbated that problem. I worry about it too. All we have to work with is a multiverse of inbred political caricatures led by Darth Brandon, “The Senator from MBNA”, in a (very small) world of “too big to fail”.

      The prospects do not look good.

      Reply
    2. chris

      Here’s a start to answering the question of how the US could be affected by chaos in Europe. The US imports a lot from the EU. Any disruption in those imports has the potential to create cascading effects. Depending on what imports we’re talking about, those effects could be minor (Hermes bags are hard to get!) or major (all Mercedes delivery vans are idled until a critical part is received).

      Yves and others are better to answer any questions of where this could go in the domestic US market economically. Physically, we will absolutely feel it. And not just because real Parmigiano cheese will become unavailable. I think we’ll see something like we saw during the financial crisis of 2007 – 2008. The risks have been hidden. No one understands the total exposure. Everything will be assumed to fine until suddenly it isn’t.

      Reply
      1. NotTimothyGeithner

        Yeah, firms overexposed to the Euro finances would be a real problem. These shutdowns aren’t the result of a hurricane in one region but all over Europe.

        Reply
  8. David

    The most important part of the explanation, curiously, is technical rather than political. It has to do with the impossibility of managing complex problems (and still more crises) by committee. Experience suggests that perhaps 5 to 6 actors are the maximum that can really manage a crisis collectively. So we are in a situation where, I suspect, many European governments are privately aware of looking into the abyss, and would take sensible measures if they were independent actors, or if they only had to worry about one or two other countries. But an organisation which is not geared for crisis management at all has had to confront the biggest crisis since 1945. The result is a kind of paralysis, where no-one wants to speak out, and no-one wants to disturb a consensus and invite all sorts of extra problems as a result. The problem is that there is no Plan B, and there never has been. Even six months ago, no European government ever thought that it would be even remotely in this situation, and so there is no articulated alternative to the present ruinous policy. The outcome will be, I think, a gradual peeling away of states, and a gradual loosening, which is likely to have disastrous effects on the EU as a whole.

    International organisations handle stress badly. In 1999, NATO nearly came apart over the much less vexed question of Kosovo, and after the first few days of the crisis, paralysis set in, and all decisions were made in an inner circle of four or five nations. That can’t happen here. The EU eventually managed to out-perform the British during the Brexit negotiations, because there was a clear negotiating objective and a powerful and expert bureaucracy familiar with the issues. That isn’t the case here.

    In conditions of stress, people tend towards fantasy worlds, and I think that’s what’s happening now. European states are clearly telling each other that Ukraine is turning the tide at Kherson, and that the Russians will soon have to negotiate. At that point, sanctions will be lifted and all will be well. And of course virtually none of the European leaders have any real-world experience of the parts of the economy likely to be devastated.

    Reply
    1. vao

      So the EU is at risk of experiencing tribulations comparable to what the Polish-Lithuanian commonwealth suffered in the 18th century? Nothing achieved because of unanimity requirements, reasonable proposals dying because of entrenched individual interests, external powers imposing their will because they always find some local actors ready to side with them, and necessary reforms endeavoured much, much too late to save the hapless, ossified community?

      Reply
    2. flora

      Your comment reminds me of the mid-1980’s Tom Wolf novel The Bondfire of the Vanities. The plotline revolves around one the the self-described ‘masters of the universe’ (a bond trader) who makes a simple mistake while driving home one night; he goes to great lengths to hide and coverup and deny he’d made any mistake. That refusal to deal openly with the mistake at the time creates a financial and personal disaster for him and his family that no amount of money or good connections or high reputation can prevent.

      Thanks to Yves and NC for this great post.

      https://www.amazon.com/Bonfire-Vanities-Tom-Wolfe/dp/0553275976

      Reply
      1. flora

        an aside: imo, Brussels and the UK will not go against the US sanctions on RU. Therefore, each country’s govt will have to decide how much damage it’s willing to inflict on its own country before it breaks with US demanded sanctions on energy. It’s almost a W. Bush “you’re either with us or against us”‘ moment. Being with the US is not supposed to result in the whole destruction of your economy, but that’s what it’s starting to look like. Neither is the US supposed to ask allies to implode their economies and govt standing. But here we are.

        Reply
        1. Telee

          I am reminded of Dr. Hudson’s analysis of the current events, some of which was in interviews published by NC. Hudson says that the primary goal of US policy is to weaken Russia but he also emphasizes that the other goal of the US is to knock the hell out of the economy of the EU. How else can the US compete when our corporations use over 90% of their profits for stock buy backs rather than invest in research and development.

          Reply
          1. Norm de plume

            Admirably concise, thank you, and shorthand for the best explanation for Yves’ opening expression of puzzlement.

            Reply
        2. French75

          Brussels and the UK are stuck with the US until the bitter end. Negotiation with Russia is the only solution, but it is a risky one; firstly because Russia is in a position to make enormous demands (recognize Crimea as a Russian territory, recognize Donetsk and Lukhansk as separate countries, Norway and Finland to exit NATO; concessions in the North sea, dropping sanctions on oligarchs, alterations to stances in Syria and Iran, etc); and secondly because countries can only hope that Russia won’t play games with restarting gas flows — whether for made-up reasons about maintenance or nitpicking about technical compliance with their list of demands.

          I imagine the US and EU are particularly wary of this outcome because, should the roles have been reversed, they would turn the screws on Russia in exactly this way.

          Reply
          1. Kouros

            Nope, US and EU would turn the screws to beyond limits. See Iran, Venezuela, Syria, Cuba, NK, etc…

            Ruskies are not really psychopaths.

            Reply
          2. hk

            To their credit, Russia has not been playing games too transparently with gas, at least so far, for most part (not so much b/c of their goodwill as much as pragmatic legalism–calvinball is hard to sustain in the long run, esp if you’re not the only calvin. But people do imagine the worst of their presumed adversaries.

            Reply
    3. Failed Intellectual (Emeritus)

      Indeed David, I think you’re quite right in that the organization as it is designed simply can’t cope with this problem, which is a bit of a scary thought that. We are saddled with the additional problem that our elites that lead these institutions have been isolated in their bubbles from the real world for so long that they no longer have a clue about feedback on what their policies are doing anymore.

      This crisis reminds one of the 1970s oil embargoes. Japan is an instructive case, as it is a country that had serious levels of administrative capacity through government organs like the famously powerful MITI (ministry of international trade and industry), as well as almost no domestic sources of energy. When the crisis hit Japan, they were able to co-ordinate effective responses quickly that made sense to their various industries because MITI had loads of industry contacts and expertise which meant they actually had some semblance of an idea of what was going on on-the-ground. In addition to that, they had real power to do things via ‘administrative guidance’ and they could do it quickly if an emergency required it. Japan in the 70s and into the 1980s grew at a steady clip of ~5%/year while lowering oil imports every single year well into the 1980s, with the exception of the one year severe economic hit in 1973 (-13% GDP).

      In contrast, It doesn’t seem like Europe has anything close to this level of administrative capacity. Instead, European countries and their elites resemble much more the sort of elites that Jared Diamond describes in his book ‘Collapse’; divorced from reality and having no clue about on-the-ground conditions that their insane policies create. Western elites in general live in a bubble where no matter what disasters happen to their societies, they keep getting richer (or they get bailed out). They don’t get proper feedback because they are a) clueless, and b) everything is always great for them no matter what happens. And compounding this, our institutions have been hollowed out over the years via neoliberalism so that the capacity that does exist to respond to crises effectively is much diminished.

      Unfortunately, at this point I think this car is going over the cliff.

      Reply
      1. Tom Bradford

        Western elites in general live in a bubble where no matter what disasters happen to their societies, they keep getting richer (or they get bailed out). They don’t get proper feedback because they are a) clueless, and b) everything is always great for them no matter what happens.

        A pretty fair description of the French elite in 1790.

        Reply
    4. ChrisPacific

      Yeah, we saw the same thing with Brexit, where the realistic alternatives on offer were sufficiently unpalatable that flights into fantasy became the norm.

      We also saw that if the only path to a positive resolution requires admitting that you cocked up monumentally, politicians will choose the path of certain disaster every time and gamble that they can blame it on somebody else. I fear we will probably see that here, along with a big propaganda campaign on the theme of “none of this was our fault.”

      Reply
  9. cocomaan

    The only solution would be to make some sort of peace with Russia,

    No, Yves, that’s not the only solution, unfortunately. The other solution that European leadership would consider is war with Russia, directly.

    They are stupid enough to risk WW3 over their own shortsightedness.

    Reply
    1. Yves Smith Post author

      The only solution to not having a disastrous energy crisis. A direct war won’t solve that. It won’t create more energy for businesses and homes. But I get your point that given how the EU seems determined to punish Russia when many (most) recent actions have been either ineffective or self harming, that they are running out of things to do and could talk themselves into that.

      But countering that is that they’ve already seriously demilitarized in arming Ukraine and their armies are not that large. Plus the decision to join is on a nation by nation basis. The UK has 86,000 thousand in its army and 33,000 in its air force. Scott Ritter has claimed that the 86,000 translates only into about 20,000 combat troops, the rest are various support functions. Would like to see that firmed up.

      Reply
      1. Dave in Austin

        As one who follows the military and the combat deployment problem, I can tell you that Scott Ritter is right and in fact may be overestimating at 20,000. That is a surge number; keeping that number in the field for any lenght of time would be very hard. The air forces are a different matter.

        Reply
        1. Synoia

          The tip (combat troops) to tail ( supporting) ratio is considered to be 1:9 for modern armies.

          Based on the numbers the UK has about 8,000 actual front line troops. The UK is not ready for war.

          In the urgent energy crises a war in Europe would require more energy than exists in Europe. Z the cost of a war financed by the US would reduce Europe to penury for a very long time.

          Reply
            1. NotTimothyGeithner

              Those troops are on an island. Who cares? Even with conscription, estimates to produce competent soldiers vary, but the best case scenario is six months. So even if Truss vowed to start today, the soldiers wouldn’t be available for 7 to 8 months assuming they had materials to train on.

              Old general Pyrrhus won, but the Roman’s equipped new legions while Pyrrhus’ guys were trying to figure out how many they lost.

              The war has was over around day 5, and countries like the UK don’t have tech edges like clipper ships that would let them deploy fire power that rapidly.

              The Iraq invasion was an exceptional event, largely due to ling term degradation and a coalition of nearly the entire world stomping on Iraq after a major war.

              Reply
        2. David

          He is right, and I suspect that 20,000 is the maximum strength that could be deployed cumulatively over a period of time. The actual in-place strength at any one time would be no more than perhaps half that. By comparison, from a somewhat larger Army, the British managed to deploy a single armoured division in 2003 in Iraq, and only one of its three brigades was armoured.

          If Wikipedia is to be trusted, the only reasonably heavy units (Brigade Combat Teams) in the Army are elements of two BCTs in 3 Division in the UK. Not an expert, but I think the accepted wisdom is that the UK could probably scrape together a force of 2 BCTs of reasonably heavy units, with artillery support, for perhaps six months, which is the standard UK military tour. Much of the Army is Light Infantry and Light Cavalry, not at all suitable for high-intensity operations. But what do you do after six months? And where do you deploy such a force and how do you support it. I’ve argued elsewhere under another name that we should stop fantasising now about rebuilding European military capabilities to Cold War levels. It can’t be done.

          Reply
          1. Colonel Smithers

            Thank you, Gentlemen.

            A few months ago, the question was put out by NATO HQ to member state ministries of defence. As member states don’t have a standard definition of what constitutes a brigade, numbers varied, but the UK said it could deploy a brigade of half of what Synoia cites. Some states have none available and won’t for a couple of years.

            David mentions the light as opposed to heavy elements. Readers should search for what that light cavalry passes for now. Scorpion and Scimitar light tanks and Warrior infantry fighting vehicles have given way to the Jackal and the notorious Boxer vehicles. The British army has no main battle tanks built this century.

            At best, it can field a squadron of light cavalry or heavy cavalry, not an armoured regiment. There are no more than 20 Typhoon jets and a dozen ships of the line available.

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            1. Cristobal

              Also, Colonel, all those military vehicles don’t run on lime soda. The military is one of the largest consumers of petroleum fuels. Throw another log on the fire!

              Reply
            2. hk

              As I understand it, Germany broke up its panzer divisions after the cold war so that tgey are not exactly “panzer” any more. 10th Panzer, for example, is now a “low intensity” warfare unit and includes all of what’s left of German nountain troops. The other panzer division, the 1st, is supposed to be high intensity, but what passes as “high intensity” to them seems unclear–ekements of the 1st (but not the 10th) went to Afghanistan, so high intensity = whenever people are actually shooting at you?

              Reply
      2. cocomaan

        That’s fair! Won’t solve their energy problem except that they might be able to militarize the economy and drive energy costs in different directions.

        Europe might be demilitarized but I expect the USA will do a lot of the arming and perhaps even fighting if it became a hot war with Russia.

        I can’t believe we have to even discuss this, but the European and American leadership cohorts are truly that stupid.

        Reply
      3. spud

        Yves you are thinking logically. as Micheal hudson has said, so did stalin, hitler invaded anyways.

        the trampoline jumper running finland has eyes on the russian lands above her country. russia has very large long drawn out borders. and the trampoline jumpers are feverish enough to think they can scare or beat the russian slav sub humans.

        Reply
        1. Yves Smith Post author

          No, Stalin did know Hitler would attack. Russia tried to get anyone but Germany to ally with them but no one wanted to help those evil Commies. So Stalin signed the Ribbentrop-Molotov Pact to buy time for Russia to arm. I concede it bought less time than Stalin had hoped.

          Reply
      4. NotTimothyGeithner

        There are various estimated ratios, but my memory is the US had one soldier on the front line in World War 2 for every 13 soldiers employed at one point to get final material into the hands of Frontline soldiers. It got better as the war went on and processes were simplified.. Local vendors and contractors skew the numbers in recent conflicts which makes me suspicious Ritter’s estimate is high in a bout where contractors might not be so eager to show up. We had the stories of mercs griping about the Russians shooting back. The guys who do laundry are less likely to show up. Russian propaganda has shown laundry and so forth being done by soldiers.

        Reply
        1. hk

          US Army no longer has cooks, I’ve heard, with the role completely passed to contractors–who almost certainly will not show up in a real war. I don’t think US military can fight any country that can seriously strike at its rear with planes or missiles.

          Reply
    2. Glossolalia

      I don’t doubt that European leadership would be stupid enough to do it, but how would that help with the energy crisis? Would Russia somehow feel compelled to resume sending cheap gas to Europe if there was a direct war with Russia?

      Reply
      1. Tom Doak

        It wouldn’t help the energy situation at all; it would help the political situation. Once it becomes a war, it is your patriotic duty to suck it up and support the troops, even if you can’t afford to run your business or stay warm.

        Reply
        1. HotFlash

          Support the troops? You mean, tie a yellow ribbon on your SUV and shout BooYah at football games as the F35’s, ? Thank homeless vets for their service?

          It takes energy, lots and lots of energy, to fight a war these days. The US military is *currently* the largest single user of fossil fuels on the planet, and that’s without a symmetrical shooting war. Fight the Rooskies mano-a-mano? It is to laugh. Using what military equipment?

          Our highly profitable MIC produces (eventually) small amounts of planes that don’t fly, boats that don’t float, and tanks that trip over Leggo ™. Arsenal of democracy much? Not any more. Steel mills? Nope. Stainless steel? Nope. Glass? Nope. Computer chips? Nope. Aluminum? Nope. Uranium? Lithium? Nope and nope. The manufacturing plants in the US that once provided thousands and thousands of P51 and howitzers and shells and bullets series no longer exist. Perhaps if we threaten the Chinese or the Iranians with sanctions they will make drones and other war stuff for us. And shoes, too, we will need shoes.

          We have seen how our ‘leaders’ have dealt with Covid, Brexit, and now the Ukraine proxy war. It isn’t just the car that’s going off the cliff, it’s the whole planet.

          What stopped the BadGuys in WWII? They ran out of oil.

          Reply
    3. spud

      stupid yes, risk no. the people who came to power in 1993 view the world this way,

      the fascist world economic forum has really outdone itself. its a generational organization that has been trying for world domination for well over 100 years. woodrew wilson was a adherent who cemented it into america.

      so there should be no confusion at all. today is their rapture.

      the people who came to power in 1993 are not imperialists, they are fascists. under fascism whats mine is mine, whats yours is mine, and there will be no discussions period. they are the hammer, everything else is a nail.

      when you understand this, then you can see why there was NAFTA and letting china into the W.T.O. and above all, white supremacy. that is why they thought it was safe to let china in, but they are to stupid to understand what they did, it ended their reign of terror. china and russia are not sub human as the free traders thought they were.

      https://www.huffpost.com/entry/the-bill-clinton-legacy_b_106089

      “Free trade, democracy promotion, and the use of force to uphold global norms comprised the core of Bill Clinton’s foreign policy – and they remain the central ideas of today’s Democratic foreign policy establishment.

      ”when bill clinton signed nafta, destroyed GATT and replaced it with the W.T.O., then let china in, was the equivalent of hitlers operation
      Barbarossa.

      https://en.wikipedia.org/wiki/Operation_Barbarossa

      hitler never attempted peace with the soviet union when it became apparent he would lose, because he viewed them as sub humans, and what was theirs, was really his. once you understand this, then you can understand what appears to be irrational.i cannot think of one thing the bill clinton democrats have done since 1993, that is not blowing back on us.

      https://jacobin.com/2022/07/free-market-neoliberalism-state-intervention-socialism

      “Neoliberal politicians like Bill Clinton presented globalization as “the economic equivalent of a force of nature, like wind or water” that it would be stupid to try to reverse.”

      “Barack Obama in 2016 framed it in similar terms as “a fact of nature.” Politics was presented as the management of the necessity of globalization, with economic decisions limited to those acceptable to international investors, with some sections of the moderate and soft left broadly accepting these ideological premises.”

      http://www.informationclearinghouse.info/55000.htm

      “April 01, 2020 “Information Clearing House” – Diana Johnstone’s just published book, Circle in the Darkness: Memoir of a World Watcher, is the best book I have ever read, the most revealing, the most accurate, the most truthful, the most moral and humane, the most sincere and heartfelt, and the best written. Her book is far more than a memoir.

      It is a history that has not previously been written. If you want the truth of the last 60 years in place of the contrived reality constructed for us by controlled explanations, it is in this book.

      This book is so extraordinary in its truthfulness and conciseness that it is difficult for a less gifted writer to do it justice. It is a book without a superfluous sentence.

      Herein I will provide some of the books message. In future columns I hope to present some of the history in the book.

      In the Western World the legitimate national interest of people has become identified with racism and fascism. Corporate globalism requires open borders, and the left has aligned with globalism and has become the most zealous enforcer of open borders, which has come to mean the right of refugees with victim status to other peoples’ countries. The left has abandoned the working class and anti-war activity.

      Today the left is pro-war in order to enforce “human rights” on alleged dictators by bombing their peoples into oblivion, thus producing refugees and tag along opportunistic immigrants that flock to the Western aggressor nations.

      Self-styled moral censors, such as Antifa, denounce hate while violently hating those they denounce. Everything is settled by controlled explanations that cannot be questioned or examined in debate.

      Those who engage in critical free thinking are censored, shouted down, beaten up, fired, and cancelled. The cancel culture permits no debate, only enthusiastic acquiesce to explanations that have been settled in advance.”

      i think Diana Johnstone once described the modern left as nothing more than trampoline jumpers, that was their lifes accomplishments.

      corbyn, sanders, the new guy in chile, true dough, etc., are not whats needed today. they are enablers that further degrade the left.

      Reply
  10. The Rev Kev

    I really find the obstinacy of European leaders hard to understand. At least most of the present crop. It may not be a profound observation but what if politicians see all this in terms of their political careers which is why they refuse to back down. They are more worried about keeping their power and position and wealth rather than the damage being done to their own country. And if they knew that they would be always ‘taken care of’ with appointments to a corporate board or a think tank or whatever – so long as they followed the EU narrative – can it be that this set of politicians are shallow enough to think in terms like this? Otherwise I find this unwillingness to negotiate and this constant doubling-down hard to get a handle on.

    Reply
    1. Robert Hahl

      The U.S. decided to prevent NordStream 2 from opening, and that decision was final, apparently, come what may so stop asking. The real mystery is how the U.S. exerts such total control over European politicians. Presumably this involves threats of military coups, and economic sanctions like confiscating their properties and Swiss bank accounts, but maybe even disabling the euro currency.

      Any bets on when Airbus goes down leaving Boeing the only western supplier of passenger jets?

      Reply
      1. tegnost

        when Airbus goes down

        Merger genius! Boeing takes over Airbus to save Airbus (hahahaha), sort of a macdonnel douglas lockheed thing where you keep the worst people from each company and backstop it all with a complicated gov’t guaranteed scheme, ensuring massive profits and no risk!
        The goon squad is no doubt salivating at the possibles… wish I had a line on the pelosi trades….
        I notice taiwan got 2 bills from the Big Guy and the very next day committed to buy 1 bills of boeing crap for the ironically named China Airlines.

        Reply
      2. Glossolalia

        I’m reminded of the alleged Kissinger qute, “To be America’s enemy is dangerous, but to be America’s friend is Fatal”

        Reply
      3. Tom Stone

        Blackmail may well be one of the reasons for EU compliance with the blob.
        Five eyes hoover up everything and they “Can get you six ways from Sunday” if you become awkward.
        It’s just helping someone make the right decisions after all…

        Reply
        1. Norm de plume

          Yes, when bribery fails, threats will appear. In the unlikely event a target is snowy white enough to present an obstacle, sins will be created out of thin air, or the obstacle will be removed. Carrots and sticks. ‘All options are on the table’.

          I think many people underestimate the gravity, the existential nature of the Russo-Chinese led threat to US dominance. If it is so obvious to some of us, it would be crystal clear to TPTB. For the cadre employed to ‘lead’ us, literally any approach that promises even a chance of reversal will be pursued ‘with extreme prejudice’.

          I have made the point here before that while secret dossiers on key players have always existed, it is only in the last generation that these have enjoyed ‘full spectrum dominance’ of ‘total information awareness’ of everyone all the time, since at least the millennium. There is nowhere to hide skeletons, and as I indicated earlier, skeletons can in any case be invented and plausibly constructed to order. Even if such skulduggery is revealed, it would nowadays not be reported, but if that proved unavoidable, the ‘misinformation’ option can always be utilised.

          This is not to say I disagree with analyses which emphasise cluelessness and panic as drivers, or indeed the inbuilt scleroticism of politico-bureaucratic responses; these are if not sufficient then at least necessary components. But this is not either/or territory, and the presence and availability of everyone who’s anyone’s dirt is a factor that I feel must be included in any serious weighing of causes.

          Only 4 questions are needed. Can they? Do they need to? Is the payoff worth it? Would they do it?

          Reply
    2. chris

      Do we have any barometers of public sentiment in the various EU member countries that are reliable? What is the chance that one or more countries would experience a coup if the high energy prices were enacted and the current leadership didn’t budge?

      Reply
    3. playon

      Perhaps the objective is to convince Europeans to hate Russia? We’ll see how that works out… I’d guess that more likely what will happen is that there will be political fallout and a lot of heads of state will lose their jobs.

      Reply
  11. DR.FRANK

    I don’t see anyone talking about a face-saving off ramp for the US in a negotiated settlement of the war in Ukraine, and whatever the outcome of the sanctions regime, I don’t see Russia ever again supplying cheap gas to Europe. Abundant supplies maybe but not cheap, having shown the Europeans their dependency. In some ways, it seems to me to be a personal contest between Putin and Biden, although I don’t see much said about Biden’s decisive role in defining the US position before the invasion as well as after. (Recall that Obama put Biden in charge of Ukraine, I guess because he was supposed to have a lot of foreign policy experience.) Biden is one and done if he loses to Putin, especially with Trump in the wings.

    Reply
    1. Yves Smith Post author

      There’s a tendency in the West to overpersonalize. Putin is the least hawkish of the senior officials in his government. And Putin has said he does not see US presidents as that much in charge of foreign policy, he’s found over years of dealing with them that they are hostage to bureaucratic forces.

      As Stephen in particularly has pointed out, the EU has been the customer from hell since the war started (remember saying they were done with Russia, as in intended to break contracts, but oh on their timetable, and then stole Gazprom assets?). Russia tends to be patient plus here in particular they are playing to the China, India, Turkey, and the Global South (“We really cut these people a lot of slack, but at a certain point…”).

      I agree that Biden likely does see this as personal. Seems to be a general predisposition of his.

      Reply
  12. Dave in Austin

    The Russian decision to shut down Nordstream but keep gas flowing though the Ukraine will raise prices in Germany and now Sweden https://www.aljazeera.com/news/2022/9/3/sweden-to-provide-guarantees-worth-billions-to-energy-companies. Looking at the pipeline map, in Hungary and Ukraine gas will keep flowing and probably (check me on this) gas prices will be lower. Keeping the Ukrainians warm and the Germans cold is an interesting strategy.

    Urban people will be hit worse than rural and small town ones, who still often have an old wood or coal stove to heat one room (see the pictures from villages in Ukraine).

    Are the German “Gas reserves for the winter almost filled” claims verifiable? Given the supply cutbacks over the past eight months they seem suspicious.

    About the chart: Why are the start-up costs for coal so high? Also, offshore wind looks like the big middle-term winner. Finally, with 18 GW in the low-cost category, shifting the average demand down 20-30% from 35 GW will have a big impact on total cost if the “Short-run operating costs at mid-2022” stay steady. So a “Shut industry for three months, keep the homes warm and take a winter vacation” (the Covid strategy) begins to make sense.

    The check is in the mail.

    Reply
        1. digi_owl

          That “nation” has been a political sore point ever since the USSR imploded.

          But because it is a bread basket like nothing else, never mind having a fair bit of untapped resources, Europe looked the other way on the hopes of tapping some of it.

          Reply
  13. european

    This is a very interesting text about Messianic liberalism and its inability to understand what conflicts are actually about:

    https://aurelien2022.substack.com/p/the-market-for-sermons-isnt-what

    Excerpt:

    The West therefore sees conflict originating in personalities: not surprising since Liberalism is, after all, about individuals and their struggles, not historic forces. In the end, conflicts are not “about” anything, really, except misunderstandings and individual human wickedness. Conflicts can be avoided, or ended, if certain people can only somehow be replaced, and men and women of goodwill brought together.

    (By the way, i can’t post via Firefox anymore and had to use Microsoft Edge to make this post. Anyone else having this problem?)

    Reply
    1. Kirkus

      Also from that link – “… As a number of African decision-makers have wearily remarked: “When the Chinese come we get an airport, when the West comes we get a sermon.” Perhaps the age of sermons is over, as western power and influence declines.”

      Reply
    2. KD

      Anyone who disagrees with me is mentally ill and evil. It would be senseless to understand their perspective because they are mad and bad. It is necessary to dispose of them, because they are mad and bad and oppressing everyone else. If they won’t go of their own accord, it is necessary to remove them by force. In fact, it is not only necessary, but our highest moral duty to protect the world by disposing of the mad/bad guys and imposing democracy and human rights with force.

      Reply
    3. Rui

      Try using a different e-mail address. You might have been included on the automatic spam list, at least that worked for me.

      Reply
    1. Ignacio

      So, if there ever a “Espadiós” (Spainbye) happens falling into someone like the Blond Clown followed with someone like Truss, i’d rather stay in hell. Certainly.

      Reply
  14. digi_owl

    Russia, the uncouth uncle of Europe.

    Nice to call upon when something heavy needs to be moved, but best left to himself during family gatherings.

    Reply
  15. drumlin woodchuckles

    What if the EUropean leaders are all secret expiationists? What if they have decided to expiate the sins of their ancestors in Asia, Africa, North and South America, Australia and the Islands of the Seas by destroying EUrope itself as thoroughly today as they destroyed the other places in the past? What if they are trying to pay for their own historical sins?

    Reply
  16. elviejito

    I worry about a nuclear war. Just one quick push of the button to set everything right. Some highly placed military people have been nattering about “how we need to learn how to accept a first strike and then retaliate.” And I keep thinking about the nobleman in Columbus’s retinue who, when told he would have to do manual labor like everyone else, suicided rather than lose his status. If the leadership is as whacked as everyone in this discussion seems to think, I would not put it past them. And there is no anti-war, let alone anti-nuclear war, movement in the West.

    Reply
  17. padflingwithoutboats

    I live in Canada, don’t let anyone tell you it’s a nicer culture, just beneath the surface, vice premier and many other politicos are direct or second gen Ukrainian. Lotta rich Ukrainians on Vancouver Island. Lot coming in.

    I’m frequently surprised how many of my colleagues and the docs at the hospital are Ukrainian.

    But, today, went to the PO, they had a markee size tv flashing adverts for buy buy buy. Nestled in was a “Support Ukraine” pitty flower stanps!

    Still it’s not as surreal as my time in the US, but they are pushing the real estate to infinity and beyond! Oye!

    Mass insanity, and I’ve see somewhere that while the US is subsidizing the Ukraine gov and army payroll (equivalent to anyway) we in Canada are following (wallowing) right along to the same tune.

    NC is a bastion of normal thinking, acute intellectual and analytical cogitation. What a relief. Wish we were all in the same neghbourhood.

    Reply

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