The Inevitable Financial Crisis

Like a traveler sailing the Archipelago who sees the luminous mists lift toward evening, and little by little makes out the shore, I begin to discern the profile of my death.

– Marguerite Yourcenar, Memoirs of Hadrian

For months, I have been confident that Europe would suffer a financial crisis and a depression, as in a real economy catastrophe accompanied by a market crash. It might not be as severe and lasting as 1929, but the breadth would mean there would not be 1987 quick bounceback nor a 2008 derivatives crisis concentrated at the heart of the banking system. Even though that looked like financial near-death experience, the same factors that made it more acute in many respects also made it easier for the officialdom to identify and shore up the key institutions that took hits below the water line.

The short version of what follows is things are looking even worse now, and on multiple fronts. And unlike 2007-2008, where the officialdom actually was monitoring the US (and other markets) housing bubble and derivatives implosion and engaging in (not adequate) responses, here top financial and monetary authorities are missing in action as far as these obvious risks are concerned.

I never thought I’d want Bernanke, Paulson, and Geithner back. I was very critical of them at the time, but they look like paragon of competence compared to the likes of Janet Yellen, Kwasi Kwarteng, and Ursula von der Leyen.

Below we’ll discuss the rapidly accelerating real economy crisis, which is exacerbated by central bank tightening as pretty much the only line of defense against inflation that is almost entirely the result of a a multi-fronted supply shock.1 Needless to say, the Fed raising interest rates (which Bernanke recognized as necessary in 2014 to tame bubbly asset prices but then lost his nerve) does nothing to get more chips from China or magically cure Covid-afflicted staffers so they can show up at work. But it will whack all sorts of speculators and financial firms who have wrong-footed their interest rate positions.

And it also seemed apparent that the US would be pulled into the maelstrom, perhaps not as far, but contagion, supply chain dependencies, and the importance of Europe as a customer would assure the US would suffer too.

That view was based simply on the level of damage Europe seemed determined to suffer via the effect of sanctions blowback on supplies of Russian gas. There are additional de facto and self restrictions on Russian commodities via sanctions on Russian banks and warniness about dealing with Russian ships and counterparties. For instance, Russian fertilizer is not sanctioned; indeed, the US made a point of clearing its throat a couple of months back to say so. Yet that does not solve the problem African (and likely other) buyers suffer They had accounts with now-sanctioned Russian banks and have been unable to come up with good replacement arrangements.

Another major stressor is the dollar’s moon shot. It increased the cost of oil in local currency terms, making inflation even worse. It also will produce pressure, and potentially defaults, in any foreign dollar debtor because he local currency cost of interest payments will rise. Given the generally high state of nervousness in financial markets, anyone who had been expected to roll maturing debt will be in a world of hurt (Satyajit Das in a recent post pointed out that investors typically don’t expect emerging market borrowers to repay).

The reason those emerging borrowers matter is that they provide 49% of global GDP. And their lenders are nearly all first world. Volcker had to back off his early 1980s interest rate hikes because they triggered a Latin American debt crisis, in particular endangering the then Citibank. Now not only do you have even greater potential for damage to important lenders, but contractions in developing economies will also put a much bigger brake on global growth.

Yet another big concern is hidden leverage, particularly from derivatives. A sudden rise in short term interest rates and increased volatility can blow up derivative counterparties. It’s already happening with European utility companies, many of whom are so badly impaired as to need bailouts.

And the failure of regulators to get tough with banks in the post-crisis period is coming home to roost. Nick Corbishley wrote about how Credit Suisse went from being a supposedly savvy risk manage to more wobbly than Deutsche Bank due to getting itself overly-enmeshed in the Archegos “family office” meltdown and then the Greensill “supply chain finance” scam. Archegos demonstrated a lack of regulatory interest in “total return swaps” which in simple terms allow speculators to create highly leveraged equity exposures. Highly leveraged equity exposures was what gave the world the 1929 crash. The very existence of this product shows the degree to which the officialdom has unlearned big and costly lessons.

Oh, and Credit Suisse is looking green around the gills. From a fresh Bloomberg story:

The cost of insuring the firm’s bonds against default climbed about 15% last week to levels not seen since 2009 as the shares touched a new record low. On Friday, Chief Executive Officer Ulrich Koerner reassured staff that the bank has a “strong capital base and liquidity position” and told employees that he will be sending them a regular update until the firm announces a new strategic plan on Oct. 27.

Via arbitrage, CDS spreads influence interest rates on borrowings. So Credit Suisse looks to be close to, if not already in, a funding crisis. Its depressed stock price means it can’t raise equity at a reasonable price to improve its capital position, which would soothe Mr. Market’s rattled nerves.

If the prospect of Credit Suisse going pear shaped in combination with the underlying level of European tsuris doesn’t persuade you that the financial system may soon hit a air pocket, Nick Corbishley last Friday wrote up an unprecedented warning by the European Systemic Risk Board. Key points from his post:

The European Systemic Risk Board (ESRB), an advisory body set up in the wake of the Global Financial Crisis to monitor the macro-prudential risks bubbling below the surface of Europe’s economy, issued a “general warning” yesterday (Sept. 29) about the financial system…. it speaks with the full authority of the EU’s two most powerful institutions, the Commission and the ECB.

Another reason this is important is that central banks are normally the last to admit that a crisis is around the corner. In fact, when they finally sound the alarm, it means the damage is already done and the crisis — which they invariably helped create — is already here….

The ESRB identifies three main risks to financial stability:

First, the deterioration in the macroeconomic outlook combined with the tightening of financing conditions implies a renewed rise in balance sheet stress for non-financial corporations (NFCs) and households, especially in sectors and Member States that are most affected by rapidly increasing energy prices. These developments weigh on the debt-servicing capacity of NFCs and households…

Risks to financial stability stemming from a sharp fall in asset prices remain severe. This has the potential to trigger large mark-to-market losses, which, in turn, may amplify market volatility and cause liquidity strains. In addition, the increase in the level and volatility of energy and commodity prices has generated large margin calls for participants in these markets. This has created liquidity strains for some participants…

The deterioration in macroeconomic prospects weighs on asset quality and the profitability outlook of credit institutions. While the European banking sector as a whole is well capitalised, a pronounced deterioration in the macroeconomic outlook would imply a renewed increase in credit risk at a time when some credit institutions are still in the process of working out COVID-19 pandemic-related asset quality problems. The resilience of credit institutions is also affected by structural factors, including overcapacity, competition from new providers of financial services as well as exposure to cyber and climate risks.

Nick points out that “on the whole is well capitalized” is not as comforting as it seems given walking wounded like Credit Suisse and Deutshe, who could easily knock down other dominoes if they fell. And more generally, Steve Waldman described years back how bank equity can’t be measured:

Sure, “hard” capital and solvency constraints for big banks are better than mealy-mouthed technocratic flexibility. But absent much deeper reforms, totemic leverage restrictions will not meaningfully constrain bank behavior. Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

To keep the post to a manageable length, we’ll skip over the shaky state of some important sovereign borrowers, notably Italy. The press has been reporting actively on the sterling crisis, where a barmy mini-budget by Liz Truss and Kwarteng amounts to a disastrously-timed gimmie to the wealthy through massive tax cuts that were somehow supposed to generate groaf. As Patrick Lawrence put it:

And what you heard across the Atlantic last week was Liz Truss crashing into reality. There was the Bank of England, raising interest rates at a precipitous clip to tighten money and stave off inflation, when suddenly, on Wednesday, it announced plans to inject ₤65 billion of emergency liquidity back into the system to save Britain from its prime minister. It is what Brits call, a little rudely, a balls-up.

Mind you, EU countries are embarking on similarly misguided policies by subsidizing energy prices on a broad basis. First, this approach will make the underlying shortages worse by subsidizing consumption. Second, this is too costly a policy to be sustained for the long term. Remember this crisis has started before the weather has gotten all that cold and will not end with the arrival of the spring.

That brings us to the deteriorating state of the real economy. It has been remarkable to see how little economic commentary there has been on the impact of the Nord Stream pipeline attacks on Europe. As Doomberg noted:

While few events can compare to 9/11, what transpired on September 26, 2022, will have enormous implications – both economic and humanitarian – and adds an accelerant to a fire that was already dangerously hot.

The only way for Europe out of its winter energy crisis was to open Nord Stream 2. That is now a non-starter. And the loss of Nord Stream 1 will increase the degree of shortfall. Germany is now planning to put off the closure of some of its last operating nuclear plants, but that will help only at the margin.

German business suspensions, which will in many cases will turn into closures, are proceeding at a more rapid pace than even your gloomy blogger had anticipated. Yet the press coverage has been muted, as if there isn’t a multiplier effect of sorts as energy-intensive industrial turn their dials down or off. The loss of ammonia production in particular mean less fertilizer, which means less food in the near future.

Europe’s other industrial power, Italy, may also be facing energy shortages. Gazprom suspended deliveries to Italy due to regulatory changes in Austria which Gazprom claim means it can’t trans-ship gas to Italy. Whether this is a problem that can be hashed out quickly, or if it is Turbines 2.0 is not yet clear. Reuters says Italy’s Eni expects the problem to continue on Monday.

And the US will share the pain to a degree. From OilPrice:

As Europe scrambles to secure LNG supplies, American companies are racing to lend a hand.

With more American LNG flowing to Europe, the United States may be facing increased electricity bills this winter.

OPEC is also expected to announce a production cut this week to boost oil prices.

And we haven’t even factored in Russia deciding (aside from the open question of whether the supply suspension to Italy continues) to turn up the pain dial, say by reducing shipments of uranium or refusing to sell oil to countries that impose a price cap (the G7 idea is still officially on despite looking like a damp squib).

On another supply front, as Lambert has been pointing out, Covid cases are now at a high level, when fall has barely begun. I was on vacation (and am not yet fully back) in Maine and saw virtually no masks despite Maine having far and away the highest test positivity in the US. There was plenty of evidence of businesses struggling to cope with Covid-induced labor shortages (and many locals describing that as the cause). So we must rely on the Fed to kill the economy stone cold dead to reduce demand for labor to its current supply.

This recap isn’t complete, but it does give an idea of how many ways things are going disastrously wrong and how the officialdom is either not doing enough, acting as if PR and can-kicking will make problems go away, or making matters worse. And these difficulties are so severe and inter-related I don’t see any way out.

So the only question is when that reality is more fully reflected in asset prices. If I were you, I’d assume the brace position.


1 For those who want to blame “money printing,” monetary experiments under Reagan and Thatcher demonstrated that money supply growth and levels failed to correlate with any macroeconomic variable, including inflation. If “money printing” did produce inflation, Japan would have collapsed under hyperinflation long ago.

And separately, QE is not “money printing.” It is an asset swap. And the effect of QE, as Bernanke pointed out when he first deployed it, is to lower interest rates further out on the yield curve (and in the Bernanke 1.0, to lower mortgage spreads…..which would help resuscitate housing prices). That does have a real economy spending impact, via the so-called wealth effect. But despite the Fed handwaving about that, the real aim was to reduce the damage to the big banks that had large second mortgage exposures, above all Citigroup. In the EU, a major use has been to contain government bond yields of weaker Eurozone countries.

The problem is that the power of central banks is asymmetrical. Sufficiently high and/or rapid increases in interest rates will chill economic activity. But loose monetary policy it tantamount to putting money on sale. Most businesses do not expand because funding is cheap. They expand because they see opportunity. The cost of money can constrain business growth. Easy money mainly favors enterprises where interest payments are one of their biggest expenses: leveraged speculators, real estate, and financial institutions.

By contrast, net fiscal spending (as in budget deficits) beyond what is necessary to create full employment will cause inflation. It creates demand in excess of the ability to satisfy it. The reason that budget deficits actually are generally necessary is that capitalists do not like full employment; it gives labor too much bargaining power and also reduces the status gap between businessmen and their hired hands (see this seminal article by Mikhal Kalecki for more detail).

This propensity of corporations to under-invest (increasing the need for government spending to make up the shortfall) become even more pronounced. Practice and policy since the 1980s in the Angloaphere, and then increasingly the rest of the world, gave even more primacy to the interests of capital over labor. In the US, a critical change was Corporate America’s response to LBO artists and the top executives they hired becoming wildly wealthy. That led to the mantra that CEOs needed to be paid like entrepreneurs, even though they are not taking entrepreneurial risk.

Since it is easier and faster to generate profit by cost-cutting rather than investing in new activities, companies became increasingly hollowed out. We wrote in 2005 about how the corporate sector as a whole was net saving, as in slowly liquidating.

When corporations are net saving, another sector has to become a net borrower (ignoring the import-export sector, which with the US running chronic trade deficits, does not change this story). In the runup to the 2008 crisis, it was households that took up the slack. The household sector is normally a net saver (for retirement and emergencies) but in the US in the 2000s before the crisis, the saving level plunged and even in some periods became net borrowing (all those subprime cash-out refis, for instance).

Admittedly, governments polluted by neoliberal ideology have a tendency not to make the best use of deficit spending when they engage in it. Ideally, those expenditures should promote the productive capacity of the economy. Robust social safety nets do so because governments that are fiat currency issuers can provide them more cheaply and without the distortions of a bloated secondary securities trading market/asset management business (studies have found these activities, beyond a not very large level, create a drag on growth). The end result, as Germany demonstrated in its better days, is more competitive labor costs despite First World living standards.

But neoliberals are allergic to industrial policy and engage in it only by default (and to favor cronies). In the US, favored sectors include health care, the military/surveillance complex, finance, real estate, and higher education.

Print Friendly, PDF & Email


  1. Redlife2017

    I can add to the Ruffer link that showed up in the last few days. Chairman Ruffer has just put out his Q3 review and he has quite a lot about the current Minksy moment:

    Q3 Investment Review

    1. Harry

      I really like their reviews. Happened to come across them over the weekend. I did listen to that one I think.

  2. José Freitas

    The “seminal article by Mikhal Kalecki” (in the end note) has no link to it.

    Very good article. It seems every authority is sleeping at the helm.

  3. Wukchumni

    I’ve been an avid voyeur of goings on since my Cassandra salad days some 15 years ago, when at one point a few weeks before Lehman my mom asked if I was ok upstairs. Everybody else merely shrugged off my concerns, but most asked afterwards-how’d I know?

    It feels like a powderkeg with a lit fuse, and if one of the pillars of finance has a downfall…everything in bubbleville is awfully wobbly now, combined with entanglement in mutual financial alliances, doesn’t the whole facade of first world countries calling the shots fall to the wayside as a result?

    Ok, lets say that happens, and what replaces it in the west with the Russo-Sino-Indian et al troika emerging the victor by default, not all that different from how the deal went down after the fall of Communism?

    I feel privileged to be able to witness a historic turning point again, but i’m terrified of the outcome, for in Bizarro World collapse rules, when the iron curtain had its curtain call, it was largely peaceful (Countries starting with R, not so much) and their populace had something to look forward to, whereas there will be much longing for the past for our entitled masses.

    1. John Steinbach

      There’s much discussion about the renewed threat of nuclear caused by the US/Russia proxy war in Ukraine. Virtually none of these analyses take in to account how the ongoing/impending financial crisis coupled with the environmental and resource depletion crisis and exasperated by your “historical turning point” from a unipolar to a multipolar world interact synergistically to make the nuclear war risks much higher than generally perceived.

      1. Cristobal

        Thank you Yves and all the other commentators for this education. Though familiar with general economic concepts, this dive into the innards of the financial system is very helpful. A recession/deptession in Europe is no doubt in the cards for this winter. So far the discussion has been focused on the financial system and individual countries. What about the EU as a whole? I live in Andalucia, an agricultural region that depends greatly on EU funding for infrastructure projects, and particularly for agricultural supports. As I undrstand it, Germany is the major contributor to this type of funding. As Germany´s economy goes boom, its contributions to the EU will of course stop or be greatly reduced. I have read that food prices will be afffected by lack of fertilizer, transport costs, drought, etc – cost increases or reductions in physical supply – but how about the subsidies. These subsidies, the CAP, are a very big deal in Andalucia. Thinking about how production will be affected in terms of Kalecki´s theories makes my head hurt. When the EU gravy train dries up there is likely to be big trouble in all of the member states.

    2. indices

      Is “…much longing for the past for our entitled masses” one of the cards in Trump’s deck?

      1. Wukchumni

        If the Car Go Cult can’t find any gas, they’ll build faux Amazon warehouses with tilt-ups made out of lashed together old mattresses & shrouded in Tyvek.

        1. Jeremy Grimm

          I will have to study such architectures. I know you proposed them in jest, but it does not hurt to look at all the possibilities. The future will be built from the WISE use of the assets left to the survivors from their past — like old mattresses and Tyvek. I do find tilt-up architectures most intriguing.

          1. Wukchumni

            A 7 foot long by 3 feet wide sheet of Tyvek makes for a fine ultra light ground sheet to place your mattress on when in the back of beyond camping cowboy style under the stars.

            The thing about salvageable America is, we’ve sold off as much scrap metal as possible to China since the turn of the century, that cupboard is bare.

  4. j

    Am I correct that shipping LNG to Europe at premium prices thus boosting the profits of US corporations will create enough supply pressure in the US to result in an increase in prices here thus further increasing profits of those same corporations? Put another way, prices will increase because they can be increased and there is nothing that can be done about it short of government action, force majeure, which given the nature of the US government is as unlikely as the discovery of a unicorn beguiled by a virgin.

    1. ambrit

      Given the levels of incompetence on display in the governing circles of the West today, you have a better chance of encountering said Unicorn. (One major impediment to such would be the difficulty of finding a virgin in the District of Columbia.)

    2. nippersdad

      No expert here, but the limitation to that happening is the lack of liquification facilities here, lack of transport ships and lack of regasification plant over there. I think they may also need an alternative pipeline structure as well. IOW, we are only being saved (to a degree) by the lack of infrastructure; something that could change, but by that time alternatives may have been found.

    3. Boomheist

      A bit of perspective, here. In the 1970s during the oil crisis (remember that?) and the first real push to alternative sources of energy, natural gas was considered “clean” as compared to coal and oil and even nuclear, and what happened, was, the US electricity grid went from, like, 70 percent coal burning and 20 percent nuclear and 10 percent everything else (hydro, oil, gas, solar) to, today, 40 percent gas-fired plants. A lot of the coal plants are shut down, and now we rely on gas for nearly half our electricity. Until very recently as said before gas was considered one of the “good” sources of energy. Now with the removal of immediate supplies from Russia to Europe, there will be a stampede of investment and construction to set up a huge LNG infrastructure from the US to Europe, and this LNG will OF COURSE compete with our own needs. So, while Europe is facing a long dark winter no matter what, the US citizen is not far behind.
      The U.S. Energy Adminstration reports that the source of much of this gas in the US is fracking – that is, the injection of water into old wells to force out remaining gas. These systems, it seems, don’t produce for that long at a high rate, and so, in order to maintain supply, you have to keep fracking new sites, drilling more wells, so as to keep up the volume of supplies. Fracking provides two thirds – 67 percent – of US natural gas. So, while the higher prices due to European demand will generate money and therefore more drilling, the entire basis of this supply is seemingly built on a kind of pyramid scheme of injecting fluids into old wells.
      This suggests, to me anyway, that it will not be at all surprising to discover say by next spring, maybe sooner, that in addition to having to pay three times what we are paying right now for gas we will start seeing supply problems, serious ones. I am old enough to remember, during that oil crisis in the 1970s, that natural gas supplies were thin, and fear they may become thin again if the fracking craze stalls….
      I am sure other NC readers can correct wrong assumptions or details in this comment, but generally I think that in addition to a huge price shock we may be about to face, also, a supply shock, and nobody is speaking of that.

      1. sharonsj

        You are correct. Right now more than half my income is derived from fracking. The first well is about 10 years old and it’s production is declining. A second well was drilled about three years ago and the output is much higher than the first well. I just got notice that they are planning a third well. None of them are on my property; they just drill underneath my land. A geologist friend told me there was enough gas in this field to last for 40 years. While that’s happening, the prices of all fuels are going up while my state (Pennsylvania) is squabbling over building transportation hubs for gas and to provide local supplies and hookups. So while I get paid for them to frack LNG, I can’t use any of it.

        1. jhallc

          Sharonsj – If you have a private water well, I highly recommend, if not already doing it, that you test regularly for a full suite of organic chemicals associated with fracking fluids.

      2. Cristobal

        Several weeks ago Yves (or something she posted) noted that the infrastructure required for this massive production and export of LNG will cost a lot of money. Those who finance this expenditure will want to be fairly certain that the investment will provide beneffits for a long time. The blowing up of the pipelines from Russia would seem to improve the long term outlook a bit, but the fact remins that US LNG is horrendously expensive and people will be turning over every rock trying to find a better way. In addition, the life of fracked wells is limited. I have no idea whether the financial markets will bet on LNG, but it seems to me that Uncle Sugar has outsmarted himself with his little James Bond caper (He Who Must Not Be Named) in the Baltic.

        1. vao

          the infrastructure required for this massive production and export of LNG will cost a lot of money.

          Not just for the production and export — the infrastructure needed for importing the LNG (i.e. harbours for LNG carriers and regaseification plants) cost a lot too.

          Which might explain the approach followed by Germany (so far): floating storage and regaseification units (FSRU), i.e. ships that do the regaseification from LNG tankers docking next to them. The advantages are twofold:

          1) If the geographical conditions are right, and if one cuts a sufficient number of corners regarding approval procedures, these FSRU can be set up much quicker than an on-land, fixed LNG plant (as early as 1 year or up to 3 years instead of a minimum of 4, usually 5 years).

          2) If the economic or supply conditions change, it is possible to wind them down quite rapidly — just stop leasing the FSRU and send it back to its shipowning company. What remains is a dock and a pipeline — much cheaper than building an expensive LNG plant that can become a stranded asset.

          The problems are that there are not that many such FSRU around; there are not that many sites which can be taken advantage of rapidly (without dredging or laying out very long pipelines) — at least in Europe; and suppliers of LNG prefer long-term contracts.

          1. Cristobal

            Interesting. I wonder what the payback period for this type of project would be (assuming somé kind of cererus paribus!).

            1. vao

              I suspect only utility companies and some specialized engineering firms could crunch out the figures. My understanding is that:

              a) FSRU are very expensive to lease — something like $130000-$150000/day, possibly even more (I think I saw once a figure of $200000/day). The FSRU are ships, and are typically usable for 20-25 years. In other words, FSRU are good as a complement to other delivery channels, as a temporary fix, or when alternatives are unfeasible.

              b) In the long term, a fixed storage and regaseification plant built on land proves cheaper and is more durable (but the initial investment is much higher). However, supplying gas via LNG is still very expensive (liquefaction, transport, regaseification operations consume substantial energy, and the infrastructure is complex).

              c) But if we assume there is indeed a long-term commitment with gas suppliers, then delivering gas via pipelines is the cheapest, most energy efficient method. Of course, there are situations where this is impossible and LNG is the only way — for example in the case of Japan.

              In other words, Germany has chosen the most expensive way to acquire the most expensive form of gas. It is all right if the objective is to address a shortage really fast, and if this is only a temporary solution. In the medium to long term, the total costs make LNG gas delivery via FSRU so expensive as to render German industry totally uncompetitive. The destruction of the Nordstream pipelines is truly a deadly blow to the German economy.

          2. Dave in Austin

            The big number 3 on Vao’s list should be safety.

            If something goes wrong on an LNG tanker or an FSRU, there can be a huge explosion. In 1944 three 65 foot diameter tanks blew up in Cleveland, OH and produced a blast equal to 1/6 of Hiroshima ( wiki/Cleveland_East_Ohio_Gas_explosion). So one LNG Tankers with five or six larger spheres full of gas is potentiall 50%-150% of Hiroshima. That’s why the LNG facilities are well away from towns and the ships in Louisiana are loaded offshore.

            When I was young I worked on WWII-era tankers filled with gasoline running from Lake Charles, Louisiana to New Jersey and New England. They contained 1/50th the energy of an LNG tanker. They were loaded and unloaded a mile from the nearest house.

    4. Velma

      You must not have received a Pacific Gas and Electric bill lately.
      Newsom’s main donor routinely pads their bills, in brown recycled envelopes–help save the Earth!, with a semi monthly application to the Public Utilities Commission hearing notice to raise prices.

      The California Dream has been replaced with the California Scheme to suck the life out of all of us.

      Store closed in the middle of business day. Husband says, “I guess they can’t find anyone who wants to work?”

      “Not for the amount of currency offered after the president and his puppet masters ruined the money by handing out trillions of dollars to insiders…” Funny how everything suddenly can become clear in an offhand comment.

    5. Gordon

      It has been suggested that the modest explosion at Freeport’s LNG export facility on the Gulf coast some months ago would have been fixed long ago were it not that surging exports to Europe were driving up US domestic prices in a way deemed highly undesirable by TPTB ahead of the midterms.

      Only a cynic like myself would expect to see the damage fixed soon after the midterm elections.

    6. Karl

      LNG is no solution for the gas shortage in Europe. LNG is not cheap. Europe’s export-driven economy requires cheap gas to remain competitive. This is the real problem with the sabotage of Nordstream 1&2 — it sabotaged Europe’s economic future.

    7. fresno dan

      I sure don’t think shipping LNG to Europe is gonna lower my electricity bills…
      PG&E is California’s largest natural gas and electricity provider, and it’s no stranger to raising its prices.

      Because PG&E’s electricity prices reflect the cost of natural gas, which has increased dramatically over the past few years, the utility giant has continued to raise its prices to keep up with the supply cost.

    8. Mike

      Yes add to that there are a shortfall of active rigs in the United States right now. Frack’d wells lose 40% of their output in the first year so they need to constantly drill. Basically drilling stopped during covid plus there has been effectively a ban on drilling in federal lands. There is massive under investment in the space right now to keep up with just domestic demand, mostly because of diminishing returns from fracking in most plays right now (need more wells to get same output). Our only saving grace we know of (some protentional for more discoveries) is for them to give more options for exploration for offshore wells. We know there is probably much more off the Atlantic coast that generally speaking has never been open. However those take ~5 years to get going and have massive investment costs. End of the day the majors are very good at manipulating pricing domestically regardless.

      Now add in on the oil side of things that we are going to shut off the SPR releases here in a few months…

    9. Jeremy Grimm

      I did not read all the comments in this thread … I apologize.
      If there is a greater demand for gas in the EU and the u.s. is able to supply gas to the EU for price=>profit advantage, do you suppose the price=>profit advantage for selling gas in the u.s. will go up? I do. Do you believe the u.s. government will act to control and minimize the increases in the prices for gas and electricity? I doubt that will happen yet, or for the near future. Do not forget for whom the u.s. government governs. Until the life interests of our Power Elites are driven contrary to their profit interests,the interests of the strongest Power Elites will prevail.

  5. Lex

    Thank you, Yves. The big picture financial side of geopolitics is one that I understand only in the broadest terms. Posts like this help me a great deal to understand the world.

  6. Colonel Smithers

    Thank you, Yves.

    You are right to highlight, amongst other things, the decline in calibre of personnel, which cascades to government official level and is also the outcome of incentives*, and inappropriate institutional frameworks**.

    Readers may be interested in, analysis by Con Keating, who I used to work with on the buy / investment side, and confesses to being “old fashioned Labour”, i.e. not a Blairite, and Ian Clacher. The pair have been warning about the use of repo / leverage in liability driven investments for some time and are critics of the market-based discount rate to estimate the present value of liabilities. Their warnings, especially to the Bank of England, have been ignored, so now long suffering British pension fund investors know who to blame. This is just one example.

    *A situation made worse by the use of hacks (see Iain Dale), think tank BSers (see Divya Chakraborty, Kate Andrews and “low tax” Chloe Westley), business partners (see Dominic Johnson and Jacob Rees-Mogg) and mates (see Carrie Johnson and her “court”) etc. instead of professional civil servants at senior government level.

    **Upon his retirement from the Bank of England in 2013 and in early 2020, former deputy governor Paul Tucker warned about the lack of oversight of investment firms / funds and added how his warnings about the institutional framework storing up trouble were ignored. Tucker warned about the framework, but for banks, in the late 1990s and in 2004 and was threatened with dismissal by Gordon Brown and his gang.

    1. PlutoniumKun

      Thanks Colonel,

      It must be nice to be working for a bank that is no longer considered the very worst TBTH! Its like watching the Grand National, but with a dogfood factory at the finish line.

  7. Northeaster

    “the United States may be facing increased electricity bills this winter.” –

    National Grid here in MA already announced a 61% increase.

  8. DJG, Reality Czar

    Yves Smith: Bracing. Thanks for the post–and the footnote chockfull of important information.

    First: Interpreting the destruction of Nord Stream 1 and 2 as a terrorist attack designed mainly to hurt the German populace–the equivalent of the September 11 attacks on NYC–is a stance that will matter. Doing so clarifies one’s thinking about the sheer immorality of the West’s efforts in Ukraine. What is to be done?

    Second: Other factors are deteriorating, many of which can be defined as soft power. Pope Francis gave an Angelus speech yesterday calling for both Russia and Ukraine to come to the negotiating table. I see no religious figures in the U S of A willing to talk about peace.

    Third: The spectacle of Ursula von der Leyen, Hillary Clinton (who stoked this war), and Liz Truss makes one wonder if the absurd overshoot of the Western reaction is tied to a kind of flailing late feminism that believes only in neoliberalism. We see the spectacle of lots of leaning in to war. Giorgia Meloni now wants to join this august club. One longs for the days of pipe-smoking men who at least had a scruple or two. And I note that Angela Merkel, compared to these four, comes off as a fossil, because of her experience as an East German, as someone who knows Russian and Russians, and as someone who seems to understand power much better.

    Fourth: Culture. I note the repertory theater at the center of Undisclosed City in Undisclosed Region has opened a production of the Crucible by Arthur Miller. This should be the play of the moment. Any productions running in the U S of A? I tend to think not. Not when one can wallow in Hamilton.

    And: Great information in the footnote: “Admittedly, governments polluted by neoliberal ideology have a tendency not to make the best use of deficit spending when they engage in it.” This is the story of Draghi. He came into power with an economic-stimulus plan in place from the Conte-2 government. Draghi then let the stimulus sputter–quite deliberately, although he took credit for Italy’s 2021 remarkable growth rate. Now Meloni wants to dismantle even these half-measures. What could possibly go wrong?

    1. CallMeTeach (retired)

      FWIW, The Crucible is part of the curriculum for a major textbook publisher who I will not name…so it is in the hands of teachers. I taught it nearly every year, and students love it–and more importantly–understand the message. (There are those of us who view teaching as a form of rebellion.)

    2. Jack

      DJG, the University of South Carolina in Columbia is opening an opera production of The Crucible next month, Nov 4-6, 2022. My wife is a theatre costume designer and is helping with the production.

    3. Jeremy Grimm

      What about “Mutter Courage und ihre Kinder” by Brecht? And these are definitely become times for Brecht’s “Die Groschen Oper”.

  9. Brian L

    In her footnote Yves references a Kalecki article which can be found in a couple of places, here and at NEP for those interested.

    That whole footnote should be common knowledge. If only it was.

    1. Senator-Elect

      Thank you. That footnote is, indeed, awesome.
      It implies that some of the current inflation is the result of supply side weakness, partly induced by cost-cutting over decades. Yet we have establishment figures running around screaming about excess demand and the need to crush labour. Not to mention the rate hikes, which may be counter-productive, in the sense that they may impede firms from making the necessary investments to meet the new, higher demand.
      The neoliberal programming from 1979-1982 is some of the most successful–and destructive–brainwashing in human history.

  10. Louis Fyne

    You have an investor class (boomers and professional boomers and young) who have seen LTCM, dot-com 1, GFC, flash crash, Covid.

    every single time, whether they realize it or not, the Fed “solved” everything with negative real rates.

    every single time, “hold on for dear life” (HODL) was the winning move.

    With all the money in passive-long index funds, if/when the herd decides that HODL is the losing strategy, stocks will drop hard–much worse than the steady, but not fear-inducing, decline of this year.

  11. PlutoniumKun

    It’s hard to avoid the conclusion that we are going to have a major crisis over the winter, and it might already be starting. Its not just in Europe – there is a big popping sound of property booms crashing from South Korea to New Zealand. While individually they are not systemically important, these things sometimes get interlinked.

    As Yves has noted, its hard to believe that we have worse leadership than in 2007/8, but thats where we are. I think a key issue in Europe is not the Van Leydens of this world, but the levels below. In the UK there was still a functioning regulatory system a dozen years ago – but its obviously been hollowed out to a shadow of its former self, and I get the impression this may also apply to a lesser extent in the US. In Europe its still fairly robust under the top level – there has been feverish activity in the mid levels at EU and national level in trying to shore up energy and financial issues – its a question as to how they will work (hint: be very worried about your pension levels if you have a private pension in Europe).

    1. Ed Miller

      Not Ursula von der Leyen level?

      I certainly don’t claim to have expertise but I firmly believe that the real problem is who controls currencies. Control of currency is real power, so the levels below have to bend over, so to speak. Europe’s problem is that it has not representative government that matters any more. The nations are vassals of the EU, which is itself a vassal of USA. As Ursula von der Leyen stated regarding Italy – we have tools.

      Even worse: Sanctions are clarifying.

      1. c_heale

        I disagree. The important thing is who controls energy. And now, unlike the last 300 years, the West no longer controls energy.

      1. PlutoniumKun

        My understanding from reading some Izabella Kaminska is that the way the current rescue rules work out in the Eurozone is that private pension funds and private equity are the ones who will be left carrying the can (i.e. liabilities) at the end of a crisis. But I’m no expert on this.

      2. Anthony G Stegman

        You may well be wrong regarding pensioners. In California where I live public pensions are guaranteed . The state supreme court decided years ago that pensions are inviolable. Instead of pensions being at risk a whole host of government provided services as basic as road repairs and maintenance, parks, and libraries will be seriously impacted as funding will be diverted to shore up pensions. Courts can’t force taxes to be raised, but they can inflict pain in other ways.

        1. Randall Flagg

          As they are in many States I believe but yes, because they are guaranteed in many States there will be a huge amount of pain that will be inflicted on someone, somewhere. Think of the discord if the pain is not shared equally as basic Government services are cut to provide the pensions of some Government retirees. Those guarantees do not mean that the effort to cut benefits will not be attempted if things get bad enough.

      3. johnnyme

        The report cited in the article only looks at data through fiscal year 2020. According to the statement I received last year from the Minnesota State Retirement System, the MSRS pension plan was currently fully funded as of then. It’ll be interesting to see what this year’s statement says…

    2. Irrational

      In terms of being robust below the top level: the European Commission mostly recruits generalists and moves them around from department to department. They often have no in-depth understanding of what their are working on e.g finance, terms of guarantees etc. Speak from experience.

    3. chris

      Don’t forget about all the insurance companies going snap, crackle, pop from their Florida exposures after Ian. And we still have a month of storms to weather before the season is considered over. One good earthquake or landslide on top of all this and we’ll have a much bigger problem to deal with in the US.

    4. Ignacio

      I wonder if lower ranks would be able to bring the upper crust to their senses. But the economic crisis might be the least of our problems. We are now primed for direct NATO action in the Ukraine war, even if the population at large is contrary to direct war declaration. Democracy doesn’t matter any more. For instance, we are being told now that nuclear Russian submarines have been detected here and there. This in virtually all media, so we must be fearful and many already are. Primed for war. The only thing NATO needs in any moment is to complement this with a false flag operation, let’s say, in Finland or in any Baltic state, with some large explosion. Then, all the idi…, leaders in charge will push NATO article 5 so war declaration. Given that there is not enough military capacity in the West to fight a conventional war against Russia in Ukraine, what resources are left for the NATO…? Hybrid war they call it. In any case total abandonment of any previous contention.

      What other way to divert attention and anger of the populace against the “leadership” better than a war? Mental barriers against war are being removed one by one and at some point there will be, apparently, only one alternative available. NS1/NS2 sabotages were nothing but an additional step in the elimination of such barriers.

      Pessimism is rising each passing day.

      1. Jeremy Grimm

        Wow! I follow your comments — among those of many others here — but this, among your comments, is one of the most worrying. I sincerely hope you are wrong in the prognostications of your comment.

        1. foghorn longhorn

          Here is Larry Johnsons take yesterday…

          Not so fast Tony. There are not billions of cubic feet of natural gas languishing looking for eager buyers. The LNG exporters sell contract at least one or more years in advance. If you are Chinese or German plant that operates on natural gas, you contract with the U.S. supplier at least one year in advance to buy gas at a set price. Those European companies will receive gas this winter based on contracts signed last year, for example. That is not the problem.

          The U.S. LNG exporters are the biggest in the world and there are six currently operating (the Freeport facility, which experienced an explosion in June, is not expected to be back on line until December). Guess what? Most of the Freeport export of LNG was destined for Germany. There is no magic wand to make that gas available to the Green Gods in Berlin.

          1. foghorn longhorn

            Russia was supplying 80 billion cubic meters a year to Germany.
            U.S. can supply, at most, 8 bcm.
            The shipping doesn’t exist and the terminals don’t exist, at this time.
            This was not thought out at all.

        2. Ignacio

          I truly hope I am totally wrong. Just trying to describe and make sense of what I see which gives me 0 confidence on the ruling classes and their ability to manage the conflict. There are reasons to expect the worst. See for instance the comments by Yves Smith missing people like Bernanke etc. When you see that people in charge aren’t willing to admit, not to mention address, the problems they have helped to create… or trying it by only piling layers of mistakes, finding solutions in the fantasy world.

      2. Felix_47

        From the looks of it it seems Russia does not have the economic capacity to wage war with the US and NATO. We are spending more than the entire Russian military budget and we have a few more months to go to hit a year. Wisely we are using Ukrainians. Were we using GIs after a few house search encounters to include killing of innocents, body searches of Ukrainian women, rapes, stealing and other crimes the populace would be hating the US just like the Iraqis and the Afghans hated many of our GIs. So we are playing to our strengths…..spending money wisely and unwisely……indiscriminately but money wins wars…..look at Russia’s victory over Germany……financed by the US. What is sobering is out of defeat many nations build military monsters…….like Germany after WW1, also financed by the US. Shame seems to trigger nationalistic responses. We may be in for a long long Cold War 2 as the US society gradually collapses as our leaders consistently choose guns over butter assuming we escape nuclear conflict. My sense of foreboding is not confirmed by Google Trends. There were more searches related to nuclear war at the time of January 6 than now by far. This reflects the sophistication and skill of our leadership’s message control.

      3. Basil Pesto

        This is the primary purpose of the (miserably successful) attempt to paint Putin as some kind of Hitlerian megalomaniac, even though it’s ahistorical nonsense: to not merely kill the appetite for peace, but increase the thirst for war. It’s truly frightening.

        1. Ignacio

          I forgot to say that apart from diverting attention from the vdLeyens and the Borrells of the West, at some point war declaration would help implement energy rationing if needed and may be other kinds of forced rationing if things go too far south.

  12. Carolinian

    the US will share the pain

    Where I live the economy now revolves around a giant German auto plant that is joined at the hip with the German economy since the car engines come from Europe and the resulting cars are sent around the world including back to Germany. The plant is so “just in time” that the car seats–delivered from another location–arrive only as needed and tailored to customer preorders. A traffic jam on the highways can threaten to “stop the line.” This computer driven gee whiz setup is not friendly to hiccups.

    We live in a society of tremendous complexity led by someone who can’t find his way across the White House lawn. Here’s suggesting that the true definition of the much talked about fascism is government by sociopaths. Current politicians here and in Europe fit that bill.

    1. KLG

      That BMW plant is very impressive! From the outside.

      And this comment wins the Internet for the day:
      “We live in a society of tremendous complexity led by someone who can’t find his way across the White House lawn.”

      1. Carolinian

        It employs 10,000 people and has been enlarged since opening in the 90s. I’ve never been on the tour myself but my brother had a video* that I watched the other day. It’s just as huge on the inside and the vid didn’t even cover the body welding or the paint shop. It is their only worldwide assembly plant for several models of BMW.

        What you learn in the vid is that they are building customized assembly line vehicles that are not merely “just in time” with their parts but also “just in sequence” as one car may be right hand drive and the next left hand drive. This is extremely high tech but also–one speculates–extremely vulnerable. Hope they have a plan.

        *So don’t have a link but from YouTube. There are probably several tour vids available.

    2. Screwball

      Great point Carolinian.

      I’m retired, but spent 25 years working for large multi-national corporations, so I have this analogy. I spent countless hours in training classes leaning how to process manufacturing. JIT is only part of it. Process mapping, continuous improvement, operational excellence, linear tolerance analysis (predicting problems due to bad parts), W. Edward Deming stuff pounded into my head until it hurt – all about how to make mass produced things the quickest and most efficient way.

      We were in one of these “corporate obedience” training classes and the instructors were doing a Deming thing. A piece of paper with 4 quadrants. If your production data was in Q1 you were good. If you were in Q2, things were not quite right (can’t remember the official name), if you were in Q3 things were not good at all, and some significant changes needed to be made. Q4 was called “state of chaos” where things are pretty much FUBAR.

      They spent most of the time on Q2 & Q3 because that’s where most everyone operates. I finally had to ask “so if we are in Q4, state of chaos, how do we get out?”

      Crickets. They had no answer because you were never suppose to get to Q4. But we do, because something happened, or several somethings, or a multitude of somethings. A black swan maybe. But here we are, and we don’t know how to get out.

      During those 25 years I watched any and everything we could ship to another country be shipped to other countries. Cheap labor, environmental arbitrage, cost this, cost that, and then ship it somewhere else for assembly. A giant spiderweb of processes that must come together at the right time in the right place and fit together each and every time so an under paid contract worker can do something on an assembly line every 13 seconds.

      This all works until it don’t. Then you are >family blogged< You are now in the state of chaos, which is exactly where we are as a nation. And nobody, including the people below the dude who can't find his way across the lawn know we are IN "the state of chaos" and maybe more importantly, how to get out.


        1. Tom Pfotzer

          Best line of the thread.

          I’ve never seen the phenomena expressed so accurately and succinctly.


    Demand for your currency does lower inflation (even if you contend QE doesn’t matter).

    And how do you increase demand of the world reserve currency from largest military power? Fly half of Congress to the South China Sea, provoke a Russian invasion of Ukraine, blow up Nordstream and generally stir up as much geopolitical trouble as possible.

    The worse it gets abroad, the more downward pressure on US inflation numbers.

    Hard for me to interpret recent events any other way.

  14. Aaron

    So the only question is when that reality is more fully reflected in asset prices. If I were you, I’d assume the brace position.

    For those of us with the standard middle class investment package confusing if sticks, what does bracing look like at this time?
    Does anyone have resources on this topic? How to go about thinking about the ramifications for assets?
    I guessed wrong at the start of COVID and lost significant potential gains

    1. Louis Fyne

      for the worst case scenario, look at an after-inflation stock chart from the 1970’s. If your personal finances can’t stomach a repeat of that scenario, de-risk yourself.

      Easier said than done for many but….as little debt as possible (unless it is fixed and low-interest), living below your means, having any stock market investments match your personal circumstances (risk, age, etc).

      relatively speaking real estate (in certain markets, like the Sun Belt minus California) probably will do better.

      Safe bet that the Fed’s response to the next financial crises will be to set rates to 0%. What that does to inflation, bond prices, commodity prices, etc…..your guess is as good as anyone else’s.

  15. RookieEMT

    Jacking up mortgage rates so quickly was cruel but just about the only thing that popped the housing bubble. Otherwise, the bubble would of held on for a few more years. Now we get the ‘fun’ of waiting 2-3 years for the housing bubble to unwind. Perhaps even four years!

    I honestly have some of the signs and symptoms of post traumatic embitterment. If I stroll back in my old city neighborhood, I just feel dread and anger. I see the tear-downs of small homes and replacement with 800,000$+ mcmansions. The current record breaker is 1.45$ million.

    They should of been townhouses or anything other than the current pathetic monuments to vanity. The city government made sure that wouldn’t happen by keeping the single family zoning.

    Even now if prices collapse by half, the neighborhood is permanently less affordable. The once empty lots have an oversized pile of sticks and bricks that needs to be torn down. Call it a vanity tax the developer has to pay.

    I did my therapy, meditation, medication, and even a spiritual awakening of sorts. It only leads to me this conclusion, lose money.

    I shall go after the market bottoms out and build little townhouses under market value. Build the housing the city actually needed the whole time. Watch a middle class family or even a working class family move in. That shall heal.

    A little revenge too, let those housing values of those mini-castles drop a bit more. My little townhouses will be the comps…

  16. Joe Well

    health care, the military/surveillance complex, finance, real estate, and higher education.

    Those are indeed the tapeworms on the economy. We need a new acronym to replace FIRE (finance, insurance real estate). Also, what about “tech” (spawn of finance much like real estate)?

  17. The Rev Kev

    In reading this post, I can see that it is not a matter of bad actors such as corrupt corporations or incompetent leaders in industry and government. These are systematic problems and I am not talking about just banking or government or whatever. I am talking about the whole of society system. Probably the engine of this destruction is neoliberalism itself with its own ‘values’ which has hollowed out government professionals, competent business leadership, enabled oceans of debt of misdirected capital, the impoverishment – both financial & intellectual – of average people….well, you can fill in the blanks yourself. It looks like that we are in for a Great Reset but not the one that the Davos set imagined. I suppose that the countries that will be first to get themselves out of the upcoming mess will be those that are rich with commodities and industries that can be eventually restarted. Those countries that made the FIRE sector the top dog in their economies are about to discover that all that will dissipate in a puff of ones and zeros. What will replace it? Local economies and local economies first – with perhaps the use of local scripts. But two things do worry me here. The first is a bank holiday where the government closes all the banks, even if your money is still on deposit there. The second is a new twist that was first done in the Cyprus crisis several years ago – a bank bail-in. What is that? That is where the government lets the bank takes depositor’s money to bail out the bank itself. In short, like Wyle E. Coyote, we have sped full speed off a cliff but have not yet reached the point where we have glanced down yet.

    1. Wukchumni

      I’m organizing a $10k bank fund run around Bank of America in Fresno, participants must be in excellent fiscal shape.

      1. Jeremy Grimm

        Do you have any sort of fund-me around creating CDs of the many many NakedCapitalism song covers!? You were one of the first instigators!!!!! If you could deal with the copyrights and find decent bands I believe you would have a strong selling CD among the NakedCapitalism faithful — with profits to be proffered to the NakedCapitalism funding lines. AND I believe we are not so alone as we seem. Make sure the LYRICS are clear. Album notes repeating the lyrics and suggesting how to interpret them might be MOST helpful.

        Art in our free world is carefully controlled — because Art can be very powerful.

        1. Yves Smith Post author

          The intellectual property protection of songs is very strong. Videos that pick up even a little bit of ambient music get taken down by YouTube. See for instance:

          Songs typically have two copyrights, for both:

          the underlying song (usually owned by the artist), and
          the recording of that song (usually owned by the recording company).

          You could write to the copyright holder(s) and ask for their written permission to use their music for the specific purpose you desire. Assuming they consent, then you have no problem.

          However, it is possible that the copyright holder(s) will refuse to give you permission, or never respond to your inquiries. Worse, the owner may ask you to pay thousands of dollars in return for the permission. That will raise the question: Do you really need permission for your project, or can you proceed without it?

          First, realize that not all music is protected by copyright. Music recorded before 1922 is generally in the public domain, meaning that you can use it as background to your animation without worrying about copyright holders. Many musical works created between 1923 and 1963 might also have fallen into the public domain, if the copyright owners failed to renew their copyrights (which you can check with the U.S. Copyright Office).

          Second, even if the song you want to use with your animation is not in the public domain, your plan for it might qualify as a fair use. Fair use is a defense to copyright infringement.

          Courts will consider four factors to determine whether a person’s use of copyrighted work—in your case, a song—qualifies as fair use:

          the purpose and character of the use, for example whether your project is for profit
          the nature of the copyrighted work, for instance, if the song is a famous Billboard hit or an academic piece of music
          the amount of the copyrighted work that you used in your project, and
          the effect of the use upon the potential market for or value of the copyrighted work.

          1. Jeremy Grimm

            Sorry. I was making a joke of sorts. I am aware of the problems of copyrights. The case of the cartoon “Sita Sings the Blues” is a good example of the problems involved.

    2. RookieEMT

      You’ve struck the nail on the head. It’s just… so empty. No values. No honor code. There’s literally nothing to anchor the ‘logic’ of the system. The biggest and most fatal factor is a lack of a corrective mechanism for the elites. China has one, so even if they did blow up bubbles, those responsible will face a massive crackdown in the near future. Russia sort-of keeps it’s elites in check.

      There’s nothing in the US. Every major disaster in policy lead to those responsible sticking around or going off to take new gigs. Even outright promotion. Dr. Fauci is getting a handsome retirement package. Zero arrests of banksters after 2008.

      How many military officers were demoted after Afghanistan?

    3. Jeremy Grimm

      Speaking as a Yank … England is screwed by the ongoing energy squeezes. I know nothing about other parts of the UK and how they might ride out the mysterious calumny portended… I see little reason for celebration in the future appearing in my cloudy crystal ball.

  18. SocalJimObjects

    The market’s up big, and no, it’s not because Europe is fine, it’s probably trying to suck in every last fool.

    1. Mikel

      Keep in mind the fools using put/call options as lottery tickets. Alot of the up and down is gaming those that want to hit that lottery.

      And workers have to be kept financially insecure in order to pressure them into accepting lower wages.

    2. Yves Smith Post author

      Maybe be a short squeeze. An I am now in NYC and Yom Kippur starts tonight. You can see signs of diminished activity.

      A lot of professional investors will have left the office early to get wherever they are supposed to be by sundown.

  19. David

    Thanks Yves.
    You mention EU subsidies for fuel prices, and it’s obviously true that this will, to some extent, subsidise consumption, but not at existing levels. People are already cutting their energy use out of fear of much larger bills in the future, and any subsidies can only affect energy prices to a limited degree anyway. Effectively, you will have rationing in some form. If you remove subsidies you will have rationing by price, which means people will die. Otherwise, since the problem ultimately is supply, not price, you will have to have some other form of rationing, but most governments no longer have the capacity to do that, still less enforce it. There is a terrifying unreality in the minds of European leaders that by turning down thermostats and subsidising at the margins, we can get through the winter OK.

    One other point: the deregulation of electricity and gas supply in Europe has created intermediaries who are largely brokers. The good Colonel, who is with us today, will know more, but my impression is that in the UK quite a lot of these companies are nothing but brokers. And just to add to the fun, EDF, the (recently-nationalised) French electricity company is a major supplier the UK. Case in point: the management company for the building I live in has negotiated fixed-price utility contracts which have several years to run. As far as anyone can see, the companies concerned will pay much more for the gas and electricity than they will earn in revenue. Nobody knows what happens then.

    1. vao

      Something similar as has been happening in Germany since the autumn 2021.

      The energy supplier (actually a broker) goes bankrupt, and your favourable long-term contract is gone. The local utility automatically takes over and supplies without interruption the customers of the failed broker. But only for 30 days — it is up to you to find a new supplier within that time frame.

    2. Colonel Smithers

      Thank you, David.

      You are correct. Other than producers like British Gas, EDF and the former DONG, Danish Oil and Natural Gas, and Spanish conquistador Iberdrola, the other providers are glorified call centres. The British government colludes in this fiction of deregulation and competition.

      UK readers may be interested to hear that the UK narrowly escaped two multi day black outs last month and was saved by last minute dot com deals with plucky little Belgium, amounting to 9000 euros per megawatt hour. The minister overseeing the deal said Britain is at war, but the public is not aware.

    3. Ignacio

      I have a very different view on this. In my limited environment I really don’t see any meaningful energy cutting so far. The captain is saying “go on dancing” (subsidies) while the ship is starting to sink. Except, probably, some of the most energy intensive activities & industries. Better than general subsidies would be special help directed to the most vulnerable to avoid deaths, though this means harder work for the regulators. Instead we are having these general subsidies to prevent anger from rising too fast but helping to deplete resources. It will be the case that those in the upper levels are being subsidized when they are, by far, the largest consumers among households and won’t have any incentive to do anything. In Spain, if I recall correctly, about 1/3 of NG is for heating and 2/3 for electricity (apart from the consumption of a few energy intensive industries that use NG in co-generation). This means that lowering the temperature in thermostats would have an effect. Indeed the effect of reducing the temperature in the thermostat is to reduce energy consumption by a cubic factor given that heat losses occur in the three dimensions. It may not save the whole winter depending on each country by IMO it could be critical in some.

      I say this and i won’t put my thermostat lower… because I did it several years ago.

  20. jailbraker

    Yellen said there wont be another financial crisis in our lifetime and I think she is still alive and kicking.
    I have difficulty understanding how QE is not money printing, as that statement is all over the media.
    The way I see it , for example, is that the government decides to send one trillion $ in PPP to the business owners and forgive it.
    They issue a bond that Fed buys with freshly printed money.
    Voila, one trillion dollars go in the economy.
    How is this not “money printing”?
    Fed will never retire this paper, so for all purposes fresh money was printed and injected in the economy.
    I can understand the asset swap if Fed was buying existing paper, but what we have here is a Fed cooperating with the treasury to issue new debt , this is direct monetization in my opinion as any hope that it will be retired in the future is a smoke screen.
    What am I missing here?
    Furthermore, if Fed was to mark to market all the bonds they bought, they would be insolvent today.
    I understand they can keep the bonds till maturity and not suffer losses but doesn’t this mean they are holding unbacked government liabilities, which is itself a form of unlegislated fiscal expenditure, which in this country isn’t actually Constitutional?
    I also dont think comparing Japan with US regarding QE and concluding that QE does not produce inflation is the right analogy.
    Because there is a lot of number involved, economics looks like science but in fact most of it is about human psychology. If the average american had a credit line for one million dollars you can bet that within 3 months the limits will be reached, not so with the Japanese I think.
    But its hard to quantify this type of behavior when reaching conclusions about inflation.
    I still think the jury is out regarding the causes of our inflation and not convinced that demand didnt play a major role in the current inflation we have.

    1. Mike

      I don’t think they consider PPP or covid checks as QE ? But they most certainly were inflationary. I know multiple business owners who got PPP, were forgiven and didn’t even need it.

      As far as Japan’s case its not a great analog, although their government still has massive debt, they are also the largest creditor globally. They “own” a lot of things.

      Lyn Alden has some great articles on this, here’s one:

  21. Domenico Cortese


    Where I totally agree that “money printing” does not automatically mean inflation or, worse, hyperinflation I’m not quite on board with the semantics of “Oh, QE is not money printing but an asset swap”.
    First of all, by accounting definition, any money printing operation involves an asset swap. When you get a loan from a bank (money or, better say, credit creation) you swap your note (promise to repay) for your new balance on the bank books, even when a Central Bank buy bonds directly from the government (the “purest” form of money printing) that operation is technically an asset swap.
    Finally, Central Bank reserves are part of the measured money supply where government bonds and agency securities are not, so when the CB buys them from the secondary market and create reserves in the banking system, money (in measured money supply terms) is created.

    1. Yves Smith Post author

      No, your comparison is incorrect. You did not have a pre-existing note. Investors DO own pre-existing bonds they paid for. The contracts that generated them and created new money happened in the past.

      Your note come into legal existence solely because the bank gave you consideration (newly created money) for it. The note would not be a legally enforceable instrument unless the bank or lender had paid for it.

      As for you comment on bank reserves, this actually undermines your contention and shows that official definitions of money are problematic. As the linked article explains:

      Only financial institutions can hold reserves at the central bank. You can’t go into a store and buy a loaf of bread with bank reserves, as you can with, say, a dollar bill or a checking account at a your local bank. Reserves just sit there. Although they do earn interest, that doesn’t mean they are money. You can rent out your house and get an income stream from that, too, but that doesn’t make your house money.

      1. Domenico Cortese


        I understand the pre-existing asset argument, however, as far as i understand, think about the typical merry-go-round in QE times where the reserves to buy the bonds are often created on the spot by the Fed (Repo, loans, etc..) for the sole purpose to buy bond at auction and then turn it immediately to the Fed….it’s not black and white.
        For my bank reserve comment I did simply stick to the official definition of money where government bonds an agencies are not part of it.
        I would also argue that physical notes, which the public can hold and use, are the equivalent of reserves (the Fed swap them for each other)

        Thank You!!

      2. Anon

        Prior to the swap, weren’t existing bank assets (especially failing ones) a restriction on their ability to ‘print’ more money, and the swap then relieved them of this? Barring some enforcement/legislation I’m unaware of, I can only assume the banks went off to print more… so while QE is not printing, it de facto facilitates it no? Perhaps one could argue its structure is superfluous and designed to obscure this fact?

        1. Domenico Cortese


          You raise a very good point. If we have to add the “pre-existing” qualifier to the QE as an asset swap statement we run into a logical issue…the reserves to buy these bonds are not pre-existing but created on the spot.

  22. flora

    Many thanks for this post. I first came to NC in what is now Many Years Ago following the 2008-9 great financial crisis. I came looking for sound, unbiased, “behind the scenes” financial information. NC never disappoints on this score. Been reading ever since.

    1. flora

      Volcker had to back off his early 1980s interest rate hikes because they triggered a Latin American debt crisis, in particular endangering the then Citibank.

      Wondering (seriously) if Wall St. and the US admin now regard the EU countries as they regard the Latin American countries, and if Ursula von der Layen understands the implication if this is true. (not saying it is.)

  23. marku52

    The Fed is having an emergency meeting today. Credit Suisse might be the reason. But it seems they do these fairly frequently

  24. Altandmain

    The big issue with the interest rate increases are that at Yves notes, there is no way for the central banks to make up for a real economy shortage. Raising interest rates doesn’t magically create desperately needed natural gas and worse it increases the loan borrowing cost of companies who manufacture goods to address the shortage.

    As Yves notes, after the 2008 financial crash, they should have allowed the banks to face the consequences. Unfortunately the banks are too politically well connected and politicians are too corrupt for that to happen.

    Some of these bubbles like in the real estate sector needed to be popped, lest they grow into an even bigger bubble, which would result in an even bigger meltdown when it happened. However, the interest rate increases will have a very real impact on the less well off.

    The loss in employment from real economic shortages in energy and natural resources will be devastating and spill over. Germany is going to be in deep economic crisis and nations that rely on their exports will also be hurt, at least until they find alternatives.

    There will be alternatives with time. Germany’s main contributions were in manufacturing. There isn’t a lot of natural resources or other sources of wealth from Germany. An example, nations like China buying discounted Russian oil will be able to passon some of their cost savings to their customers, such as importers of Made in China products.

    This will be devastating however for the job market in Europe and the middle class. It could lead to serious social unrest and political unrest. That is putting it very mildly, by the way.

    In regards to the few people who are wearing masks in Maine, I can confirm that around 10 to 20 percent of the folks on the Canadian side of the border are also mask wearers. It feels like the US and Canada are pretending that they are back to the normal pre-pandemic world, but they aren’t.

    1. Anthony G Stegman

      It appears that for most people the pandemic is indeed over. Folks visiting Naked Capitalism may see a variety of indicators to the contrary, but the media no longer mentions the pandemic except to remind people to get the latest “vaccine”. Mask wearing in public has declined sharply. Restaurants and bars are crowded. Football stadiums are packed with nary a mask to be seen. I’m doubtful that even a fall surge in case numbers will alter any of this. The significant majority of American people are done with the pandemic. Until they or someone they know gets sick and hospitalized ( the hospitalized part is vital).

    2. Yves Smith Post author

      10% to 20% is way better than I saw. Literally no one (admittedly I was in touristic spots, so you’d have self selection v. that) except 2 other customers in a big but pretty empty grocery store. Zero aside from me and as few cashiers (wearing non N/KN95) at the Whole Foods (yes I know bad but we had logistical issues) and the nice little health food store in town.

      Even on the plane, only one other person wore a mask, and it was a KN95.

  25. Rip Van Winkle

    Ah, remember the good old days – Newsnight 26th May 2010: Hugh Hendry: “I Would Recommend You Panic”?

  26. podcastkid

    “By contrast, net fiscal spending (as in budget deficits) beyond what is necessary to create full employment will cause inflation. It creates demand in excess of the ability to satisfy it.” Y.S.

    I’m thinking of F-35 assemblers, a million folks with top secret security clearance…and about where all the QE really went prior. These are small groups seems to me. What are some better examples?

  27. MoongooseAnalogue

    Given Western society is mostly story-based now, including of course the fake QE-floated financial markets, is this coming crash likely to be ‘conceded’ by Western leaders? Is this the bit where Wile E Coyote looks down, or will something even worse happen? The lies are big these days. Collapses like the COVID pandemic are refitted as a new normal.

    If Europe collapses while trying to cause Russia’s economy to collapse, do they have to concede defeat? The West behaves like the sort of person who will allow their personal flaws to tear apart the family rather than admit they have any.

    I miss the pre-2018 days so much when, living in Europe, it felt like you could look foward to closer Eurasian integration…

  28. Wolfie

    … all this wreckage and we still pretend we don’t have the blueprints to Nikola Tesla’s free energy solution.

    “The fracturing process uses on average about 45 million L of water for a single horizontal well”, so don’t think there isn’t a looming “water shortage crisis” in the works. Whoever claimed that aristocratic fascism was efficient?

  29. bassmule

    Adam Tooze in the NY Times today:

    “Pity particularly the companies and countries around the world that have borrowed in dollars, to the tune of more than $22 trillion by 2019, and now face repayments at a steeper exchange rate. Struggling to keep up with debt service, they will most likely first squeeze other spending, compounding the recession, and then seek to restructure their debts. At that point recession will tip into crisis and outright failure of businesses and sovereign borrowers.

    Market purists will insist that this was long overdue: It is high time to cull the zombies — borrowers who live on only because the cost of borrowing is so low. But talk of culling is better on paper than in practice.”

    The First Global Deflation Has Begun, and It’s Unclear Just How Painful It Will Be

  30. Advait

    Whatever fund crashes and bank crashes happen, remember that the US govt has full capability to mitigate any financial crashes. If a big financial crash happens the US govt (because it has full monetary sovereignty) can create out of thin air all the money needed to shore up poorly run banks, shadow banks, etc. Remember huge 2008 crash and QE? Umpteen billions of dollars given to banks for mostly worthless assets? With no auditing or oversight? Well, that can easily happen again. Remember that the US budget deficit is just a number. No one needs to “pay back” the deficit cuz the govt is the sole issuer of the dollar and can make all the dollars it wants. If those dollars don’t go into the real economy, all they do, like in QE, is make wealthy bankers even more wealthy. Has nothing to do with “taxpayer money”.

    In the US, federal taxes in no way, shape or form fund federal spending. All federal spending is the creation of band new money by order of the US Congress. The money is created by federal govt employees at their computers typing numbers into bank account spreadsheets.

    The Japanese budget deficit is way larger than the US, and the Japanese economy is doing fine. Almost everyone in Japan has the goods and services they need at reasonable prices and the people are well fed, well housed, well educated with mostly free govt national health care. And with very low unemployment. And amazing infrastructure that puts the US to shame.

    Anyone who’s worried about the US budget deficit simply doesn’t understand how the US monetary system actually works. Learn MMT to get the real picture. Read “The Deficit Myth” by Prof Stephanie Kelton.

    The US can easily mitigate *any* financial crash as long as the federal govt responds properly. If they don’t, well, then it’s our fault for voting idiots into office.

Comments are closed.