Just like Wile E Coyote, the United States and Europe are discovering that their incredibly “clever” plan to punish Russia with draconian economic sanctions is backfiring. And it is backfiring with a vengeance.
Take a look at the U.S. stock market. It has lost almost 1900 points since last Friday–i.e., four straight down days. That is just for starters. Check out these recent headlines:
Deteriorating liquidity in Treasuries points to turbulence across various assets. A Bloomberg liquidity index that measures deviations of yields from their fair value climbed to the highest level since March 2020 this week.
Home Sales Are Declining Due to High Borrowing Costs
Mortgage rates are rising. Home sales are declining. Supply is improving. Here are the latest housing market trends as seen in June 2022. To begin with, the prices are not going to decline in 2022. The various forecasts from experts show that 2022 will remain a sellers’ housing market, and home values are expected to increase on a year-over-year basis.
Now take a look at Europe. Turning into a nightmare that is likely to produce widespread political upheaval. Thanks to the sanctions imposed on Russia, the U.K. and Ireland are getting savaged with shockingly high energy bills amid the ongoing (and worsening) energy crisis.
The U.S. economy faces significant headwinds moving into the fall. Biden and his team will continue to use the lipstick on a pig to paint the situation in the most positive light possible, but that will not solve the supply chain shortages and the continue growth of inflation.
In Europe, things are markedly worse. The UK and Ireland are grappling with soaring energy costs that are forcing many small businesses to shutter their operations:
One such owner is Geraldine Dolan, who owns the Poppyfields cafe in Athlone, Ireland – and was charged nearly €10,000 (US$10,021) for just over two months of energy usage.
The cost of electricity to the Poppyfields cafe for 73 days from early June until the end of August came in at €9,024.70 an increase of 250 per cent in just 12 months. There doesn’t include the €812.22 in VAT, which brought her total bill to €9,836.92.
It has left Geraldine Dolan wondering if she will be able to continue running the business she has owned for the last 16 years as Ireland heads into what is certain to be a winter of rising energy prices and cost of living spikes.
Zerohedge reports that this is not an isolated event:
In short, small businesses are getting utility bills that are 10 times what they were paying a year ago. Most are going to be forced to shutdown operations.
Things are no better in Germany and Slovakia:
Zinc, Aluminum Smelters Shuttered In Europe Due To Soaring Power Prices
“A Structural Rupture” – German Companies Shutting Down In Response To Record Energy Prices
As the FT reports, German manufacturers are halting production in response to the surge in energy prices, a trend the government has described as “alarming”. German economy minister Robert Habeck said industry had worked hard to reduce its gas consumption in recent months, partly by switching to alternative fuels like oil, making its processes more efficient and reducing output. But he amusingly clarified, some companies had also “stopped production altogether” — a development he said was “alarming”.
“It’s not good news,” he said, “because it can mean that the industries in question aren’t just being restructured but are experiencing a rupture — a structural rupture, one that is happening under enormous pressure.”
Habeck said rising gas prices were affecting everyone from big industrial companies to small trading firms and the medium-sized enterprises that make up the “Mittelstand”. “Wherever energy is an important part of the business model, companies are experiencing sheer angst,” he said. And since energy is a crucial part of every business model, one can only imagine the chaos, fear and loathing hammering the largest European economy right now.
Meanwhile, the Russian economy is doing okay. That is because it produces energy and commodities and metals that the world needs. It is not dependent on imports to stay afloat. And, the sanctions notwithstanding, Russia continues to export oil, gas, fertilizer and grains.
The messages from the HBO series Game of Throne and the movie, The Fly, are being repeated in the press–“Winter is Coming” and “Be Afraid, Be Very Afraid.” As winter approaches the European resolve to continue to punish Russia with sanctions will crumble. There will be a rupture between Europe and the United States over policy towards Russia. Unfortunately, the rupture will probably come to late to avoid people in Germany, France and the UK from dealing with unheated homes and dramatic increases in unemployment. We are likely to enter a period of economic chaos and upheaval not seen since the Great Depression of the 1930s. I hope and pray I am wrong. But the indicators are neither promising nor reassuring.