naked capitalism

Washington, Brussels Set Sights on TurkStream Pipeline Amid Crackdown on Ankara-Moscow Cooperation
Conor Gallagher, Naked Capitalism, Oct 5 2022

At the beginning of this year there were four pipelines carrying natural gas from Russia to Europe, and a fifth (Nord Stream 2) was about to come online. Now Nord Stream 1 and 2 are dead, the Yamal Pipeline is closed, and the amount of gas flowing through Ukraine is greatly diminished. That leaves theTurkStream pipeline, which transports natural gas from Russia to Turkey and then onto southeastern Europe, and it’s in the crosshairs:

South Stream Transport BV, a Netherlands-based subsidiary of Gazprom that operates the Black Sea portion of TurkStream, said the Netherlands withdrew its export license on Sep 18 amid wider sanctions from the EU. South Stream Transport applied for a new license but it doesn’t know if it will receive it. Now South Stream plans to suspend the execution of all contracts related to the technical support of the gas pipeline, including design, manufacture, assembly, testing, repair, maintenance and training. No-one will be able to carry out repairs if a pipe is damaged, gas leaks, or if a part of the pipeline comes apart due to an earthquake.

The news comes on the heels of Moscow’s claim that it foiled an attack on TurkStream. And Washington luminaries are now homing in on the pipeline. MIchael Rubin of the AEI writes:

Biden should kill TurkStream to promote transatlantic energy security.

Former CIA director and known perjurer John Brennan is very concerned about all pipelines bringing natural gas to Europe:

TurkStream was launched in 2020 as part of Russia’s efforts to diversify its export routes away from Ukraine. It  has the capacity to deliver 31.5 bcm/yr of natural gas, with half of it destined for Turkey and the other half for the Balkans and Central Europe. Strangely enough, the Blue Stream pipeline that brings gas from Russia to Turkey, but not onto Europe, has yet to come under the same scrutiny as TurkStream.

Southeastern Europe Gas Infrastructure

The main European customers of TurkStream natural gas are Serbia and Hungary. The former is an ally of Moscow, and the latter is the most outspoken member of the EU against Russian sanctions. Other countries, like Austria and Slovakia, also receive gas from TurkStream via Hungary. Milos Zdravkovic, who heads the department of energy management at Public Enterprise Road of Serbia, told Serbian Monitor:

TurkStream would be more difficult to attack than Nord Stream because it is under Russian and Turkish control, and it is much more difficult to carry out a terrorist attack since this pipeline lies very deep on the seabed.

Still, countries who rely on TurkStream are recognizing the threat. Hungarian Foreign Minister Péter Szijjártó said on Sep 28 that increased attention must be paid to the safety of the TurkStream in order to avoid a fate similar to Nord Streams 1 and 2. Bulgaria just opened a pipeline connector to the Trans-Adriatic pipeline in Greece, which supplies natural gas from Azerbaijan and reduces Sofia’s reliance on TurkStream. Greece’s biggest gas utility just completed a deal with Total Energies for LNG deliveries in the event gas flows from TurkStream are curbed or halted.

TurkStream came about after the US and EU effectively killed the Russia-Bulgaria South Stream pipeline back in 2014. The project would have transported Russian gas under the Black Sea, making landfall in Bulgaria and then passing through Serbia and Hungary into Austria. Instead Russia pivoted to Turkey and opened TurkStream at the beginning of 2020, despite US sanctions on companies involved in the construction of the pipeline. Additionally the US helped kill the EastMed Pipeline which would have brought natural gas from deposits off Israel and Egypt to Greece and elsewhere in Europe via Cyprus. US Under-Sec State Victoria “Fuck the EU” Nuland said at the time that it would take too long, and the solution instead was increased LNG shipments to Europe.

Russia supplied about half of Turkey’s natural gas purchases last year, and at an August summit in Sochi, Erdogan vowed to begin gradually paying for Russian imports with rubles. Doing so would avoid the dollar and would protect the Turkish economy from its diminishing hard currency reserves. The Turkish lira is down approximately 27% against the dollar this year. The loss of TurkStream would have devastating consequences for a Turkish economy already in freefall. Turkey would be left scrambling for natural gas supplies like the rest of Europe, and it would damage Turkish industry exports, which Erdogan is committed to boosting by lowering borrowing costs. He continues to go against the economic grain by lowering interest rates. In September consumer prices were up annually by 83%, and the domestic producer price index was up 152% year on year. Turkey’s deficit was at $4b for July, bringing it up to $36.6b for the year. And the foreign trade deficit was at $10.7b in July. The increasing import bill, especially energy, played a large role in the figure.

Without TurkStream, Ankara would also lose undisclosed monthly amounts to the Turkish treasury in transit fees for every cubic meter transferred. Turkey is now requesting that Russia delay its gas payments until 2024. Any economic boost Erdogan can find could help him next year in what’s shaping up to be his toughest reelection fight yet. In an effort to improve the economy, Turkey has taken advantage of the Ukraine conflict and continues to pursue a foreign policy of “strategic autonomy.” Washington, however, is determined to end Turkish economic cooperation with Russia and wouldn’t mind seeing Erdogan replaced next year with a leader who takes their marching orders from NATO.

In August the US Treasury threatened secondary sanctions on Turkish financial institutions for processing the Russian Mir payment system. On Sep 19 Turkey’s two largest private banks quit accepting Mir; now three state-owned banks are following suit following what the Kremlin called “unprecedented pressure.” The moves will likely be a blow to Turkey’s tourism industry, which was seeing a major uptick in the number of Russians visiting the country. Turkey, as the only member of NATO not to apply sanctions on Russia, had  2.2m Russians visit over the first seven months of 2022, an increase of 600k. The US is also abandoning its neutral stance on the long-standing rivalry between Turkey and Greece and funneling weapons to Athens, which is escalating tensions in the eastern Mediterranean. In September Greece received its first two F-16 military jets from the US as part of a $1.5b program to upgrade the Greek fleet. Ankara, which is excluded from the US F-35 program for buying Russian S-400 air defense systems, is worried that in time Greece could have a stronger air force than Turkey. The US is also ramping up its control over Greece’s Alexandropolis port in the northeast of the country 18 miles from the Turkish border and using it as an entry point for supplies to Ukraine. From El Pais:

Over the last three years, the US and Greece have signed agreements to strengthen their defense cooperation and guarantee “unlimited access” to a series of Hellenic military bases. Among these is a Greek Armed Forces installation in Alexandropolis. Since this collaboration began, the port has experienced unusually high traffic of military ships, so much so that, when 1.5k Marines from the USS Arlington docked in May, the city’s 57k inhabitants faced shortages of some products such as eggs and tobacco.

US military officials have proposed deepening and expanding the port with in order to accomodate US destroyers. The US decision to make a fortress out of Alexandropolis came after Turkey’s decision to close the Turkish straits to all warships after the war in Ukraine began, including its NATO partners who wanted to send weapons to Ukraine via the straits.The move was well within Ankara’s rights under the 1936 Montreux Convention Regarding the Regime of the Straits, and Turkey’s adherence to the agreement has been credited in not making the Ukraine conflict even worse. The US pressure on Turkey via Greece doesn’t stop with Alexandropolis. Turkish drones recorded Greece deploying US-donated armored vehicles on the islands of Lesbos and Samos, which is in violation of international law. Turkey lodged a protest with the US and Greece over the deployments, and in a thinly-veiled dig at Washington, Erdogan recently said:

We are well aware of the real intentions of those who provoked and unleashed Greek politicians against us.

Hasan Koni, a scholar on strategic studies at Istanbul Kultur University, told Turkey’s Anadolu Agency:

The American security apparatus has also recognized that the balance of power in the region is shifting toward Turkey and needs to be checked by empowering Greece. Washington’s push for more Greek bases is aimed at containing Turkey.

Historically, the US played a buffer role between Turkey and Greece and deescalated tensions. No more. The same is happening in Cyprus, which is split between the internationally recognized Republic of Cyprus in the south and the Turkish Republic of Cyprus in the north, which is recognized only by Ankara. In September the Biden administration lifted the 35-year-old ban on the sale of US arms to the Republic of Cyprus. Congress restricted the sale of US arms to Cyprus in 1987, hoping it would incentivize a diplomatic settlement to the island’s conflict. Cyprus was required to block Russian naval vessels from accessing its ports in order to get the US arms sale ban lifted. Turkey already has about 40k troops on the island, and Erdogan recently declared plans to reinforce them with land, naval and aerial weapons, ammunition and vehicles. Offshore gas fields discovered in the early 2000’s further complicated the territorial dispute on Cyprus. The global energy crisis following the West’s war on Russia raised the stakes. And Washington taking advantage of the situation to pressure Turkey adds fuel to the fire. Cyprus foreign minister Ioannis Kasoulides fears that Cyprus could be dragged into the Turkish-Greek conflict. In a Sep 26 interview with Bloomberg TV he said:

The Turkish army is stationed on our island and we fear that any conflict in the Aegean Sea will affect us directly because we’ll be used as the weakest link in the whole story.

Kasoulides must understand all too well the word of Victoria Nuland, who earlier this year at the opening of a US-funded training and cyber-security facility on the island, said the security relationship between the US and Cyprus is now “irreversible.”

Nobody Cares About The Labour Files
John McGregor, Naked Capitalism, Oct 4 2022

In late September, Al Jazeera’s investigative unit released a documentary series called the Labour Files. This in-depth investigation is based on a 500GB leak of British Labour Party documents, an enormous story in its own right. It shows how Labour Party officials worked against the leadership of Jeremy Corbyn, attacking and expelling other members of the party, and suspending constituency groups. The Labour Files is, or should be, a big story. Al Jazeera is a global mainstream, state-backed media outlet, and the corruption and collusion it has exposed across state institutions, mainstream media, and the Labour Party apparatus is extraordinary. Whilst dedicated independent media have uncovered and analyzed much of the anti-Corbyn campaign, both internal and external to the Labor Party, Al Jazeera’s leaked documents give it far greater insight. Instead, there has been little comment from the British media. As The Canary noted, the Express ran an article on the series but other major outlets have either ignored it or mentioned it in passing. The Guardian found space to mention the Labour Files in an opinion piece by Nesrine Malik. This piece, which noted that Starmer is “on his way to a coronation”, focused on the issues of Islamophobia and racism towards people of color within the Labour Party.

It is perhaps not too surprising that the same media outlets that worked with Labour insiders to topple Corbyn don’t want to report on their own efforts. A 2019 BBC Panorama special was key to cementing in the media narrative allegations of institutional anti-Semitism against the Labour Party under Corbyn. Corbyn was suspended from the Labour Party for claiming that the scale of the anti-Semitism problem was exaggerated for political reasons by his opponents and the media. Notwithstanding the various investigations into the Labour Party, including the Forde investigation that confirmed accusations of anti-Semitism had been weaponized within the party, current Labour leader Keir Starmer has not restored the whip to Corbyn. With Corbyn sidelined, the Labour Party under Starmer has been the political beneficiary of a series of Tory policies that have been catastrophic for British people. The UK is currently experiencing multi-industry strikes, struggling to maintain the value of the Pound, and facing national protests over the cost of living. Whilst the unashamed and bumbling rule-breaking of Boris Johnson might have incensed the public, long-term Tory policies and approaches to government are costing the party its support and pushing working people to respond. A number of British voters, as seen in the protests, are angry at the rapid cost of living increases, many directly caused by Tory warmongering foreign policy, insane Brexit plans, and unbalanced fiscal policy.

In a system with two parties of government, it is somewhat inevitable that the opposition will eventually form government. In the UK, the Tories have now led the country through more than a decade of austerity and into an as yet unresolved, although already catastrophic, Brexit. YouGov’s most recent voting intention poll in the UK, from Sep 28-29, found if there were a general election tomorrow, 54% of voters would choose Labour while only 21% would vote Conservative. This represents a prodigious change in less than a week. In the survey from 23-25 September, YouGov found support for Labour at 45% and support for the Tories at 28%. New Tory PM Liz Truss seems to have been directly responsible for much of this change. When asked by YouGov on Sep 6-7 who would make a better PM, 25% of respondents nominated Liz Truss, 32% selected Keir Starmer, 40% were unsure, and 3% refused to respond. By 28-29 September, only 15% of respondents thought Truss would make a better PM compared to 44% for Starmer (and 37% unsure; Truss, it would appear, is so bad she makes undecided people certain Starmer would have to be a better PM).

With Truss’ almost complete lack of political appeal propelling Starmer forward, his political platform has a good chance of eventually replacing a decade and a half of Tory leadership. Starmer’s politics are far more appealing to big business than those of his predecessor Corbyn. A YouGov poll undertaken for The Times in late August found that 47% of Tory voters were in favor of returning energy companies to public ownership in light of the current crisis. In red wall seats, traditionally Labour seats where the Tories under Johnson made large inroads, 53% of Tory voters were supportive of renationalization. Confronted with the energy crisis and this political sentiment, Keir Starmer proposed in his Labour conference speech to establish Great British Energy. This is a proposed publicly owned company that would invest in wind, solar, tidal, nuclear and new energy technologies, either alone or alongside the private sector. It will get seed capital from the National Wealth Fund. Despite Starmer saying in his speech that the move was the right thing to do “for energy independence from tyrants like Putin,” the proposal, which would only be implemented if Labour won power in any case, would take years to deliver returns of any sort and does nothing to address the current cost of energy in the UK.

Notwithstanding widespread support for nationalization, Starmer’s Labour was abundantly clear. The Guardian quoted a Labour spox as confirming that this move is “not about nationalization, this is a new player into the market.” Even with a decent level of support from the other side of politics, and complete failure of the market to provide British people with the basic essentials, Starmer is not interested in the opportunity to roll back one small step in the otherwise constant march of privatization in the UK. Instead, Starmer’s Labour would prefer to spend public resources on developing new technologies that will eventually benefit private operators by “making strategic investment that the companies shy away from.” Risky public investments in new technologies that will only produce energy, if they are successful, in the years to come is clearly of little help to the people in the UK who are struggling right now to afford the essentials in life. It also stands in stark contrast to proposals from the Labour Party under Corbyn, when it proposed renationalizing the entire distribution network and the retail arms of the largest gas and electricity suppliers. When Labour proposed this last move in 2019, Nils Prately argued in The Guardian that there was no reason for the move:

So what problem is Labour trying to address? The government can set the price of gas and electricity if it wishes and there is no shortage of would-be suppliers. Of all the proposed nationalisations, this looks the strangest.

The problem that Labour was trying to address has now become an extremely acute reality: the price of gas and electricity has become unaffordable for large numbers of British people. This problem has been growing. It was a predictable and intentional outcome of Tory and Blairite policies, and the NATO war with Russia. Also predictable in this context was the disenfranchisement of British voters with the Tory party after so many years of austerity, corruption, and Brexit failures. Large swathes of the British media, including the BBC, worked diligently and deceitfully with the establishment of the Labour Party itself to ensure that when the British people finally faced the depths of Tory policy and were forced to reject the party out of basic survival instinct, they would either break off to the Right or fall into the safe hands of Keir Starmer’s Labour. Right as this process is unfolding in the UK, Al Jazeera has exposed much of its inner workings, but the British media has little interest in revealing its own role in neutralizing the threat of Corbyn’s Labour to corporate interests.

The Inevitable Financial Crisis
Yves Smith, Naked Capitalism, Oct 3 2022

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.* 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 counter-parties. 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 (Sep 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 ₤65b 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 Sep 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 US 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.

* 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 Anglosphere, 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 run-up 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.

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