The Bleeding Victor (Part One)
Yes, Mr. Putin is losing everything – the war, the arguments, hearts, minds, a bunch of Generals (some dead and some denouncing) and more. Yes, the West is winning. The typical Russian is now likely to greet the West with the overwhelming enthusiasm that Putin had somehow once expected from Ukrainians. But…..
But, the victor is injured. President Putin has inflicted extraordinary damage on the West. We are bleeding but have not yet recognized it. We in the West have no reason to be smug. We’re going to need an ICU for the world economy after this. Here is why:
1. The Putin Triple Punch: Putin has created a combined oil price shock + the fertilizer price shock + a food inflation shock that will reverberate through every home in the world.
2. The “Go Ahead and Hit Me” Strategy is working. We hit Russia with sanctions. Russia defaults. We in the West slowly begin to recognize how much we depended on Russia. A Russian default means the Italian and German banking systems will be feeling immense, possibly mortal pain. Could the Russian default undermine the Euro? Yes. I wrote a piece on October 29, 2021 called “WWIII Has Already Started”. It sounded outrageous then. President Zelensky has just said the same thing to the US Congress. It still sounds outrageous now. But, it isn’t.
3. The “It’s Mine all Mine, Nobody Else’s” strategy: The world depends on Russian and Ukrainian wheat, on Russia and Belarus for fertilizer and on Russia for key computer chip materials like neon gas and palladium.
4. “Free Markets and Rule of Law? Watch how Russia’s actions are pulling the rug out of the West’s open markets. The London Metal Exchange closed when the nickel price went so high that the exchange could not bear it. Contracts around aircraft leases are being torn up.
5. “Texas Hold ‘Em”: When every hand Putin plays has a nuke he is willing to use. We have thousands of nukes with kilotonnage that dwarf Hiroshima. But, we in the West won’t use them. We did. We learned. We know there is only one planet and we are all on it. Putin? Not so much. He invented the modern Russian nuclear deterrence strategy – “Escalate to De-Escalate”. This holds that you must deploy nukes to get de-escalation.
The Putin Triple Punch reminds me of Mohamed Ali’s insight that “everyone has a plan till they get punched in the face”. The timing was both perfect and not random. The West faces record debt, record credit risk, fast-rising inflation and central banks that have no ammo left. What better time to throw a punch? What the West is still working out, though is how bad the damage is. My view is that Putin has quite deliberately set the stage for a famine. We can already see the early signals of famine. The high oil prices caused by Western sanctions and saying no to Russian energy exports automatically raises the cost of both fertilizer and food delivery. Food prices were already screaming upwards even before that. The association of truck drivers in Italy announced a stoppage. They were very clear. This is not about wages. The problem is that they simply cannot make any money delivering food when the oil price is so high. The Italian grocery stores are already self-rationing spaghetti as a result. The Italian livestock growers have already announced that they will start culling animals in another few weeks because the cost of feedstock (wheat/grain) is so high. Why have wheat prices skyrocketed? Russia and Ukraine are the 5th and 4th largest producers of wheat in the world.
The Food and Agriculture Organization has said that wheat prices are not only hitting all-time record highs but that the Middle East and many African nations are at risk of famine now. Why? Because they depend on the supply from Russia and Ukraine for as much as 30% of their needs. Why won’t that be available to them? Either there won’t be a harvest (Ukrainian tractors are too busy hauling away Russian tanks) or because these countries will hoard what they have. Last time we saw wheat prices jump like this we got the Arab Spring. Will farmers plant more in the US or Canada or Australia? They will not of the oil price and fertilizer prices are so high. Who knew the world depended so heavily on Russia’s ammonium nitrate and Belarus’s potash? Who can help? Argentina has already frozen soy exports. It’s every nation for itself unless a conscious effort is made to stop the madness. Canada may have wheat and potash but where will it go? Perhaps not to Europe or Africa or the Middle East. Ukraine is full of signs telling Russia to go “Fuc* Yourself”. Putin’s “Fuc* You” may take a very long time to recover from.
“Go Ahead and Hit Me” is all about provoking the West to take actions that will ultimately hurt the West. This approach leads to the discovery that war is inflationary, especially when we already had serious inflation. Now we are going to need another round of bailouts because major banking systems are so vulnerable. Germany and Italy built their economies on the idea that you could outsource production to the East and lend to Russia and its neighbors, like Ukraine, without a care. Now this strategy is going to bite their economies. After the Cold War, Americans almost made fun of Russia for being such a small economy. Who is laughing now? Venerable American and British institutions are waking up to find out that they are vulnerable: Pimco stands to lose a couple of billion from its sovereign debt and derivatives exposures to Russia alone. The IMF says that this default has unleashed a global contagion. Putin has pulled a trick out of a hat and caused COVID to morph into a new kind of global contagion. Presto Chango. European leaders are already issuing the kind of denials that confirm the risk. The default of Russia could mean the death of the Euro. Unicredit alone has 8B Euros of debt outstanding in Russia. The German baninking system and German automotive supply chain are heavily invested in Russia and Ukraine. That’s 10% of German GDP. It is also spelling trouble in the US. See the alarmingly titled article from The American Banker which tends to be a pretty sober publication: A big bank is in trouble, and no one knows which one or why. So, yes, Russia may be the most sanctioned country in the world now but everybody else is feeling the pain too.
“It’s Mine all Mine, Nobody Else’s” (think Gollum in Lord of the Rings) approach can work in the short run. The end result is simple. Canada and Qatar and elsewhere will become the new source of oil and gas. Also, the market will take some of the money that has been going to entrepreneurs and shift it over to scientists and physicists. The advancement in new materials is truly astonishing. We can learn to replace pretty much anything these days. The incentives have to be right. The oil price is headed to $200+ and possibly $300+ if Putin can keep this up, though that looks increasingly doubtful. His marines and soldiers are refusing to follow orders now. Sending in troops from the Pacific is not going to fix this.
Now is the time to consider what happens when Putin is no longer in charge. Is it possible that power passes to the military (check out this thread)? The longer you are at war, the more power the military gains. Is it possible that the Russian Federation will break into its old states again? Might we be looking at new countries being formed? Adygea, Altai, Bashkortostan, Buryatia, Chechnya, Chuvashia, Dagestan and maybe even Crimea? Putin has been fomenting trouble in places that we had all forgotten about. Conflicts is unfolding in Nagorno Karabakh, between Armenia and Azerbaijan, and there are signs that Turkey and Armenia may start normalizing relations again. The whole landscape of international relations is changing due to Putin’s actions. The center cannot hold. Things fall apart….. Time to re-read Yeats’s poem:
The Second Coming
Launch Audio in a New Window
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
Part Two of this article continues the argument and addresses how Putin is pulling the rug out from underneath our rule of law and reliance on free markets and forcing us to face nuclear risks.
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