OK, the latest from Gonzalo is a must-watch/listen to understand what the sanctions mean for the world economy. It probably will be brutal across the West. Time to make some good decisions in order to survive financially!
I've gone through most of the video and Gonzalo makes some very interesting remarks backed by data and logical reasoning about the financial implications of the sanctions and the inevitable counter-sanctions that will follow, and what it entails for the future of the West.
He starts off by sharing some key data about the commodities and agricultural products controlled by Russia. Between Russia, Ukraine and Belarus, they control:
- 35% of potash, a fertiliser component
- 15% of urea, a fertiliser
- 25% of wheat
- 25% of barley
- 15% of corn
The three countries also represent:
- 50% of Europe’s food
- 40% of Europe’s gas
- 50% of Europe’s oil
The sanctions do not hurt anyone in the higher echelons of the Russian leadership as they can redirect the gas and other commodities to China and South-East Asia while in return buying products and services from these countries that they usually get from Europe and the US, even if the quality may not be as good. But it's something they don't really need as these goods are not essential or existential to the country. However, Russia’s food and energy is existential for Europe. You will always need food, electricity, oil and gas for heating and gasoline. In fact, Hungary recently pulled all the its grain exports from the market.
It's remarkable how Russia was cut off almost completely from the West which is still getting existential goods it needs from Russia whereas Russia didn’t loose anything it existentially needed. If you antagonise the seller and the seller has other customers, who gets screwed? Russia has yet to pull the trigger on its response to the sanctions, but they will pull the trigger and have already started. Recently, Russians shut down a major natural gas pipeline to Europe accounting for 15% of the gas flowing to Europe, i.e. 6% of Europe’s total gas needs and this is just a warning sign.
Gonzalo also remarks that renewable energy is not predictable. Renewable energy is only viable when local Governments give huge incentives to producers, such as subsidies, tax breaks or regulatory breaks, something Europe has scaled back on substantially.
He argues that central banks will have to raise interest rates to offset the high inflation which will push real estate prices down across Europe. Europe will cash out hard assets in order to keep pace with commodity prices, something similar to what happened in Chile in 1970-73 when the Leninist regime crashed the economy which led to hyperinflation before the military took over. People had to sell assets for cash to buy food.
He then explains the difference between Europe, primarily a service-based economy and Russia with its manufacturing sector. It’s easier to fire people from a service economy but harder in manufacturing. Labour flexibility also means recession can hit a lot faster. If you have high inflation and people receive the same salary but have to pay more for food and gasoline, you will lose revenue and will have to fire people. The latter start selling their possessions to get cash in order live, chewing through all their savings. On the flip side, if you are a producer of commodities, you end up getting a big influx of money and the hard money and commodities that Russia holds will be backing the ruble.
Towards the end, he talks about the role of the US dollar as a reserve currency, arguing that if Russians come up with a currency clearing house where you don't need to rely on the dollar to trade goods, there will be less demand for it and therefore less need for US treasury bonds. So how will the US finance its treasury funding and the build back better program? They will have to print more dollars to pay for the goods internally, but when more dollars are printed in the US with no demand for it outside of the country, the value of the dollar inflates. That’s how hyperinflation starts.