The US has blown up the global economy by blowing up Nordstream

Spectator: Europe’s descent into deindustrialisation. The US has blown up the global economy by blowing up Nordstream. The BRICS will survive. Western dominance may not. 旁觀者:歐洲陷入去工業化. 美國通過炸毀北溪管線炸毀了全球經濟. 金磚國家將倖存下來. 西方的統治可能不會.

The Spectator is the world’s oldest current affairs magazine. It is conservative, pro-Capitalist, pro-US/Atlanticist, anti-EU in its ideology. This article is out of character.

Europe’s descent into deindustrialisation
The attack on the Nord Stream pipeline will encourage protectionism

Philip Pilkington

The rapid economic collapse that Britain is facing is simply an accelerated version of what the whole of Europe is about to go through; unsustainable borrowing to fund the gap between high energy prices and what households can actually afford. With the sabotage of the Nord Stream pipeline, there is now no feasible way back. Europe can no longer physically import Russian gas – prices will remain high until Europe builds more energy capacity, which could take years.

What is likely to come of this? High energy prices will render European manufacturing uncompetitive. European manufacturers will be forced to pass through the higher energy costs in the form of higher prices and consumers will find it cheaper to buy products from countries with normal energy prices. The only logical European response to the threat of widespread deindustrialisation is to raise tariffs. This is the only way to equalise prices between more expensive European goods and cheaper foreign goods, therefore artificially supporting European manufacturing. This strategy will lower living standards, depriving Europeans of cheaper goods, but it will at least preserve some manufacturing jobs.

This process looks remarkably like the start of the Great Depression. In the 1920s, due to lopsided financial arrangements initiated in the Treaty of Versailles, western economies accumulated enormous amounts of debt. In 1929, the collapse of the American stock market removed one of the key remaining props and the western economies collapsed. Europe went first and, as trade dried up, America followed it down the hole.

Modern western economies have been accumulating debt for decades. But since the lockdowns in early 2020, this debt accumulation has gone into overdrive. In 2019, Eurozone government debt-to-GDP was 83.8 per cent. In 2020, after the lockdown bailouts were unveiled it shot up to 97.2 per cent. In the same period, Britain’s debt-to-GDP ratio went from 83.8 per cent to 93.9 per cent. These are the largest single increases in history. The run-up in debt during the lockdown was probably unavoidable. But it certainly triggered the beginning of the inflationary pressures we now see everywhere, especially because the lockdowns themselves completely demolished supply chains. So, more money chasing fewer goods. But what has happened since the start of this year is something else entirely.

The Russian invasion of Ukraine has triggered an energy price war in Europe that is forcing even higher levels of government borrowing to cover energy costs. Unlike the lockdowns, these energy price increases are putting direct pressure on both prices and the trade balance between countries. Higher energy prices mean that Europe must send more euros and pounds abroad to get energy and so the value of imports rises and these higher import costs are fed through to consumers as businesses try to offset rising energy costs by raising prices. The situation is no longer remotely sustainable. This is almost certainly our 1929 moment.

In the 1930s, Europe fell into an economic black hole. Its economy collapsed and so all the trade that it did with the rest of the world was sucked down the hole with it. Europe then turned in on itself and started raising trade barriers to eke out some semblance of economic normality. This was a classic case of what economists called the ‘fallacy of composition’: what was good for Europe in particular, was bad for the world economy and since Europe was part of the world economy, it turned out to be bad for Europe too. The world slipped into depression.

Could the same thing happen today? The Office of the United States Trade Representative estimates that the United States engaged in over $5.6 trillion of trade – roughly 26 per cent of GDP – in 2019. In the same year, trade with the European Union was estimated at $1.1 trillion – that is approximately 20 per cent of total trade. As European falls into the hole, this trade will fall with it. The American economy, already frail, will likely fall too.

One key difference this time around is that there is a rival economic bloc that could be insulated from these dynamics, the emerging Brics+: Brazil, Russia, India, China, South Africa and Argentina – with Iran, Turkey, Egypt, Indonesia, and Saudi Arabia also joining the queue. Since the start of the war in Ukraine, the Brics countries have been solidifying trade and financial ties and adding new members. It appears that the goal is for these economies to decouple as much as possible from the West. If they are successful in doing that – and it looks like they may be – they may avoid the depression. The Nord Stream sabotage could be the point at which future historians mark the end of western dominance.

Other good articles by Pilkington

Pilkington is a macroeconomist specializing in general equilibrium theory.

This is a good article on why the Chinese economy will not collapse:
The point is that China has beaten its doubters before. Last time we saw the RMBS market collapse in China in 2014-15, the lull did not last long. The reason for this appears to be that China’s real estate sector is largely controlled by the government. Whether through direct government contract issuance or through pressure on Chinese Communist Party (CCP) connected businessmen, the Chinese state appears to be able to dictate the terms of investment.

China also appears to have a debt system immune from widespread default. During the Asian Tigers crisis in the late-1990s, the Chinese government set up so-called Asset Management Companies (AMCs) whose job it is to take bad debt onto their books and, with the help of the money-creating powers of the Chinese central bank, make them disappear. Lately these AMCs have been stuffed full of bad property debt and while there are reports that they are bulging at the seams that are way beyond capacity, there is nothing to stop the government from simply creating more.

The fact of the matter is that the Chinese economy is a hybrid, not a purely market-driven economy. Consumer goods are distributed in the same manner as we see in Western market economies, but the pace of investment and the finance system is controlled by the government. For this reason, indicators that warn of disaster in market economies fail when applied to China’s partially planned economy.
What about the impact of a burst housing bubble on the Chinese economy? Well, as we have said, the Chinese state controls investment. So, in theory, they can simply invest in something else other than housing — infrastructure perhaps, or military equipment. Those currently building houses can be employed, via state diktat, to build something else. Given that the Chinese government has explicitly stated it wants to tackle the housing problem, it would be surprising if they were not planning for this.

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