De-globalization is underway. One of the main ramifications is higher inflation.

World map from Nations Online Project, annotations by Mish

Existing gas supply from the EU

  • The EU obtains about 40% of its total natural gas supply from Russia. This gas arrives in EU countries through existing gas pipelines.
  • Russia and the EU have just completed an additional gas pipeline, Nord Stream II, to supply even more gas to Europe.

After Putin’s invasion of Ukraine, the EU set itself the goal of no longer receiving natural gas from Russia.

Proposed gas supply

  • Instead of using existing pipelines for short distances, the EU wants the United States to deliver liquefied natural gas (LNG) by shipment across the Atlantic Ocean to Europe. This is much more expensive and will require more LNG terminals.

  • The American Greens are not really happy that the United States is fracking more natural gas. And how much energy is lost when compressing and transporting LNG to Europe?

  • It’s not as long as Russia can’t sell its natural gas. Russia and China are building new pipelines for Russia to deliver gas to China instead of the EU.

Russia and China strike 30-year gas deal via new pipeline, to be paid in euros

On February 4, Reuters reported that Russia and China agree to a 30-year gas deal via a new pipeline, to be settled in euros.

The announcement was made before Russia invaded Ukraine on February 24.

The new pipeline is expected to be operational within three years, but given the sanctions and the threat of further sanctions, I suspect Russia and China will work to speed up the schedule.

Power of Serbia

Russia-China pipelines courtesy of Refinitiv

“Pipeline gas from Russia can be supplied to northern China at prices competitive with LNG,” said Ken Kiat Lee, an analyst at consultancy FGE.

If that sounds convoluted, that’s because it is. But that’s a pittance compared to oil-based workarounds.

Money, Commodities and Bretton Woods III

Credit Suisse Economics Contributor Zoltan Pozsar Discusses Supply Chain Disruptions in Currency, Commodities and Bretton Woods III

Ultimately, it will take months more for oil to get where it’s headed. And that does not eliminate Europe’s need for oil.

The details are quite amazing.

Zoltan notes that as Russian oil is diverted to China, China will then buy less oil from the Middle East, and then oil from the Middle East will now have to be shipped to Europe with the same loss of efficiency. as shipping oil from the Baltic to China.

But heavier ships can’t pass through the Suez Canal, so they have to offload oil from tankers, pipe it around the canal, and then swing it onto the tanker to head for Europe.

De-globalization will add to inflation. Here is Pozsar’s key paragraph.

Bretton Woods

Bretton Woods II served a deflationary impulse (globalization, open trade, just-in-time supply chains and a single supply chain [Foxconn]not much), and Bretton Woods III will serve an inflationary impulse (de-globalization, autarky, hoarding in case of raw materials and duplication of supply chains, and more military spending to be able to protect whatever remains of maritime trade) .

Bretton Woods refers to the post-World War II agreement in which established floating currencies and trade imbalances settled into gold.

In 1971, President Nixon defaulted on the gold settlement, leading to the “Nixon shock” and then massive globalization eventually led by China.

Bretton Woods III

Pozsar describes the end of de-globalization and the end of just-in-time manufacturing, which he calls Bretton Woods III.

The new trinity of will be about “our merchandise, your problemPozsar says.

It’s a version of Nixon Shock when Nixon’s Treasury Secretary told a group of European finance ministers worried about exporting US inflation that the dollar “is our currency, but your problem.

nixon shock

Many of today’s problems, including deficit spending, trade deficits and income inequality, have their roots in 1971.

To discuss this, please see my September 30, 2019 article on Nixon Shock, the Reserve Currency Curse, and a Looming Currency Crisis.

What about NAFTA?

Many people confuse NAFTA with the reason for outsourcing from the United States to Asia. They are wrong.

Once Nixon ended the enforced convertibility of gold into dollars, countries were able and willing to inflate at will. The United States then became the global consumer of choice.

For a discussion of the NAFTA fallacy and President Trump’s inept attempt to fix things, please see Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the Real Source of Trade Imbalances?

Can the Fed solve this problem?

If anyone thinks the Fed has any chance of fixing inflation other than massive destruction of demand and a very brutal recession, please tell me how.

And if the Fed doesn’t, then who is the beneficiary if not gold and commodities?

Arguably in a Bretton Woods III scenario, commodities are the big beneficiaries, regardless of what the Fed does.

Plea for more inflationary free money

Meanwhile, the demand for more free money and therefore more inflation is rampant.

For example, the 18-34 age group wants more free money for themselves. But who will pay the free money?

Senator Elizabeth Warren keeps asking Biden to cancel student debt. Will he? If it does and survives a legal test, it will add significantly to inflationary pressures.

For a discussion of measures of inflation, including an additional focus on food, please see Let’s look at four measures of inflation plus a spotlight on food

The economic illiteracy of progressives is staggering.