The West today is facing a dangerous future. If Europe does not figure out a way to get Russia to turn the gas back on, the European economy will likely collapse this winter. If this happens, expect serious political instability. Yet at this very moment, our leaders are engaged in absurd power fantasies where they dictate terms to Russia about the sale of energy.
Consider the price cap on Russian oil. The idea is simple enough: buyers of Russian oil join a big club which makes a commitment not to buy any Russian oil that is priced above a certain level. Clubbing together has long been a feature of global oil markets. OPEC – and now OPEC+ – is a club of sellers. They effectively set the price of oil by meeting and agreeing on production targets for oil. So why haven’t buyers of oil clubbed together until now? Probably because the idea is ridiculous and, until very recently, Western leaders were not willing to look so unserious on the world stage.
It is not hard to explain why the idea makes no sense. Let us say the countries currently signed on to the madcap scheme – the United States, Canada, Japan, Germany, France, Italy, and Britain – turn to Russia on December 5th (the planned date of the action) and say they will not buy a single barrel of oil priced over, say, $90. The likely answer from the Russians will be: “Sorry, the market price of oil is higher than that. If you do not want our oil at the market price you are free to look elsewhere.”
What happens next? Assuming these countries place a ban on buying Russian oil over $90 a barrel, consumers and distributors will have to start bidding for oil in countries other than Russia. This will greatly increase the price they pay in these countries. This, in turn, will drive up the global price of oil – certainly for all the countries signed up to the policy.
What about Russia? They may lose out on some oil revenue, or they may not. It depends on two things. First, on how much the rise in the price of oil cancels out the loss in quantity being sold. Second, on how much of their oil can be shipped to alternative markets. Considering all this, who is more adversely affected by the oil price cap? Obviously, the countries trying to impose the cap. And those countries are not just slightly more adversely affected, they are far more adversely affected.
This is why no countries have tried a price cap before. It is an absurd policy. It is deeply unserious. It does not even pass the smell test of being an idea worth considering. If such ‘magic beans’ tactics worked, they would have been used by oil consumers against OPEC long ago.
It is sad to say, but the credibility of our elites is crumbling. They are becoming very difficult to take seriously. One can only imagine how their statements and actions are viewed across the world. Without putting too fine a point on it, the Chinese, Russians and Indians must be having a good laugh. And when that laughter dies down, it will have very real effects. Global partners will take us less seriously. We will not be accorded the respect we have been hitherto.
Meanwhile, inflation surges at home. Living standards fall, and there is reason to think the decline may not be reversed. This does not feel like a normal inflation. Normal inflation occurs when the economy is running too hot and is reversed when the economy enters a recession – typically after central banks raise interest rates. But our current inflation feels more like an impairment in living standards caused by supply chain disruptions and a shake up in global trade relations, sparked by geopolitical realignment.
Let us run some simple models to get a sense of how bad this could get. In one scenario, let us imagine that inflation in Britain continues at the current rate and we do not get a recession (or at least, the recession is not that bad) – so nominal wage growth continues at its present rate. This is the ‘No Recession’ scenario. In the second scenario, let us imagine that inflation continues at its present rate, but we get a recession in the last three months of 2022 and nominal wage growth goes to zero. This is the ‘Recession’ scenario.
Here is what those two scenarios looked like and compared to real wage growth in the 2001-07 period and the 2010-2021 period.
As we can see, in those halcyon days before the financial crisis, Britain saw its real wages rise around 2.4% a year. In the wake of the financial crisis, British living standards have been basically flat. That has been pretty unpleasant, but it has been tolerable – sort of. Now look at the two models. They show that we should probably expect real wages to fall by anything from 1.9% to 3.5% this year.
Now let us imagine that we are in for a decade of this. Let us say that due to shifting trade patterns, geopolitical chaos, continued supply disruptions (from lockdowns, net zero policies and various other interventions) and the decline of Western reserve currencies, we continue to see high inflation and low nominal wage growth. Here we will just label our ‘No Recession’ and ‘Recession’ scenarios ‘Bad’ and ‘Very bad’.
The erosion of purchasing power builds on itself. By the end of the decade, living standards – what you can purchase with your paycheck – have fallen by somewhere between 18% and 30%.
Of course, I do not have a crystal ball. Maybe after a few more months of turbulence, the economy will right itself and inflation will subside. My point is that you can make a credible case that this will not happen. In other words, I can argue with some justification that living standards in Britain will fall 18–30% in the next decade. Prior to the lockdowns, if you had tried to make that case to me, I would have dismissed you as crazy. But the world has changed drastically.
As these new realities assert themselves, our leaders engage in fantasy and playacting. And the rest of us risk, as Peter Cook once quipped, are sinking giggling into the sea.
Philip Pilkington is a macroeconomist and investment professional. You can subscribe to his Substack newsletter here.
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Wage growth is a bit of an odd measure, I’d argue it has more effect on some workers than others. More established older workers may be more effected than younger workers for example.
Why so?
Well, I started in 2006 fresh out of uni as a new hire on 17k but since then I have seen wage raises based on seniority as well as annual increments. Hence if you assume I had only had annual increments on my 17k then yes I would be feeling the pinch but I have risen several grades in that time to now being the office senior and therefore compared to myself back in 2096 I am much much better off.
Now some people will still be doing the same job in the same grade that they were on in 2006 but how many actually does that represent?
I’ve never had much respect for our so called elites but I didn’t really mind them because for the most part we could just get on with our lives and navigate around the messes they created.
The problem is that they are now deploying the power of the state against us and imposing their stupidity on us in a way that makes it very difficult to ignore.
Boris read classics at Oxford and a compulsory subject in the both classics and PPE in those days (sadly dropped as standards fell) was logic.
This article is an excellent exercise in logic – something sadly lacking amongst our leaders who think that because they say something it will happen like they want it to rather than as inevitably happens the law of unintended consequences. Example, lockdowns – some children not being educated or acquiring social skills or even potty training. Pretty obvious to someone who had stopped for five minutes to consider the logical outcomes as most readers of this site appear to do
Our leaders were well aware of the probable consequences of depriving children of their routines and that is why education was disrupted. The psychological damage was intentional.
If our children are to accept their slave status as adults the programming has to start now.
All pre-planned.
Talking about Bozo Johnson. Whenever Paxman cornered him on Newsnight – Johnson would stymy Paxman by throwing in a random phrase from Greek Literature that would (as with most of us), throw the interviewer off the scent. In essence outside of that Bozo is not very bright and certainly not good enough to lead a nation.
The sheer stupidity of ‘net zero’ has not been addressed in this article. It is in my opinion patently obvious that net zero has sod all to do with global health, in fact the opposite is the case and fuel impoverishment is an end in itself. No modern economy can run without carbon so the whole basis of net zero is based on a very obvious lie from the off. Even a very unscientific mind such as mine has grasped this basic fact.
Fuel shortages are being deliberately engineered and to pretend otherwise is simply naiive at best.
Cold and hungry people are much more susceptible to illnesses and the Davos Deviants have probably got a new brew under way already. So we are going to see a huge rise in sickness levels, another round of “vaccines,” and huge rises in mortality, in short depopulation. And for the sickened survivors – the slave class – “you will own nothing and be happy.”
Agenda 2030 is being rolled out in broad daylight yet people still have their eyes shut.
“It’s not always about what they say it’s about.”
I often wonder whether things would be different were the RPTB not in control of the MSM. This would mean that people might actually learn how to think critically because they would be presented with all sides of, in this case geo political matters, especially Russia/Ukraine.
They might then consider the fact that come what may the elites will never have their own living standards adversely affected, the simple reason being their wealth and power.
So, they are free to “get tough” with Russia which seems, at the moment, to find favour with the sheep – who to be fair, they control via the MSM.
Winter may yet prove to be interesting -pitchforks anyone-as we continue to fight the bear to the last Ukrainian, impose more and more sanctions and then bleat about Russia turning down the gas.
So sad, so stupid, so predictable.
Stagflation:
Money Printing + Restrictions on Supply
Not a nice thing.
Who could possibly have predicted it?!
next in the illogical and hysterical sanctions list is freezing our own pensioners to death. Who is laughing now, Mr. Putin!
A German engineer throws in the towel and sums it all up very succinctly.
I could do with a translation.
Don’t moan about: being unemployed, when you freeze in winter, you have to eat insects, and your kids can’t go to (pre-primary) school. Roughly covers the bottom end of it, if that helps.
Thanks John.
It’s more like when your children already spoiling in day care (including the grammatical error).
“Have fun in the New World Order!
It wasn’t the Coronavirus which disturbed our businesses, it was the measures taken/lockdowns etc.
It’s not the war on the Ukraine which is taking away our last reserves/resources, ( of everything ), but the sanctions.”
Thanks Amtrup.
Well, I get the gist of it. Similar posters could be made for other nations as well, no doubt.
The last sentence isn’t really German, it just uses German words in a way which doesn’t make sense. Specifically, it’s lacking a necessary auxiliary verb. Additionally, applying verdorben to people (as opposed to, say, vegetables, where it would mean rotten) is seriously oldschool. This fell out of fashion a pretty long time ago.
Perhaps he/she is from the former East Germany. I have friends now living in Mainz who were originally from the east and they are continually telling me that east Germans still have a very different mindset from their western compatriots and live “30 years behind.”
From Russia, possibly, but they wouldn’t make the mistake with the missing verb. That’s almost certainly an incompletely copied Google translation of something which was originally written in a different language. Whether that was English, Russian or Chinese is anybody’s guess. That’s also visible from the emotional in the header. The German meaning is identical to the English one, just maybe a little bit stronger: Subject to wild mood swings. Nobody, especially no engineer, would use that in the context of a professional advertisement.
BTW, I know a fair lot of people from the ex-GDR. If anything, they’re more German and less Americanized than the population of the western powers occupation zone (also known as FRG). That’s a refreshing difference.
Well since the US and its NATO vassals are not buying any Russian oil, that would seem to be the ultimate price cap $0 per barrel.
Price caps – on anything – are the best way to ensure a supply shortage.
75% of the World hasn’t joined the Coalition of the Stupid against Russia, so why would the clowns imagine they will sign up to oil price caps – when they are getting nice discounts already?
However.
The Middle East oil producing States have significantly increased their purchases of Russian oil which they are buying at a discount.
What? Coals to Newcastle!
But, all becomes clear when…
The ME States are using Russian oil to replace their domestic use of their own oil (Saudi generates most of its electricity by burning oil) and this displaced oil is sold on the World market – large amounts to Europe – at full market price. The Arabs are pocketing the difference… arbitrage.
The Europeans are in effect getting Russian oil via the Middle East, but paying more for it. Absolute genius! Take that Putin!
It also explains why Joey CoVid Fourjabs was returned rinsed and empty from Saudi. Europe is getting the oil, but the Saudis don’t need to produce more as they can get plenty from Russia, and by not increasing output they keep market prices up and therefore they maximise the profit they make by buying discounted Russian oil.
Russia has made up lost sales to the Loonie Brigade of Countries, by selling more to other Countries, at a discount, but higher volume maintained revenue, and by selling in Ruble or gold, is keeping the currency strong and still collecting foreign exchange.
In brief: the Russians clearly are more economically savvy than the cheerless, nitwits running our ‘developed’ Countries.
‘Normal inflation occurs when the economy is running too hot and is reversed when the economy enters a recession’
Yes this occurs when cheap credit encourages demand in an economy where the supply side is running at full steam ahead but cannot keep up because high level of employment means there is insufficient labour to increase output to meet increasing demand.
But this situation is different. Two years of idiotic economic shut down has paired low demand with low supply, but thanks to more Government idiocy too much printed/valueless money has been fed into the economy looking for too few goods as consumer demand recovers before supply side can which after two years of abject Government stupidity on a global scale is dead in the water.
The thing not to do is encourage demand with cheap credit, nor further impede supply-side recovery with higher costs (energy), taxes and regulation (Net Zero) nor cut off avenues of supply with sanctions on Russia.
The solution? Revolution to sweep away the whole ghastly enterprise of Government and (nominal) Opposition and the Marxist, misanthropists in the EcoFascist religion.
We could all apply a personal price cap to our energy suppliers. Simply cancel the direct debit and pay a reasonable amount by bank transfer. Inform the supplier you will do this and give reasonable notice.
The CPI suggests a 12% increase in payments since 2020. Of course the companies will threaten. But we have to tackle the house of cards sometime.
All planned. We are to own nothing.