More ominous signs in the financial world
[On December 15th] Russian interest rates were at 10.5%, which sounds incomprehensibly high to those of us who have been living in the world of ZIRP (Zero Interest Rate Policy) for the past six years. But then overnight, the Russian Central Bank raised interest rates to 17%.Just a few days after Ann posted this it was reported that the Russian government was buying up a Billion dollars worth of rubles every day to prop up the currency. And then the next day they announced that they wouldn't continue to do so but would let market forces determine the value.
We all remember what parabolic increases in interest rates mean. Ahem. Cough cough.
The Russian economy is now dangerously dependent on oil. 25% of their GDP is derived from the energy industry. Half of the Russian government’s budget is funded by tax revenue from energy.
So now Brent Crude is trading under $60 per barrel, and Russia’s economy is imploding. People are selling the ruble and moving into dollars, euros, yen...anything but rubles.
So to attract capital to Russia (or keep it from fleeing) the government has raised interest rates to junk-bond levels. And you know what? The market is showing that even with Russian bonds paying 17%, the interest rate still isn’t high enough. People who were holding Russian bonds or rubles before are STILL selling them, and there is no new buying interest.
If Russia can’t price its bonds into the market and attract capital to shore itself up, the banking system will fail, and Russian bank deposits will be “bailed-in”--in other words, swept as they were in Cyprus. But don’t worry--all the Oligarchs keep their money in London.
So why is this happening in Russia and not in the West? I believe the difference is that the Russian economic bubble has been inflated by highly-leveraged oil revenue, but the West’s economy, as Karl Denninger has been screaming for years, has been propped up by Federal Reserve (and European Central Bank) money-printing. Everything in the US is debt-driven. Heck, today Americans are using credit not just to buy houses and cars, but also groceries. New debt creation has outpaced GDP growth in the US since the CARTER administration--sometimes by as much as a factor of 7:1.
Clearly the Western paradigm is worse. At least Russia’s economy, levered though it may be, is tied to a physical commodity: energy. By contrast, the Western economic paradigm is based on larceny: currency debasement and the forcible financial rape of multiple generations of people, many of whom will not even be born for decades. Our debt bubble is a massive catch-22 that may perpetuate itself a bit longer than Russia’s petroleum bubble but is far more toxic.
Both Russia and the West are “in check” on the chessboard, but the board is far more open for Russia. The West has basically nowhere to go, and is down to its last piece.
Putin has been flexing his military muscle like crazy lately, with Russian fighters and subs probing and flat out incurring into European and North American airspaces and waterways on a near-daily basis. Putin is economically trapped, and is also nuts, and history tells us that when nut strongmen become trapped, they get out of it by starting wars. If Putin were to invade Finland, Estonia and Poland tomorrow, you and I both know that the former U.S. would do nothing to stop it.
Again, and I cannot say this enough, get out, Get Out, GET OUT of the financial system as much as you can – and as soon as possible. Your money, your savings, is a proxy for all those years you spent working. All of that time. All of that labor. If the Rule of Law is finished--and it clearly is--then the government can seize your money at any moment. The only remaining restraint on the government doing this is the rapidly-waning integrity of the ruling class.
As you can see, lack of confidence in the ruble resulted in roughly a 50% devaluation in just two years. Wonder if they'll default on those 17-percent government bonds next?