Yesterday, Russian interest rates were at 10.5%, which sounds almost incomprehensibly high to those of us who have been living in the world of ZIRP (Zero Interest Rate Policy) for the past six years. Well, overnight, the Russian Central Bank raised interest rates 650 basis points in one shot – to 17%.
And we all remember what parabolic increases in interest rates mean. Ahem. Cough cough.
The Russian economy is now completely dependent upon oil. 25% of Russia’s GDP is derived from the energy industry. Half of the Russian government’s budget is funded by tax revenue from energy. Apparently someone didn’t go to class the day they taught about diversification. (Must have been out shirtless bareback riding that day.) Even I didn’t realize how heavily levered Russia was in energy until I looked it up just now. It’s categorically insane.
So now Brent Crude is trading under $60 per barrel, and Russia’s economy is imploding. People are selling the Ruble and moving into the Dollar, Euro, Yen, pretty much anything is considered a flight-to-quality at this point. Heck, the Ruble is crashing even relative to the Venezuelan Bolivar.
So, in order to attract capital into Russia, which they need desperately because the massive petroleum expansion was financed with debt, they are raising interest rates hoping to retain that capital which remains, and more importantly to attract new capital. And you know what? The market is showing that even with Russian bonds paying out at 17%, the interest rate still isn’t high enough. People who were holding Russian bonds before are STILL selling them, and there is no new buying interest. And the Ruble is still selling off. 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 of the Russian Oligarchs keep their money in London.
So why is this happening in Russia and not in the West? I believe that the difference is that the Russian economic bubble has been inflated by highly-leveraged pertroleum revenues, 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, Americans are using credit not just to buy houses and cars, but to buy groceries today. New debt creation has outpaced GDP growth in the US since the CARTER administration. Sometimes by as much as a factor of 7:1.
Which is worse? Clearly, the Western paradigm is worse. At least Russia’s economy, levered though it may be, is tied to a physical commodity – and perhaps the physical commodity par excellence: energy. The Western economic paradigm is inextricably tied to larceny: currency debasement and the forcible financial rape of multiple generations of people, many of whom will not even be born for decades or centuries hence.
So, in the West, in our debt bubble we are in a massive catch-22 that can perpetuate itself a bit longer than Russia’s petroleum bubble, but is far more toxic. Namely, if the Federal Reserve/Banksters keep interest rates synthetically at zero, all of the interest-income dependent portfolios (i.e. money market funds, pension funds, 401k and IRA, insurance companies, AND Social Security and Medicare) will eventually implode due either to a simple lack of revenue OR because the high-risk derivatives they have migrated into in order to generate any sort of return have collapsed, BUT if they allow interest rates to rise and the bond market genuinely comes back into play, there will be a massive move of money OUT of the equities (and also residential real estate, obviously), and the stock market bubble will utterly collapse, along with the real estate bubble.
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 possibly, possibly can – while you can. Your money, your savings, is a fungible proxy for all of those years of your life that you spent working. All of that time. All of that labor. If the fungible proxy of 0’s and 1’s on a computer server becomes extremely vulnerable to theft with no recourse or Rule of Law, then prudence dictates that you should defend your property by reallocating into something that is, at least, LESS VULNERABLE than 0’s and 1’s, which are wholly, completely contingent upon the Rule of Law and the fiduciary integrity of the ruling class.
Considering that the ruling class today is wholly comprised of psychopathic oligarchs, and that the Rule of Law is dead, replaced instead by an arbitrary tyranny, NEED I SAY MORE?