European economics update: The U.K. is the canary in the coal mine

For the U.K component, see Richard Murphy's tweets.

And while we are comparing the severity of the UK’s and Germany’s pathologies, let us also consider a warning from Pozsar that doesn’t appear to have gotten as much attention as his conclusion about the economic leverage of Russian gas:

More broadly, the three “moments” of reckoning we discussed above mean that
global supply chains, whether they produce military or civilian goods, are facing
a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to
the implosion of the long-intermediation chains of the shadow banking system
that marked the onset of the Great Financial Crisis. Today, we are witnessing
the implosion of the long-intermediation chains of the globalized world order:
masks, baby formula, chips, missiles, and artillery shells, for now. The triggers
aren’t a lack of liquidity and capital in the banking and shadow banking systems,
but a lack of inventory and protection in the globalized production system,
in which we design at home and manage from home, but source, produce, and
ship everything from abroad, where commodities, factories, and fleets of ships
are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007-08, big banks
ran on “just-in-time” liquidity: the dominant form of liquidity was market liquidity,
for which you could always sell assets into a deep market without moving prices,
so you did not have to have liquidity reserves at the central bank. Similarly,
big corporations today run “just-in-time” supply chains for which they assume that
they can always source what they need without moving the price. But not really:
the U.S. military has to wait a little bit as Raytheon “will take a little while”;
Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over;
and if your washing machine broke recently, you’ll have to wait a bit too until
defense contractors are done buying them up to rip chips out to make missiles.

We’re borrowing from “here” to make things “there”. Do you remember the
three units of Minsky? Hedge units can cover their payments from their incomes.
Speculative units have to borrow to be able to make payments. And Ponzi units
can make their payments only if they sell some of their assets and are thus the
most exposed to rising interest rates. As our chip examples demonstrate,
Minsky would classify our military supply chains as “speculative” units at best,
which are exposed to a further escalation of geopolitical tensions that could
easily turn them into Ponzi supply chains. We can also apply Minsky’s framework
in Europe, where Germany can’t cover its payments without Russian gas and
the government is asking citizens to conserve energy to leave more for industry…

Protection by Pax Americana for global supply chains is what capital is for banks.
In 2007-08, big banks didn’t have enough capital to deal with systemic events,
because they were Too Big to Fail. The assumption was that the state will bail
them out. The state did provide a bailout, but at a cost, which was Basel III…

Today, the assumption among investors is that globalization is Too Big to Fail…
…but globalization is not a bank in need of a bailout. It’s in need of a hegemon
to maintain order. The systemic event is someone challenging the hegemon,
and today, Russia and China are challenging the U.S. hegemon. For the
current world order and its trade arrangements and network of global supply chains
to survive the challenge, the challenge must be squashed quickly and decisively,
in the spirit of the Powell Doctrine. But Ukraine and Taiwan aren’t Kuwait,
Russia and China aren’t Iraq, and Top Gun 2 isn’t the same movie as Top Gun.