Debt Bubble and Hyperbitcoinization in Europe – Bitcoin Magazine

09/09/2022

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Europe’s energy crisis escalates

In last Thursday’s dispatch, we covered the dynamics of this inflationary bear market, where conditions in the global macroeconomic landscape are rapidly repricing global interest rates higher. Likewise in our series “Energy, Money & Deglobalization”,

“Energy, Money and De-Globalization, Part 1”

“Energy, Money and De-Globalization, Part 2”

Since our last publication, the response of European governments to “combat” soaring energy costs has been staggering.

In the UK, newly appointed Prime Minister Liz Truss has already launched a draft plan in response to rising consumer energy bills. The policy plan could cost £130bn over the next 18 months. The plan details government intervention to set new prices while securing funding to cover price differences with private sector energy suppliers. Using 2021 annual figures, the plan would be around 5.9% of gross domestic product. Stimulating the UK to 5% of GDP would be roughly equivalent to a $1 trillion stimulus package in the US.

There is also a separate plan costing UK businesses £40bn. Counting the two, they represent around 7.7% of GDP for what will likely be a conservative first pass of stimulus and spending to offset a longer and sustained period of much higher energy bills across Europe over the past few years. next 18 to 24 months. The initial scope of the policy does not appear to have a cap on its spending, so it is essentially an open short position in energy prices.

Ursula von der LeyenPresident of the European Commission, tweeted the following:

The so-called Russian oil price cap is important for a number of reasons: the first is that with Europe’s solution to the current energy crisis appearing to be stimulus tax packages and energy rationing, which this makes the euro and the pound, the two energy currencies the import of sovereignties, only compounds its problems.

Stimulating fiscal measures and energy rationing as solutions to the current energy crisis have had an impact on the euro and the pound.

Stimulating fiscal measures and energy rationing as solutions to the current energy crisis have had an impact on the euro and the pound.

Even with the European Central Bank (ECB) and Bank of England set to roll back pandemic-era easing programs, the solution Western voters are likely to demand is an “energy bailout.” Some are calling this Lehman moment in Europe, in reports yesterday by Bloomberg, “energy trading stressed by $1.5 trillion margin calls.”

“Cash support is going to be needed,” Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview. The problem centers on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate of $1.5 trillion to support so-called paper trading is “conservative”.

–Bloomberg

Similarly, Goldman warned of a bleak outlook for the markets.

“The market continues to underestimate the depth, breadth and structural impact of the crisis,” Goldman Sachs analysts wrote. “We believe these will be even deeper than the oil crisis of the 1970s.”

The energy crisis is currently expected to cost the European continent around 2,000 billion euros, or 15% of GDP.

The energy crisis will have significant costs for Europe.

“At current forward prices, we estimate that energy bills will peak early next year at around €500/month for a typical European family, implying an increase of around 200% compared to 2021. For Europe as a whole, this means an increase of around 200% compared to 2021. A 2 trillion euro increase in energy bills, or around 15% of GDP.

Although this number is likely to be reduced by tax subsidized prices, the currencies are falling significantly against the dollar (still the trade unit in place for global energy), while the dollar itself has been revised down in terms of energy.

However, the corporate sector is among the losers as energy rationing and soaring costs hammer European industrial producers.

“The metallurgical plants that supply European factories are facing an existential crisis”

“The best aluminum factory in Europe will reduce its production by 22% on energy costs”

“German factory orders fall for sixth month amid energy squeeze”

The graph above represents German factory orders by month before the fall.

“Aluminum cuts in Europe deepen day by day as electricity crisis escalates »

“These restrictions come on top of the extreme consequences of the energy crisis on the European metal industry, which is one of the largest industrial consumers of electricity and gas. A group representing the region’s biggest producers has written to European Union politicians warning that the energy crisis could cause ‘permanent deindustrialisation’ in the bloc unless a package of support measures is put in place. work”.

Aluminum, whose production requires about 40 times more energy than copper, is quite energy intensive.

Source: Bloomberg

“This is a real existential crisis,” said Paul Voss, chief executive of European Aluminium, which represents the region’s largest producers and processors. “We really have to sort something out pretty quickly, otherwise there will be nothing left to fix.”

–Bloomberg

What is demanded because of the structural energy deficit in Europe is the population and the business sector demanding the public balance sheet bear the risk. Subsidies for energy bills or price caps do not change the absolute amount of energy-dense fossil fuel molecules on the planet. The price caps and Russian President Vladimir Putin’s subsequent response is what makes all the difference, and it has the potential to create potentially devastating results in financial markets.

No government will allow its citizens to starve or freeze; it’s the same story throughout history with sovereign nations burdening future debts to solve today’s problems. This comes at a time when a handful of European countries have astronomical public debt-to-GDP ratios well above 100%.

A handful of European countries have astronomical public debt-to-GDP ratios well above 100%

A sovereign debt crisis is brewing in Europe, and the most likely outcome is for the European Central Bank to intervene to contain credit risk, perpetuating the devolution of the euro.

We’ve talked at length about the drastic rise and rate of change in US 10-year yields, but it just so happens to be the same picture across all major European countries despite slower actions by various central banks to raise rates.

European debt yields, which also factor in future inflation expectations, still show no signs of slowing. The Bank of England predicts 9.5% Consumer Price Index inflation through 2023 (read “Bitcoin’s Seven Daily Candles” where we cover its latest August monetary report) and the European Central Bank expects a rate hike of 75 basis points in its announcement tomorrow, after just rising recently from negative rates. For what it’s worth, the probability of a Federal Reserve rate hike to 75 basis points for the Federal Open Market Committee meeting in two weeks is currently 80% (intraday pricing vs. 73% for Sept. 6) .

With political pressures mounting, high inflation rates, which have even recently shown slight signs of slowing down, still leave central banks with no other viable options. They need to “do something” to try to keep inflation targets at 2%, even if that only partially causes adequate demand destruction. This is largely where investors who have a thesis around peak rates and “the Fed can’t raise rates” have been crushed. While rising government yields may not be sustainable to service the long-term burden of debt interest payments, we are still awaiting that breaking point that forces a change in direction.

The second-order inflationary effects of unloading more fiscal stimulus policies and/or a seizure in the US Treasury collateral markets are what to watch.