Ukraine Unexpectedly Strikes Back
The Wall Street Journal reports Ukraine Strikes Russian Navy as War Enters Second Month
That link is not paywalled so you can click to watch the video. Here are a few snips.
Ukraine said it struck the Russian-occupied port facilities in the Azov Sea city of Berdyansk Thursday, setting off a large fire and hitting a Russian warship as the North Atlantic Treaty Organization pledged additional help for Kyiv.
Seized by Russia in the first week of the war that began a month ago, Berdyansk has become a major logistics hub for Russian forces. Footage from the area showed smoke billowing from the berthing area and secondary explosions from the detonating ammunition.
The attack in Berdyansk, nearly 100 miles from the main front line in southern Ukraine apart from the besieged Ukrainian port in Mariupol, is a sign Kyiv has retained significant military capabilities as it pursues a large-scale conventional war against Russian forces.
Footage from Berdyansk also showed two smaller Russian ships fleeing the port after the explosions, one of them on fire.
Before Thursday’s strike, Ukraine managed to inflict severe damage on the Russian navy personnel in the Azov area. Moscow has acknowledged that Ukrainian troops killed the deputy commander of Russia’s Black Sea Fleet, Navy Capt. Andrey Paliy, and the commander of the fleet’s 810th Marine Infantry Brigade, Col. Aleksey Sharov, both of whom were recently operating in the Mariupol area.
Western analysts expected Ukraine to fall within a couple of weeks, possibly even a few days.
It’s now been over a month and the Russian advance on the capital city Kyiv has been stalled for weeks.
Another military surprise occurred today with the missile attack hitting at least one large ship. Ukraine has not disclosed how it hit the ship or with what weapons.
Reports first said Ukraine hit the ship Orsk. Now the reports named the targeted ship as Saratov. Other smaller ships were hit as well.
Looking Ahead
There is no logical end to this war. Putin cannot easily back down and as long as the West supplies weapons to Ukraine, the fight will go on.
Ukraine and Russia provide close to a third of global wheat exports and planting season is about to start.
Most chilling quote from the article:
“The United States thinks it has only sanctioned Russia and its banks. But the United States has sanctioned the whole world.”
Meanwhile senators like @BenSasse hyperventilate about killing Russians.
— David Sacks (@DavidSacks) March 21, 2022
Anyone who thinks rate hikes will cure these inflation shocks isn’t thinking clearly.
Hard Landing or Very Hard Landing
There will be no soft landing whether or not the Fed shrinks its balance sheet at a fast pace or not!
There is only a hard landing or a very hard landing.
I am still waiting for anyone to explain what the Fed can do stop inflation in food or rent.https://t.co/dtkN0y3aiX
— Mike “Mish” Shedlock (@MishGEA) March 24, 2022
I fully understand the Fed can destroy new home buying and thus new home building. but how does destroying new home building lower rent prices.
— Mike “Mish” Shedlock (@MishGEA) March 24, 2022
What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
The answer is nothing or next to nothing. Rates hikes will not impact inelastic items.
For discussion, please see What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?
This post originated at MishTalk.Com.
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Mish
That fertilizer shortage isn’t a massive news story yet, but it will be.
In theory and in accounting terms, there are no direct limits to the size of a central bank’s balance sheet. The fact that the Bank of Japan’s balance sheet now stands at 130% of GDP illustrates this point. Unlike other economic agents, central banks are able to adjust the level of their assets without any immediate limit, by issuing reserves to finance their securities purchases or the provision of refinancing (Barthelemy and penalver (2020)).
However, the growth in central banks’ balance sheets is not an objective in itself. It reflects the implementation of policies for the purpose of reaching an objective: in the Eurosystem, it is the return to inflation close to 2%. Asset purchases and the parameters of liquidity-providing operations are calibrated according to this price stability objective.
Central banks issue two important types of liabilities, which comprise the monetary base: bank notes in circulation and deposit and current accounts.
Bank notes – the euro bills in your wallet – are printed by central banks. They are sold to retail banks on demand in exchange for interest-bearing claims so that your bank can give them to you when you make a cash withdrawal.
Bank notes do not earn interest. Since bank notes cost very little to print but are exchanged at face value, central banks make seignorage revenue on the issuance of bank notes because the financial claim yields a return that in general exceeds the zero return on money. There are currently about 1.2 trillion EUR worth of euro bank notes circulating in the world. The value of a bank note comes from its role as legal tender and the public’s faith that its purchasing power will not be eroded by inflation.
Central bank accounts are provided to domestic banks, international financial institutions and governments to facilitate payment flows between them. When you pay for a laptop using a credit card, then the transfer from your bank account to the seller’s bank account ultimately involves a transfer from your bank to their bank across their respective accounts at the central bank. Major central banks pay interest on these deposit accounts or current accounts and it is via these rates that central banks steer other interest rates in the economy and thereby implement monetary policy. The deposit facility rate of the ECB is currently negative, -0.5%, implying that banks are paying to hold their reserves at the central bank.
On the asset side, central banks hold gold and foreign exchange reserves, collateralized loans to banks and outright purchases of euro area government and corporate bonds (and a few other things). Historically, the ECB and the national central banks – the “Euro-system” – used collateralized loans to banks (known as repos) to regulate the amount of reserves in the system and influence the interest rate on borrowing between banks. Since 2015, the Euro-system has purchased around 2.8 trillion EUR of bonds under its Asset Purchase Programme (APP) as an additional tool of monetary policy (see Figure 1). On 12 March 2020, this was extended by a further 120 billion EUR and under the Pandemic Emergency Purchase Programme (PEPP) announced on 18 March 2020 the Euro-system will purchase an additional 750 billion EUR of assets by the end of 2020.
The assets purchased by the Euro-system include government bonds, corporate bonds, asset-backed securities and covered bonds. The purchases are split between the national central banks and the ECB and government bonds are bought more or less in proportion to the fraction of the capital of the ECB held by each member. So French government bonds comprise about 20% of government bonds purchases under the APP and these are mostly purchased by the Banque de France (BdF). The split of purchases across countries is more flexible under the PEPP.
When the BdF buys a French government bond from a French bank, it credits the deposit account of that bank at the BdF. The BdF now earns interest income from this bond and pays interest on the deposit created – both interest rates can be negative. As long as the yield to maturity rate of return on the bond is above the deposit rate, the BdF earns a profit, which it eventually transfers to the French Treasury.
Since the central bank owns government debt and the government owns the central bank, cannot government debt held by the central bank be cancelled leaving the combined balance sheet unchanged? No, not only is annulling sovereign debt illegal in the euro area but the central bank also still owes interest on the deposits created. This is not a problem now since the deposit rate is negative but may become a problem when the deposit rate becomes positive. The central bank will owe money without income to pay for it. The central bank will also record a significant capital loss.
There are mainly two possibilities to resolve this income deficit: either the transfers between the central bank and the government serve to absorb the loss, or the central bank repays by issuing new reserves. In the first case, the government has to accept a lower monetary dividend. In the second, whilst it is true that central banks can always create additional deposits to pay for this shortfall, this risks becoming a pyramid scheme, as the central bank has to issue increasing volumes of deposits to pay interest on its existing reserves. Banks will have more and more central deposits for which there is little prospect of obtaining real value. Inflation is the inevitable consequence when households and firms begin to doubt about the value of this money and begin to spend their money before its purchasing value disappears. This may start an inflationary spiral.
A similar problem would occur with monetary finance – paying for public expenditures through central bank money creation. A central bank can simply credit funds into the account of the government. But when this money is spent, the deposits will transfer from the government’s account to a bank’s account (similar to the laptop example). The central bank will owe interest on this deposit but without any additional asset to pay for it. A similar inflationary spiral can begin.
But there is a wake up call for ANY military power thinking of adventurism. When the defenders are armed with anything more than 30 year old weapons, things get messy in a hurry.
I hope China, as well as the US, are taking notes.
P.S.: lets just hope Putin doesn’t get crazy desperate and start pulling out the big bombs.
Frankly, I’m surprised Russia hasn’t stopped energy shipments. They must really really need that income. I’d have thought China and India would be willing to buy it all….but transporting it requires infrastructure that may not exist in sufficient volumes.