The Perfect Storm

We can see that prices are skyrocketing, and I must say that before they start to fall, they will continue to rise, at least until the end of the Russian winter. But what is causing this sudden surge in inflation? Well, it is due to a number of factors—unrelated to one another but which reinforce each other—coming together at the same time, causing an explosive effect that could leave the European economy in a very sorry state by the time the recovery begins in the spring.

11 November 2021 Reading time: 3.50 mins

It is known as the ‘Perfect Storm’ because three economically damaging events – which are unrelated to one another but which, by coinciding in time, feed off one another and exacerbate the crisis – have come together. There are three such events, the combined effect of which increases the damage exponentially.

Firstly. The gas crisis, caused by the unusual shortage of reserves at the start of autumn in Europe and China.

This shortage is, in turn, due to two events:

• A longer-than-usual winter in Russia (the world’s leading gas producer), which meant that exports for storage began later than expected

• Unusual spikes in demand in various markets (caused by the excess liquidity generated by central banks) led to increased gas consumption to produce these items during the spring and summer. This triggered the supply chain crisis subsequently discussed.

The consequence of this is that, as China’s gas reserves are so limited, it has had to buy gas on the spot market, competing with European countries for Russian gas and causing prices to rise

the price we are seeing, which in our case has a direct impact on the price of electricity.

“The peaks in demand during the spring and summer were not properly anticipated by any central bank or by any major think tank attached to national governments”

Secondly, the coal crisis. China consumes between 50 and 60 per cent of the world’s coal production, and although it is a major producer, it still needs to import. Until last year, its main source of coal was Australia, but tensions in the South China Sea (*) have severed these ties, leaving China with a significant coal deficit.

At present, coal is the main energy source for China’s combined-cycle power stations, so any shortfall in coal supplies has a direct impact on the price of electricity. The Chinese Communist Party keeps electricity prices capped, which means that power generation must be carried out at a loss, causing many combined-cycle power stations to close and resulting in systematic power cuts across two-thirds of the country.

(*) These tensions in the China Sea are the reason why the Americans have sold the Australians Virginia-class nuclear submarines. These submarines are ideal for patrolling those waters without having to surface to refuel whilst on patrol.

Third. Military tensions in the Taiwan Strait. Taiwan currently produces 85 per cent of the world’s microchips.

Technology that is not only beyond the reach of most people, but the construction of its factories requires not only a significant investment but also a great deal of time.

The Taipei government has come to the conclusion, and it appears to be correct, that the only way it can attract the world’s attention and aid in the face of China’s threats of invasion is to blackmail the world by withholding microchips – components that are increasingly found in any product containing electronic components, which today make up the vast majority of goods.

“Taiwan is playing its hand under enormous pressure. Until the Chinese withdraw their threats, the export of microchips will be restricted.”

This is compounded by the fact that the peaks in demand during the spring and summer led to overproduction, for which the logistics chain was unprepared, resulting in the supply chain bottlenecks we are currently seeing.

Ships laden with containers cannot unload because the ports cannot cope, and the containers are being stored because there are no lorries. As the goods stored in the ports are not being distributed, the containers are not being emptied and the ships cannot unload to return to their ports of origin to collect more goods; this, combined with the microchip shortage, is causing shortages throughout the entire supply chain.

In addition to the above, the energy problems described earlier mean that products which are heavily reliant on burning gas or coal face rising costs due to the increase in the price of this scarce resource, as well as producing in smaller quantities because producers are unable to bear or cover these costs in advance.

And it all boils down to the fact that prices are skyrocketing, not because of excess demand, but simply because there is less and less supply – in other words, because the economy is performing increasingly poorly. Definition of that pesky term: stagflation.