Total economic war will have much collateral damage.

RESULT MAY BE WORLD ECONOMIC DEPRESSION

INCALCULABLE CONSEQUENCES   

Due to the West's frustration at not being able to stop the Russian invasion of Ukraine, they have now embarked on a scorched earth policy to punish Russia. While these sanctions will damage Russia, no one, and I do believe no one, has calculated what the cost is going to be to the rest of the world.

We have been told for decades that the Russian economy is just a fraction of the United States economy. That Russia is an insignificant part of the world economy. Many believe that a nation should be judged by it's GDP.  I occasionally remind my children that the two most important physical things are having enough food and being able to keep warm in winter. Cell phones, entertainment and stuff soon become insignificant when these things are not available.

Today, we see that the Euro has dropped significantly against the U.S. dollar, the medium of exchange for oil and many commodities. This coupled with the increased cost of energy has made Europe especially vulnerable. It is reported that some business's have actually already closed due to the fact that energy costs have made them unprofitable. Diesel is priced as though there is no supply. European stock markets are plummeting.

It has been touted that huge decline in the ruble will cause economic disaster for Russia. This decline is only relevant to goods priced in dollars and imported into the country. The west has mostly stopped the sale of western goods to Russia. The oil that they continue to sell to the world is priced in dollars, so they are in effect getting more rubles for their oil than they were before. They are only penalized when they purchase imported goods. Gas and diesel in Russia is under $2.00 gal. It is also reported that Russian oil is being discounted to favored buyers, which will give them an economic advantage over western companies.

Oil this morning in the U.S. closed at $124. a barrel and wholesale gas without tax or costs is at $3.72 a gallon, this will translate to around  $4.69 a gal. in Pennsylvania,, more in N.Y. and California. Heating oil is at  $4.07, this will translate to $4.49 to $4.99 a gal. delivered. I saw diesel prices yesterday at $5.49. Electric costs will also be rising dramatically.

The real estate bust of 2008 was triggered by $4.00 gas. Many people buy with the view they can make the payment, but when expenses that cannot be eliminated rise by double digits, they often find they can no longer make the payments.

This was when food was not an issue. Food was rising in price and scarcity before this war. It is now going to go critical. No country will be immune except those which are not dependent on foreign food, which today may be no one. Wheat has already risen by 44% on the world market. Same goes for most all food commodities. Russia and Ukraine are biggest producers of Wheat. There will not be any planting or harvest in Ukraine this year. This morning all food commodities have risen sharply.

This coupled with the largely unknown fact that Russia is the biggest source of nitrogen fertilizer, which is already in short supply in the U.S. and prices are expected to possibly quadruple. Planting is to begin in the U.S. in weeks and some farmers are considering not planting due to the cost of getting the plants in the ground.

We hear the U.S. is expected to embargo the purchase of Russian oil and gas. While it may be a feel good response to Ukraine it will result in $6.00 gas and $7.00 diesel and home heating oil.  It may also usher in lowered allocations to distributors which may see some running out of gas. I would expect that may be offset by a drop in demand in the coming weeks. You can also expect this government to consider price controls which could end in rationing.

We expect truckers will want to be assured of increased compensation before they load and transport anything, very likely starting this week.

We also hear that longshoremen want to refuse unloading goods from Russian ships, this will mostly be important agriculture commodities like fertilizer and potash which will end up with more strain on the food supply.

We see most U.S. companies pulling all activity out of Russia, this will translate to write offs and loses that may translate into defaults for some financial institutions. These services will likely be replaced by Chinese and Indian companies.

These energy prices will translate into double digit inflation, some business closings, possible layoffs and a possible plunge into an incalculable decline. An economy that has debt levels never before seen in human history can not withstand a severe economic decline.

I could go on with more repercussions of this economic war, but suffice to say an economy that is largely made up of insignificant products that do not satisfy the need for the basic necessities of life is a very vulnerable economy. It is likely that the financial and trade world will never return to what we consider normal. Having enough food and keeping warm in winter are the most important things for physical life.