Biden tries to climb down from Ukraine ledge

President Joe Biden’s administration faces a double disaster after its Ukraine miscalculation, namely a US recession and a second strategic humiliation in the space of a year. The US economy is almost certainly in recession, while oil prices drive inflation that has cut workers’ real pay by about 6% year on year. Washington’s earlier boasts of driving Russian President Vladimir Putin from power, destroying Russia’s capacity to make war and halving the size of the Russian economy look ridiculous in retrospect. The world economy is reeling from supply shocks in energy and food provoked by Western sanctions on Russia. Monetary policy can reduce inflation only by forcing consumers to stop buying, which forces retailers to liquidate inventory at lower prices and crushes demand for raw materials – a cure that is worse than the disease. Russia meanwhile earned a record €93 billion (US$97 billion) from energy exports during the first 100 days of the war, a Finnish study concluded. China and India, which refused to join Group of Seven sanctions against Russia, reportedly are buying oil at a discount of $30 to $40 per barrel, while American and European consumers are paying the full price. Energy prices have become the main driver of G7 inflation. Changes in the oil price lagged by one to four months explain 70% of the monthly change in the CPI, according to an Asia Times study. The sensitivity of the US Consumer Price Index to the oil price, moreover, was about twice as high during the February 2020 to May 2022 period than it had been during the preceding 15 years, the study shows. US GDP contracted at a 1.9% annual rate during the first quarter. The surprise drop in May retail sales that was reported June 15 by the Commerce Department and the 14.4% month-on-month fall in US housing starts reported on June 16 point to a second quarter of contraction – that is, a recession according to the standard criterion. That spells catastrophe for the Democrats in next November’s election. More dire than an American recession is the risk of a financial disaster among the weaker G7 economies. Japan’s yen has been in free fall as the Federal Reserve has tightened credit. Government debt is 270% of GDP, and half of it is owned by Japan’s central bank, up from about 5% in 2011. With an aging population that is spending its retirement funds rather than saving, the world’s third-largest economy is financing itself by the printing press. The cost of hedging Japanese government bonds spiked this week to the highest level since the 2008 financial crisis. Italy, Europe’s weakest economy, suffered a jump in government debt risk almost as severe. The European Central Bank convened an emergency meeting on June 15 to address the deterioration of its weakest members and promised yet-to-be-specified measures to prevent the “fragmentation” of the European Union. The Biden administration vastly underestimated the inflationary impact of the $6 trillion Covid stimulus package, which began under Donald Trump’s administration but doubled under Biden. It underestimated the resilience of the Russian economy and the capabilities of the Russian military. Climbing down off this ledge won’t be easy. It may be impossible. Biden denounced Russia’s leader as a war criminal, averred that he couldn’t be allowed to remain in office and bragged that US sanctions would cut the Russian economy in half. Defense Secretary Lloyd Austin claimed that the US would destroy Russia’s capacity to make war. A compromise in Ukraine with significant territorial concessions to Russia – the only conceivable way to end the war – would humiliate Washington. A negotiated solution to the Ukraine war, though, is not impossible. Washington could continue to portray itself as the defender of Ukraine’s sovereignty while encouraging European leaders to do the dirty work and force Ukraine into negotiations with Moscow. A possible hint in this direction came on June 14 from US Undersecretary of Defense for Policy Colin H Kahl, who declared: “We’re not going to tell the Ukrainians how to negotiate, what to negotiate and when to negotiate. They’re going to set those terms for themselves.” Kahl was Joe Biden’s national security adviser during Biden’s term as vice-president under Barack Obama, and one of Biden’s most controversial appointees. Republican senators unanimously rejected his nomination to the Pentagon post, and Vice-President Kamala Harris cast the tie-breaking vote to confirm him. It is noteworthy that the statement came from him, rather than from Secretary of State Antony Blinken or national security adviser Jake Sullivan. Kahl’s statement, to be sure, is mendacious in the extreme. France and Germany on February 15 asked Ukrainian President Volodymyr Zelensky to comply with the Minsk II agreement, then supported by Moscow, which would have given autonomy to Russian-speaking regions in the Donbas within a sovereign

Biden tries to climb down from Ukraine ledge

President Joe Biden’s administration faces a double disaster after its Ukraine miscalculation, namely a US recession and a second strategic humiliation in the space of a year.

The US economy is almost certainly in recession, while oil prices drive inflation that has cut workers’ real pay by about 6% year on year.

Washington’s earlier boasts of driving Russian President Vladimir Putin from power, destroying Russia’s capacity to make war and halving the size of the Russian economy look ridiculous in retrospect.

The world economy is reeling from supply shocks in energy and food provoked by Western sanctions on Russia. Monetary policy can reduce inflation only by forcing consumers to stop buying, which forces retailers to liquidate inventory at lower prices and crushes demand for raw materials – a cure that is worse than the disease.

Russia meanwhile earned a record €93 billion (US$97 billion) from energy exports during the first 100 days of the war, a Finnish study concluded. China and India, which refused to join Group of Seven sanctions against Russia, reportedly are buying oil at a discount of $30 to $40 per barrel, while American and European consumers are paying the full price.

Energy prices have become the main driver of G7 inflation. Changes in the oil price lagged by one to four months explain 70% of the monthly change in the CPI, according to an Asia Times study. The sensitivity of the US Consumer Price Index to the oil price, moreover, was about twice as high during the February 2020 to May 2022 period than it had been during the preceding 15 years, the study shows.

US GDP contracted at a 1.9% annual rate during the first quarter. The surprise drop in May retail sales that was reported June 15 by the Commerce Department and the 14.4% month-on-month fall in US housing starts reported on June 16 point to a second quarter of contraction – that is, a recession according to the standard criterion. That spells catastrophe for the Democrats in next November’s election.

More dire than an American recession is the risk of a financial disaster among the weaker G7 economies.

Japan’s yen has been in free fall as the Federal Reserve has tightened credit. Government debt is 270% of GDP, and half of it is owned by Japan’s central bank, up from about 5% in 2011. With an aging population that is spending its retirement funds rather than saving, the world’s third-largest economy is financing itself by the printing press. The cost of hedging Japanese government bonds spiked this week to the highest level since the 2008 financial crisis.

Italy, Europe’s weakest economy, suffered a jump in government debt risk almost as severe.

The European Central Bank convened an emergency meeting on June 15 to address the deterioration of its weakest members and promised yet-to-be-specified measures to prevent the “fragmentation” of the European Union.

The Biden administration vastly underestimated the inflationary impact of the $6 trillion Covid stimulus package, which began under Donald Trump’s administration but doubled under Biden.

It underestimated the resilience of the Russian economy and the capabilities of the Russian military.

Climbing down off this ledge won’t be easy. It may be impossible. Biden denounced Russia’s leader as a war criminal, averred that he couldn’t be allowed to remain in office and bragged that US sanctions would cut the Russian economy in half. Defense Secretary Lloyd Austin claimed that the US would destroy Russia’s capacity to make war.

A compromise in Ukraine with significant territorial concessions to Russia – the only conceivable way to end the war – would humiliate Washington.

A negotiated solution to the Ukraine war, though, is not impossible. Washington could continue to portray itself as the defender of Ukraine’s sovereignty while encouraging European leaders to do the dirty work and force Ukraine into negotiations with Moscow.

A possible hint in this direction came on June 14 from US Undersecretary of Defense for Policy Colin H Kahl, who declared: “We’re not going to tell the Ukrainians how to negotiate, what to negotiate and when to negotiate. They’re going to set those terms for themselves.”

Kahl was Joe Biden’s national security adviser during Biden’s term as vice-president under Barack Obama, and one of Biden’s most controversial appointees. Republican senators unanimously rejected his nomination to the Pentagon post, and Vice-President Kamala Harris cast the tie-breaking vote to confirm him. It is noteworthy that the statement came from him, rather than from Secretary of State Antony Blinken or national security adviser Jake Sullivan.

Kahl’s statement, to be sure, is mendacious in the extreme. France and Germany on February 15 asked Ukrainian President Volodymyr Zelensky to comply with the Minsk II agreement, then supported by Moscow, which would have given autonomy to Russian-speaking regions in the Donbas within a sovereign Ukraine.

At Washington’s prompting, Zelensky rejected a February 19 proposal from German Chancellor Olaf Scholz to avoid war. Michael Gordon reported on April 1 in The Wall Street Journal:

“Mr Scholz made one last push for a settlement between Moscow and Kyiv. He told Mr Zelensky in Munich on February 19 that Ukraine should renounce its NATO aspirations and declare neutrality as part of a wider European security deal between the West and Russia. The pact would be signed by Mr Putin and Mr Biden, who would jointly guarantee Ukraine’s security. Mr Zelensky said Mr Putin couldn’t be trusted to uphold such an agreement and that most Ukrainians wanted to join NATO.

The hapless Zelensky did not invent the idea of NATO membership for Ukraine. He was given assurances by Washington and London, which stepped up weapons deliveries to Ukraine.

The United States won’t tell Ukraine what to do, Undersecretary Kahl declared. But that doesn’t prevent other governments from making Zelensky an offer he can’t refuse. Zelensky adviser Oleksiy Arestovych told Germany’s Bild-Zeitung on June 16 that German Chancellor Scholz, French President Emmanuel Macron and Italian President Mario Draghi might deliver such a demand to Zelensky during their current visit to Kiev.

The Zelensky aide said he feared that Scholz, Macron and Draghi “will try to get a Minsk III. They will say that we need to end the war that is causing food problems and economic problems, that Russians and Ukrainians are dying, that we need to save Mr Putin’s face, that the Russians made mistakes and that we need to forgive and give them a chance to return to world society.”

Germany’s leading center-right daily Die Welt commented: “Kiev is beginning to have doubts about the solidarity of the West. Voices are being raised calling for peace efforts. In particular, a statement by NATO chief Stoltenberg points to a change of course.”

Die Welt referred to a June 12 speech in which NATO Secretary General Jens Stoltenberg stated: “The question is: What price are you willing to pay for peace? How much territory? How much independence? How much sovereignty? How much freedom? How much democracy are you willing to sacrifice for peace? And that’s a very difficult moral dilemma.”

It’s possible that Biden’s instincts for political survival may take precedence over the ideological priorities of his Secretary of State Antony Blinken and Undersecretary of State Victoria Nuland, the architect of the 2014 Maidan Square coup that set the present tragedy in motion.

We do not know what the Biden administration will do in the face of this double disaster, to be sure. At this point, it probably doesn’t know, either. The choices, though, are stark and clear: Either climb down off the ledge or plunge into a world recession and a spiraling strategic crisis.