Sri Lanka, a nation of 22 million inhabitants, has been facing turmoil.
Protestors took to the streets and ousted the president,
forcing him to resign and pushing the country to declare a state of emergency.
The country has endured its worst financial crisis since gaining independence in 1948.
If you are wondering how did that happen? How did things get so bad?
The answer is simple! Food inflation rose as much as 80
percent. More than 60 percent of Sri Lankans were already choosing to limit meals to stretch their
food budgets. In one dire example of the lengths, some vulnerable people need to go in order to eat.
Some families travel nearly 10 kilometers on foot to get a free meal from a community
kitchen in Colombo. When people have to borrow money to satisfy their basic needs,
such as putting food on the table, you know that a crisis is on the horizon.
Add to that fuel shortage where people had to wait in long queues to be able to fill their
tanks and constant electricity cuts. Things went from bad to worse. The country halted
petrol sales except for essential services. The protestors stormed the president’s home,
and the country defaulted on its foreign debts. The country’s leaders are definitely responsible
for mismanaging the crisis but that’s side one of the coin. The other is
the world is on the brink of food and energy catastrophe and if things continue the way they
are now. Sri Lanka might be just one out of many countries that will collapse in the coming future.
Russia and Ukraine supply 28 percent of the global wheat, 29% of the barley, 15%
of the maize and 75% of the sunflower oil. Take these supplies out of the market, and you have
hundreds of millions of starving people that are ready to storm presidential palaces.
When there is nothing to put on the table, there is very little left to lose. Nearly 250m are on
the brink of famine, and hundreds of millions more are driven into poverty since now they
have to spend a larger share of their income on food. Almost half of the cereals imported by
Lebanon, Tunisia, and Egypt are from Ukraine. The problem is that over 90 percent of Ukrainian
exports go through either the Odesa port or Mariupol. One is entirely in the hands of Russia,
and the other is blocked by Russian ships that do not let Ukrainian ships pass. On top of that,
the United States and its allies imposed severe sanctions on Russia, which limits its ability to
export its wheat and further creates a shortage in the market, driving higher food prices. Russia is
also the world's largest exporter of fertilizers, but as a way to pressure the west, it suspended
the exports of fertilizer which further created a shortage of wheat which led to higher prices.
That pushed many countries to ban the export of essential products such as
wheat which made the situation even worse. So if you are wondering why inflation is rising?
Here is your answer. There is a global shortage of wheat, barley, and other
basic necessities that are driving prices up worldwide and not just in the United States.
So, just because the Fed raised the rates, it doesn't mean inflation is going to come down.
Only asset prices will most likely fall for reasons we have explored in previous videos.
After 10 years of asset inflation, the Fed finally put an end to that,
but it can’t do much with consumer prices. The global food prices didn't start with
Russia's invasion of Ukraine. China, the largest wheat producer, has said that,
after rains delayed planting last year, this crop may be its worst ever. Extreme temperatures in
India, the world’s second-largest producer, a lack of rain threatens to sap yields in other
breadbaskets, from America’s wheat belt to the regions of France. The Horn of Africa is being
ravaged by its worst drought in four decades. Add to that the disruption of global supply chains,
and you have a recipe for a catastrophe. But things are not as bad as they could be
because Ukraine had already shipped much of last summer’s crop before the war,
and Russia is still managing to sell its grain, despite added costs and risks for shippers.
So, what is the big deal? The most frightening fact is -Winter is Coming!
If the w ar is not going to stop by winter, Ukraine’s next shipment is not going to leave
Ukrainian soil, and Russia won't hesitate to use wheat as a weapon to stop the west from supporting
Ukraine and finally declaring victory on its so-called military operation. If it comes to that,
food prices are going to SOAR! and 9.1 percent inflation will be remembered as the good old days.
However, that’s not the worst-case scenario. JP Morgan expects oil prices
to cross the 380 dollar threshold for the first time ever if Russia cuts its supplies.
Russia produces around 10.8 million barrels of oil a day, making it the third largest oil producer
after the United States and Saudi Arabia, while it consumes just 3 million barrels.
Theoretically, Russia can slash its oil production by over 7 million barrels just to push oil prices
higher as a way to pressure the west to stop supporting Kyiv.
According to experts, if Russia cuts its daily supplies by just 3 million barrels, that would
push crude prices to $190. That’s almost double the price they are today. While the worst-case
scenario is a 5 million barrel slash per day which could mean “stratospheric” $380 crude oil
prices. Putin’s government will already make more money this year than ever from high oil prices
and can easily afford to slash production at the peak of winter. If the last few months have taught
us something, then it’s Russia is struggling and couldn’t break away the Ukrainian resistance,
and it's ready to use any weapon at its disposal to declare victory over Kyiv.
A $380 dollar oil price will increase food prices to levels we have never seen before.
Such high prices will significantly lower demand which will hurt business profits
which will lead to higher unemployment and a recession we have never seen in the past.
Europe, which is the United State’s largest trading partner can easily
slide into a recession the coming winter. While Europe is declaring that it will entirely
get rid of Russian gas, practically speaking, that’s way harder than many think. It does not
have the infrastructure to do that. For the past decades, german factories got hooked on cheap
Russian gas. While many European countries are cutting their Russian gas imports now,
it will be much more difficult to do so a few months from now when the demand for gas will rise
when people begin heating their homes in winter. You can’t simply import natural gas. You need
the required infrastructure that takes years and billions of dollars to build to be able to import
natural gas, which Europe most likely won't be able to solve by the coming winter.
So, if Russia is going to use natural gas as a weapon in the coming winter,
that could send Europe into a recession, and since the EU is the united state’s largest trading
partner and second-largest exporter of China, that will hit both the US and China’s economy severely.
The collapse of Sri Lanka is just the first stage of what's coming next if the world
energy and food crisis aren’t solved. While the world is about to face such a catastrophe,
the Fed is preparing to raise the rates by another 0.75 basis points to further lower the demand.
It’s really difficult to make any predictions at this point because so much depends on the
outcome of Russia’s invasion of Ukraine. But what’s certain for sure is that,
if things will continue the way they are, a recession or probably a stagflation is inevitable.
That’s it for today. Thanks for watching, and see you in the next one.