Long Term Economic Fallout From War In Ukraine

[yakers]

I saw this in the Financial Times:"The idea that Europe can choose the good life over military clout is over"
It is maybe the end of US dollar as the international reserve currency, a high price to pay but maybe one we must pay to keep free. The Economist had a good article about how there was extensive free trade around 1900 whcih ended by war.
Money/prosperity is important but it is not the most important thing. The question is what will we fight for.

[Closet_Gamer]

I feel this is pretty binary.

Scenario 1: Russia loses
Regardless of whether Russia keeps Ukraine or not, Russia loses this thing.

If he loses and evacuates Ukraine, his economy comes back but modern Russia is over for a generation in terms of its global role. His military is being utterly humiliated right now.

Putin's best case scenario is now that he becomes Cuba with nuclear weapons and a side helping of Afghanistan. If he takes over Ukraine, he will have a completely crippled economy for years or decades and an insurgency that he will struggle to put down in such a large country occupied by a clearly de-motivated military.

Perhaps Putin gets taken down from the inside, which I think is increasingly likely. That's the best case variant of this scenario.

The world will feel the loss of commodities exports, but not really much else and it will flex around those. Renewables pick up steam to deal with the fall off of Russian fossil fuel exports.

Europe finally gets its head in the game on defense and energy security regardless of what happens. Fracking probably stops being a four letter word and Lockheed is pressed to put out 2-3x the number of F35s. SpaceX wins because Russia is out of the satellite launch business for the western world. The AUKUS deals gets accelerated through creativity and there will be a dramatic expansion of naval ship building capacity in the US and abroad.

Net impact on FIRE: not much.

Scenario 2: Russia escalates
Whether due to some NATO intervention or Putin being cornered with no way out, he goes nuclear or finds some way to attack a NATO country and radically expand the scope of this. He can't win but he can still make everyone lose. He is in the mode of testing boundaries and international conventions. Nuclear blackmail through those nuke plants, traditional nuclear weapons or that insane sub with the nuclear torpedoes could easily be in the cards. The west may decide to somehow preempt selected scenarios through covert, cyber or direct attacks on key nuclear capabilities or C&C.

Or he convinces China to get in the boat. The latter is only likely if they see some sort of nuclear or other exchange which so pins the US into Europe that they have more freedom of action in Asia.

The detonation of one or more nuclear weapons would be world historic in its impact. Significant market and economic dislocations will ensue immediately. God only knows where that leads. The world will never be the same in our lifetimes and scenarios/permutations of outcomes are all too bad to think about.

Impact on FIRE: My plan to buy a beach house is the least of my worries.

Let's all pray for option 1.

My own position is "accidentally hedged" as I'm hoarding cash for to buy the beach house. That's dramatically shifting my AA towards a far more conservative posture, which buys me flexibility in case I need to call off the beach house purchase.

[BeachOrCity]

Quote:

Originally Posted by yakers I saw this in the Financial Times:"The idea that Europe can choose the good life over military clout is over" It is maybe the end of US dollar as the international reserve currency, a high price to pay but maybe one we must pay to keep free. The Economist had a good article about how there was extensive free trade around 1900 whcih ended by war. Money/prosperity is important but it is not the most important thing. The question is what will we fight for.

Good thought....
I love the FT, but the subscription price is so expensive...unless you get it thru work or school.

[BeachOrCity]

Love your signature re: Luck is where preparation meets opportunity.

While i am hopeful that his own people take him out (literally or figuratively)....I always remember what Colin Powell said about how to keep the peace afterwards.

Sadly, I just don't see a "likely" outcome where "the world" is largely ok. There is going to be a very high price (financial, life / lives, etc) in excess of what we have seen today. The question is what is the price and who will be paying it.

The lowest price I suppose is putin is gone, literally / figuratively. How to keep the peace afterwards assuming the replacement doesn't continue the war

Very (VERY) sadly, the second lowest 'price' in the short / medium term is for the "west" to capitulate. But in all honesty, I think that means the end of the baltics and much of former eastern europe as far as freedoms go.

From there the price gets quite high in almost unthinkable ways.

No matter what happens there is a global power reordering happening incl China and the speed of it dramatically accelerated in the past two weeks.

[ivinsfan]

Great post gamer, you talk about renewable energy. Here's a thought what if everyone in the affluent countries used one car per family, lived in and owned one small house with one bathroom and didn't fly on jet plans? Most of us live with much much more yet have no problem telling people with one days food in their homes they need to go overthrow their oppressive government. I'm not as optimistic as you are that the US standard of living isn't going down. A bushel of corn ATM costs over 7.50 are you not going to eat..meat,dairy chicken.

[OldShooter]

Quote:

Originally Posted by ivinsfan ... I'm not as optimistic as you are that the US standard of living isn't going down. ...

The handwriting has been on the wall for years, predicting the demise of the dollar as the world's reserve currency. The only thing protecting it has been that it is the least awful alternative. Certainly the Russian sanctions have sharpened the resolve of many countries, most notably China, to work on this problem. "When and how fast?" is really the only unknown. That and how far the dollar will fall in relative value -- IOW how bad the effect on the US standard of living will be. It won't be just expensive imports, either. Any product priced and sold on the international market will become more expensive, even if produced domestically. Oil obviously, ag products, metals, minerals, re-shored manufactured products, ...

[Markola]

+1. What viable alternative to the dollar exists? I heard the dollar described this week as “the cleanest dirty shirt in the closet.”

[Markola]

Quote:

Originally Posted by ivinsfan Great post gamer, you talk about renewable energy. Here's a thought what if everyone in the affluent countries used one car per family, lived in and owned one small house with one bathroom and didn't fly on jet plans? Most of us live with much much more yet have no problem telling people with one days food in their homes they need to go overthrow their oppressive government. I'm not as optimistic as you are that the US standard of living isn't going down. A bushel of corn ATM costs over 7.50 are you not going to eat..meat,dairy chicken.

I don’t disagree that we face a decline in living standards but I’m curious what you would have the U.S. and Europe do, or not do, differently than economic sanctions on Russia and support of all kinds for Ukraine. I personally cannot think of anything differently our government could do, short of WWIII, and I’m pleasantly surprised to see so many U.S. and British private corporations choose to assist in the Russian sanctions by ceasing operations.

[pb4uski]

+2 as long as the USD is the best looking horse in glue factory it will remain the world's reserve currency.

[OldShooter]

Quote:

Originally Posted by Markola +1. What viable alternative to the dollar exists? I heard the dollar described this week as “the cleanest dirty shirt in the closet.”

That's the world's problem and our salvation. A few years ago there was a proposal to replace the dollar with a basket of currencies including the rouble, the yuan, IIRC the Brazilian Real, and one or two others. Kind of like the IMF's Special Drawing Rights. That's gone for obvious reasons. China would like the world to simply adopt the yuan, but nobody trusts the Chinese.

There have been some baby steps. Some oil was being sold based on an ad hoc currency basket but I don't know if that is still the case.

Lately I have read that China would like to see their central bank cryptocurrency used. I think other central bank cryptos have been proposed too but I am not smart enough to understand why the crypto aspect solves the dirty shirt problem.

[Markola]

^^^ From what I understand, a blockchain-based Central Bank Digital Token (CBDC), by definition, records in its ledger every transaction by every user. And, it could be instantly bought and used globally. The rub is, those transactions might well be only readable by the issuing government, making a CBDC a tool for surveillance. As you say, no one trusts China (or any other government?) enough to create reserve currency-level adoption.

[aja8888]

Here's a brief article explaining where things stand with the global reserve currency:

https://wolfstreet.com/2020/12/31/us...-slow-decline/

Quote:

The US dollar’s position as the dominant global reserve currency is an immensely important factor in supporting the ballooning US government debt, the Fed’s drunken money-printing, and Corporate America’s ambition to offshore production to cheap countries, thereby creating huge and ever-growing trade deficits. They all have become dependent on the willingness of other central banks to hold large amounts of dollar-denominated paper. But from the looks of things, those central banks might be getting a little nervous. The global share of US-dollar-denominated exchange reserves – US Treasury securities, US corporate bonds, US mortgage-backed securities, etc. held by foreign central banks – fell to 60.5% in the third quarter, according to the IMF’s COFER data release. This is the lowest since 1995. Over the past six years, the dollar’s share has been dropping at a rate of about 1 percentage point per year:

Global reserve currency.png

[BeachOrCity]

Quote:

Originally Posted by OldShooter That's the world's problem and our salvation. A few years ago there was a proposal to replace the dollar with a basket of currencies including the rouble, the yuan, IIRC the Brazilian Real, and one or two others. Kind of like the IMF's Special Drawing Rights. That's gone for obvious reasons. China would like the world to simply adopt the yuan, but nobody trusts the Chinese. There have been some baby steps. Some oil was being sold based on an ad hoc currency basket but I don't know if that is still the case. Lately I have read that China would like to see their central bank cryptocurrency used. I think other central bank cryptos have been proposed too but I am not smart enough to understand why the crypto aspect solves the dirty shirt problem.

I think the freezing of FX reserves changed everything. What govt wants to have their reserves subject to being in the good graces of the USA or its "by by savings account"?

I don't know what the answer will be, but though the dollar is rising bc of the war and uncertainty, strategically every country will want to be less dependent on it.

[gman1234]

From a purely stock market view, what about Boycotts of Russia? For example, if Burger King boycotts Russia, they lost that revenue. No else is buying more burgers to make that up - the sales are just lost. Thus, if Russia is, say 5% of sales, their revenue will be down that amount. Thus, many businesses that are boycotting Russia will have earnings reduced...which usually shows up in quarterly revenues and profits.

[EastWest Gal]

Quote:

Originally Posted by gman1234 From a purely stock market view, what about Boycotts of Russia? For example, if Burger King boycotts Russia, they lost that revenue. No else is buying more burgers to make that up - the sales are just lost. Thus, if Russia is, say 5% of sales, their revenue will be down that amount. Thus, many businesses that are boycotting Russia will have earnings reduced...which usually shows up in quarterly revenues and profits.

Russia is a nation of 144 million people, many who cannot afford to eat out. According to Forbes, there were 847 McDonalds in Russia, and over 39,300 worldwide. So Russia has 2% of all the McDonalds. I don’t think we really appreciate how small the Russian economy is.

[yhoomajor]

Quote:

Originally Posted by pb4uski +2 as long as the USD is the best looking horse in glue factory it will remain the world's reserve currency.

I would disagree with this conventional wisdom (as Russians found out the hard way). "best looking horse in glue factory" would be the case if you could use that horse in a time of true emergency. But, for Russia, Euro/USD reserves turned out to be totally illiquid. Can't use it at all when they needed it most.

Also.. there is no law that other countries HAVE to use USD as the currency to trade. Turkey is already working with Russia to trade in Ruble/Lira. So is China (trade in Yuan/Ruble). Iran has been trading via Barter with several countries.

As I have said few times before, having USD as the world's currency, has allowed us to print $28 Trillions of virtual money.. and other countries ship us their hard-labor-produced products for this funny money. It's great for US, as long as we can keep this trick going. Eventually China, India and rest of world will wake up.

Gold may get its Mojo back, sooner than we think.

[Gearhead Jim]

(Subscribed)

[pb4uski]

Quote:

Originally Posted by yhoomajor ...Gold may get its Mojo back, sooner than we think.

Yeah.... right.

[captain3d]

Gold is up about 12% in the last three months so someone is buying

[Markola]

I read that Russia still has $200 billion in gold within its borders, and that sanctions will prevent them from selling it to the west. Maybe China would trade for it, but at a likely discount, from what I read. We’re all getting a crash course in the ultimate efficacy of one’s financial reserves, including portable yacht wealth and luxury real estate wealth, when more powerful entities don’t want one to access them.