OPINION:
The war in Ukraine has turned a probable recession into a near certainty. A series of policy mistakes by U.S. and European leaders had put the world economy into a precarious position before the war — and now the tipping point has been reached.
It was obvious to anyone who had a basic understanding of monetary history that having a record rise in the money supply — far in excess of the supply of new goods and services — over the last two years was almost certain to cause a great rise in inflation. Many of us had sounded the alarm bell, but the obvious seemed to have eluded the leadership at the Fed and U.S. Treasury. More evidence that abolishing the Fed is long overdue.
Inflation is a pernicious tax on the poor and middle class. During the last three months, consumer prices have been increasing at almost a 10% annual rate, and that was before the big increase in gas prices over the last couple of weeks. Consumer prices might be rising at a 12% rate by next month. Commodity prices have risen 26% from the beginning of this year, which does not bode well for future consumer prices.
From the time that President Biden entered office, real wages (inflation minus wage increases) have declined by over 3.5%. Biden administration officials first told us that the inflation was temporary (what is their definition of temporary?). Now they say it is all Russian President Vladimir Putin’s fault and will be over in a year or two. They conveniently ignore the fact that the excessive money supply began well before Mr. Putin’s war and is continuing. The Biden administration and the Fed are too timid about cutting spending and raising interest rates as much as would be required to stop inflation.
The Europeans are in a similar pickle, and many of the countries have engaged in an even dumber set of energy policies than the Biden administration. It is not rocket science to understand if the goal is to go “green,” a country needs to have enough “green energy” sources operating before shutting down coal, nuclear, oil and gas — or there will be many very cold people.
Despite record gasoline and other fossil fuel energy prices, the Biden administration still refuses to remove all the destructive restrictions on oil and gas production and transport — causing great economic hardship for no good reason, unless it’s assumed they are very stupid, corrupt or both. For a decade, it has been known that the Russians were feeding monies through U.S. entities like the Clinton Foundation to environmental groups and certain Democrat politicians to lobby against fracking and other oil and gas production. The payoffs appear to be working.
Total U.S. employment is still below the pre-COVID-19 high. The unemployment number is low because so many people have not returned to the labor force. So, with falling real wages, fewer people are at work than two years ago. That reduces people’s ability to spend and save and therefore means slower economic growth, which most likely will soon be negative — i.e., recession.
The war makes all of the above worse. Russia supplies 17% of the world’s gas (upon which the Europeans are highly dependent) and 12% of the world’s oil. Russia also supplies 38% of the world’s palladium (used in cell phones and other electronics), 13% of platinum, 9% of nickel, 8% of gold and 6% of aluminum. Russia is the world’s biggest wheat producer and exporter, and Ukraine is the fifth largest, and between them, they account for a quarter of all wheat exports. (Wheat prices doubled last week.) Ukraine also exports about 15% of all corn, behind the U.S. at 30%.
Petroleum is the feedstock for many fertilizers, and Russia again is the biggest exporter of fertilizer, and Ukraine is also a major fertilizer producer and exporter. It is unlikely Ukraine will be able to plant much of its wheat and grain crops this year. Less and higher-priced fertilizer means lower crop yields throughout the world. The poor in the Middle East and Africa depend on cheap wheat and corn from Russia and Ukraine — so expect political turmoil in those parts of the world.
The war and resulting sanctions will likely put the Russian and Ukrainian economies back a couple of decades, but they will survive because the world needs their natural resources. Russia will sell some of the oil it formerly sold to the west to the Chinese — but the major Russian oil fields are a long way from the Chinese population centers — without adequate pipeline or rail infrastructure. Much of the Russian economy — such as the airline industry — will grind to a halt because of the lack of spare parts and business support services. How will the Russian people react to having their disposable incomes cut in half?
Government fiat currencies like the U.S. dollar may have taken a fatal hit. But the market will come to the rescue by creating private commodity-backed monies like gold and silver, base metals and even energy, which will benefit Russia over the long run. But too late to save Mr. Putin from his folly and the misery he has inflicted upon the world’s people. What a legacy!
• Richard W. Rahn is chair of the Institute for Global Economic Growth and MCon LLC.
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