Conflict, Covid, China and Congress give inflation historic mementum

 

Gordon L. Weil

Your wallet is at war.  It’s losing to inflation.

Almost everything from gasoline to food to computers costs more and there’s a good chance that a tax increase will top it off.

The reasons are clear: conflict, Covid, China and Congress.   

Most of us feel far removed from major forces of change.   We struggle to recover the lives we led just a few years ago.  But the interconnected world reaches into the pockets of average people.

You can see it in most L.L. Bean catalogs. Everything, except some boots, is marked “imported.” Imports are cheap, thanks to lower cost labor and lax environmental rules elsewhere, compared to the company’s traditional Maine-made products.  American consumers have liked it cheap and the heck with world politics. That will change.

It is impossible now to ignore world events and avoid their effects. Hostile relations among nations are leading to economic warfare among emerging zones seeking greater self-sufficiency. A zone led by China and one led by the U.S. seem to be forming.  Though each plays in the world economy, each also seeks strategic advantage by reducing reliance on the other.

There may be outright conflict in places like Ukraine or possibly Taiwan. The effect is felt by most people in the form of higher prices.  While it is easy to blame President Joe Biden or either party in Congress for inflation, the forces behind higher prices are far more powerful than federal deficits.

The most obvious and immediate upward price pressure comes from the Ukraine war. Russia is the largest supplier of oil and natural gas to Europe.  The EU now understands that its ability to fight Russian aggression is limited by its dependence on those fuels.  It is turning to alternate supplies all of which are more expensive.

The U.S. and Canada will step up more expensive fracking and send fuel to Europe.  Qatar will add its natural gas.  While Europe reduces Russian supplies, the price of fossil fuels increases. Oil and gas trade is conducted in a world market, so rising prices are felt everywhere.

American suppliers charge American customers more.  There are not enough renewables to save the day, and they have their own price tag.

Food supplies and most other products must be transported from their origins to end users.  The price of motor fuel figures in almost everything we buy or seek to sell.    Higher fuel costs yield higher costs of almost everything. 

The impact of Covid-19 on national economies as people have hunkered down and reduced production and transport has also led to shortages of consumer goods and resulting higher prices.  The notion of the “supply chain” and its interruptions has entered the everyday vocabulary.

Another effect has been a change in the attitude of many workers who resist low pay levels and part-time hours that undermine their quality of life.  The Great Resignation of millions of workers is real and limits output or raises wages, both leading to price increases.

At the same time, the Chinese government has moved to reduce the free market that had grown up there.  The Communist Party is regaining control over what is produced, by whom and at what price.  That way, it can use trade and finance as weapons in international relations. 

"Rare-earth elements are necessary components of more than 200 products across a wide range of applications, especially high-tech consumer products,” says the U.S. Geological Survey.  China accounts for 97 percent of the world’s supply.  Moving away from its dominance will make those products more expensive. 

In the short run, the economy is growing as its recovers from the effects of the coronavirus.  Government is able to cushion the shock of rising prices.  But that is first aid, not a cure for inevitably higher prices.

The Federal Reserve is now increasing interest rates, which have been maintained at extremely low levels to spur growth in recent years.  Going back to traditional levels should limit inflation by slowing an overheated economy and allowing it to manage itself.  Over the long term, higher rates will raise the cost of a home or a college education.

To these increases in the market price of almost everything must be added the planned federal tax increase at the end of 2025.  In the latest tax law, Congress gave a permanent break to corporations, but for individuals it was only temporary. Without congressional action, taxes will automatically climb back to their old levels.

The economy and the economic position of individuals will not again look like it did in the early years of this century.  While we may suffer the effects of inflation now and expect government to fix it, most prices will be permanently higher.

This is not merely old-fashioned inflation. This is history presenting its bill.

 

Sanctions work, but Putin still risks major war

Gordon L. Weil

Soon after the Russian invasion of Ukraine, I sent a contribution directly from my bank to the Ukraine government’s national bank account in Kyiv.  It transferred the same day using SWIFT, the international payments message system.

It cost me nothing.  I am just a random American with no special ties to Ukraine.

If a person wants to follow exactly the same process to send a gift to Russia, they can’t.  SWIFT to Russia is functionally closed.  That’s an economic sanction. 

The big question is whether the sanctions imposed by the world’s largest economic powers, the U.S. and the EU, will work. Sanctions have been considered only partially successful in the past.  But cutting SWIFT, halting other world financial links or suspending preferential trade deals have not been used before now.  

Part of the problem with sanctions is that they usually take time to work, while an invasion is immediate.  Vladimir Putin, Russia’s dictator, obviously believed his army would occupy Ukraine so quickly that sanctions would have had little time to work.  They would be more symbolic than real.  After all, that’s what happened when Russia seized Crimea in 2014.

One reason economic sanctions have not worked well is that countries using them often intend them purely for show.  They may hit the assets or travel of a few leaders of an offending country, but sanctions usually avoid harming average citizens.  In short, sanctions may look tough, but they amount to little.

So what’s different now?

Russia’s invasion of Ukraine flouted the world order.  Two world wars began as European conflicts, and the allied victories in World War II were meant to end territorial land grabs there.  Russia has destroyed that post-war peace, or at least the absence of war.

The second motive for tough sanctions has been Putin’s orders to the Russian military to attack civilians.   If Russia would hit average Ukrainians, then average Russians would become legitimate targets.

The sanctions leave Russia significantly cut off from the rest of the developed world.  Europe is learning the harsh lesson that its excessive dependence on Russian natural gas and oil now limits its range of action.  Bruised by the Ukraine experience, it is likely permanently to reduce its economic ties with Russia.

In fact, learning this lesson amounts to recognition of a faulty belief, shared by the U.S., in the future of relations with Russia after the collapse of the Soviet Union in 1991.  The theory was that closer economic ties with Russia would modernize and westernize it, eliminating it as a threat.

The theory depended on Russia accepting its reduced role in world affairs.  Despite being the largest country geographically, heavily armed with nuclear weapons, it is only a middle-rank economic power.  Refusing to accept that reality, Putin resisted simply becoming a member of the club.

Putin seems to think Russia can go it alone, even nationalizing foreign operations there.  Vladimir Potanin, a billionaire Putin pal, worries about such a policy.  “This would take us a hundred years back, to the year 1917, and the consequences of such a step – the global distrust of Russia from investors – would be felt for many decades,” he wrote.

That’s exactly the risk in Putin’s ignoring sanctions.  They could have a long-term effect. Globalization is a reality, shown by Russia’s participation in the World Trade Organization. Without their country enjoying international economic links and access to trade and investment, ordinary Russians will suffer. 

In short, the sanctions could change the economic world. Europe would no longer take for granted its need for closer cooperation.  The U.S. would see America First fade after this reminder that isolation means a loss of influence. 

Even those private investors who care more about democracy than their profits could become more wary of possible risks in Russia.

Putin needs to understand that failure to win a quick war over Ukraine is bringing economic disaster, accelerating the steady decline of post-war Russia.  Russia’s foreign military adventures in Afghanistan, Crimea and Syria have undercut its economic growth. 

The sanction penalties are so severe that some have an immediate impact. As Russians experience sanctions at the supermarket, they may increasingly conclude that, despite Putin’s propaganda, the Ukraine invasion is not worth its cost to them.  Worse for him, they may recognize they have been lied to.

Putin seems not to care about his own public’s opinion, but he might pay attention to his intelligence circle, generals and billionaire oligarchs whose support he needs to continue to rule. While he obsesses about obliterating Ukraine, they may prefer stability.

This time, because sanctions are serious not merely symbolic, they work.  Putin can only ignore them if he proves to be a maniac, totally committed to a war Russia cannot win.

Note: Last week I incorrectly wrote that the Gulf of Tonkin Resolution responded to a North Korean attack. In fact, the gunboats were North Vietnamese.

Nukes, war weariness limit Ukraine options; consumers become soldiers

 

Gordon L. Weil

Ukraine is different. It won’t be run over. 

And it presents a national security challenge to the U.S. and Europe that is downright frustrating.

Most Americans are sympathetic to Ukraine whose main offense seems to be that it exists.  Russian President Vladimir Putin thinks the people there don’t know who they are. They are really Russian, he says, and if they won’t accept that, he’ll make them.

Americans lean toward the idea that the people should decide for themselves whether they’re Russian.  And many Americans would like to help give them the chance to make their own choice.

The U.S. is accustomed to being a great world power, able to have its views accepted after a little muscle flexing.  Now, it finds its options are limited.

There are two reasons for this problem.  Americans are tired of wars to help others which end up being costly in the lives of U.S. service personnel and military spending.  And they turn out to be indecisive. Plus, direct involvement in Ukraine could bring confrontation with Putin, a man who seems to have left rationality behind.

Putin has made a thinly veiled threat to use nuclear weapons if he faces outside opposition. The nuclear threat is itself a weapon that influences actions by other countries.  Beyond that, his own manic behavior is a similar weapon.  Who knows what will make him go off?

It’s tempting to compare Putin to Hitler.  They both liked to gobble up neighboring countries.    But Hitler didn’t have nuclear weapons. Given Putin’s poorly performing armed forces, they are the Russian’s principal asset.

Putin mistakenly thinks he leads of one of the world’s great powers. He brushes aside the overwhelming condemnation of his Ukraine invasion by the U.N. General Assembly’s emergency session.  He may see great power precedents.

Twice the U.S. similarly snubbed the U.N.  In 1983, after U.S. forces invaded Granada, a Caribbean country where there were 600 American medical students, the same kind of U.N. session gave the U.S. the same treatment.  Then, after its 1989 invasion of Panama to topple its drug-dealing dictator, the U.S. again faced General Assembly censure.

In both cases, the U.S. installed governments more favorable to American interests. In Panama, U.S. forces captured its president and brought him to Miami.  After a trial, he was sent to prison. Is that what Putin would like to do with Volodymyr Zelensky, the Ukrainian president?

The domestic constraint on direct American or NATO involvement may have deep roots. In the fury of the moment, leaders may commit the country to a massive show of force to resolve a crisis only to find that what started out as righteous indignation turns into a costly quagmire.

Take the Golf of Tonkin Resolution by Congress, adopted in August 1965.  Two U.S. destroyers were thought to have been harassed by North Vietnamese (corrected) gunboats.  Congress quickly authorized President Lyndon B. Johnson to take action.  He interpreted the Resolution as a declaration of war, and the conflict lasted 10 more years, deeply dividing the country.

More recently, the conflicts in Afghanistan and Iraq involved specific causes that led to prolonged wars.  The U.S. reasonably went after Al Qaeda in Afghanistan but stayed in the hopeless effort to create democracy there, an effort that turned out to be America’s longest war.

In 1991, with access to oil at stake, the U.S. efficiently pushed Iraq out of Kuwait.  But war hawks wanted more, so in 2003 American forces took on Iraq’s Sadam Hussein, based on the phony claim that he had weapons of mass destruction. 

All of these conflicts have worn down American willingness to police peace. Institutions like the U.N. and NATO were created to provide a unified international barrier to Hitler-style invasions.  The EU was supposed to yield a unified European partner in the effort, but nationalism flourishes from London to Warsaw.

Putin has revealed the failure of post-World War II peace plans.  But he is not alone.  China swept up Tibet.  The U.S. propped up South Vietnamese dictators.   The world community does nothing to halt a range of Middle East conflicts from Syria to Yemen.

It’s possible that Putin has done more ultimately to reduce future armed conflict than all the post-war initiatives. NATO has come together.  Europe is acting with some degree of unity.  Russia is highly likely to become China’s satellite after much of the world slashes economic links with it.

But, as in any other war, helping Ukraine comes at a price.  It won’t be paid on the battlefield.  The cost is already coming at the gas pump and the shopping website.  The American consumer is today’s soldier.

To deny Russia or, for that matter, China the power to dominate world affairs, people will have to pay more to support them less.

Putin gambles, everybody loses

Gordon L. Weil

Is Ukraine run by Nazis?

Is Ukraine really part of Russia?

Is Russia back as a great power?

Russian President Vladimir Putin is trying to force his unique and distorted views on the world.  Given his lies that Russia had no intention of invading Ukraine, his claims require close review.  Here’s some context.

Putin charges that Ukraine is run by Nazis. In most Nazi-occupied countries during World War II, some people sided with the Nazis.  That was true from Norway to Poland, including Ukraine, which provided soldiers to fight beside the German army and a compliant government. Maybe that’s the background for Putin’s assertion.

But Putin fails to mention that the Soviet Union, run by Russia and sorely missed by him, had a formal treaty with Hitler that allowed the two countries to carve up Poland.  Russia’s dictatorship today is closer to old-fashioned Nazism than to Ukraine’s democracy.

Then, there’s the Holocaust, the Nazi genocide of six million Jews including Ukraine President Volodymyr Zelensky’s great grandfather and two great uncles.  Zelensky is a Jew. And Putin wants us to believe he’s a Nazi.

Russia deserves a “sphere of influence,” according to Putin.  Despite the Soviet Union having lost control of countries it occupied and oppressed, it should be allowed to dominate them as a way of protecting Russia.

There are at least two problems with his thinking. First, nobody is threatening Russia.  Second, the notion of geographic spheres of influence has faded over the past seven decades.

What Putin may really mean is that, without dominating countries surrounding Russia, his country is no longer the great world power it became after the Second World War.  Its population is less than half than that of the U.S. and Russia’s economy is smaller than California’s. The only vestige of its superpower status is its stockpile of nuclear weapons.

NATO thought Putin got it.  Russia could prosper by acting within international norms.  Disputes would not be settled by force. Putin would not stage a Nazi-style invasion of a neighboring country.  In an earlier column, I accepted that view and suggested that he was only bluffing.

The alliance’s error in dealing with Putin was its failure to punish Russia for seizing Crimea from Ukraine in 2014.  This apparent appeasement probably led him to believe he could take over the entire country without much opposition. Zelensky and NATO have corrected that false impression and given him a nasty surprise.

Russia deserves to control Ukraine, he claims. It is really a part of Russia. They speak almost the same language. Tell that to many Canadians, who make sure they are not mistaken for Americans. Political boundaries have long sliced across common cultures.  People have the right to decide their nationality for themselves.

When the United Nations was established in 1945, the Soviet Union wanted more votes.  So Ukraine (along with Belarus) became a founding member with its own seat at the table.  With the breakup of the Soviet Union, it remained a U.N. member.  Russia had already made it look like a real country.

In the years after World War II, the Cold War pitted NATO, formed to prevent Soviet advances westward in Europe, against the Soviet Union.  In 1991, the Soviet Union collapsed and some optimistically thought the world had arrived at permanent peace.  Nine years later, Putin was in power and he was not ready for peace.

Whatever the outcome in Ukraine, Putin has gambled and his country will suffer.  NATO and the EU have learned that it is dangerous to allow their economies to become overly entangled with Russia’s.  They will likely avoid the risk of remaining dependent on an undependable partner.

While the economic break will cost the U.S. and its allies, it could set the Russian economy back decades.  Without its links with the massive American and European market and investment, it could be forced to depend on China.  To a certain degree, the once great power could itself come within the Chinese sphere of influence.

The Ukraine crisis has prompted worries that Russian success could encourage China to attack Taiwan.  While Taiwan was a part of China, it has evolved into a separation nation.  It is an island located in vital international waterways. 

The American involvement with Taiwan is like its 1991 intervention in Kuwait.  There it had a direct, oil-related interest and sent U.S. armed forces to push out Iraqi invaders.  Now, the U.S. Navy is deployed in the South China Sea.

Facing Nazi Germany, some American Nazi sympathizers formed America First.  Today, Donald Trump and his most ardent right-wing followers adopt the America First name and have expressed support for Putin.

The dangers of appeasing China, with its superpower ambitions, and the overt support by some Americans for foreign despots should be warnings. Been there. Done that.