FWIW #24 Ukraine War

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Several readers have wondered why there hasn’t been a FWIW about the current world dilemma. The current situation can’t be totally digested via a normal thought process. The potential variables are too broad. The actions currently underway are different from geopolitical events happening at any time since 1939–1941. After the First World War, the leadership and population of this country lived through wildly good times (the twenties), unbelievably bad economic times (the thirties), and a devastating world war (1939–1945). The United States emerged from WWII as the strongest nation on earth and the leader of Western civilization, with Africa and Asia (including the Middle East) building their own civilizations from the ashes of the war and the end of colonialism.

From the late 1940s, successive generations of America’s political leadership embarked on two totally different paths: First was militarism to fulfill Woodrow Wilson’s and Ronald Reagan’s visions of America as the shiny city on the hill and the democratic torchbearer to oppressed people around the world. Second, in spurts, the political leadership of both parties found that it was to their advantage to drive a wedge deep into the American melting pot to (a) slow the assimilation of ethnic and racial groups into one people under the constitution and (b) turn ethnic or racial groups against another in order to assume or maintain political control over the government at all levels.

The militarist torch bearing for democracy around the world and the fracturing of the population within the country have a common element: In both cases the political and military processes have cost a significant amount of economic wealth. The value of the dollar, in terms of purchasing power for the ordinary citizen, has crashed. Up until the 1970s, the nominal income of the population essentially kept up with the decline in purchasing power. After the bills came due for the Viet Nam debacle and the Great Society payoffs for power, the American public, particularly the poor and elderly on fixed income, were crushed.

One expensive government program after another has been implemented to assist the poor and elderly, but the deliberate devaluing of the dollar has always outpaced the government benefits handed out. Globalization, the marriage between multinational companies and political leadership around the world, has worked to stifle working-class jobs in this country since the 1980s; and working-class families have found themselves unable to live respectable lives based upon one-salary households. Moving jobs overseas, coupled with the political leadership’s fostering of illegal immigration, has suppressed wage growth in this country for most except the elite corporate leaders.

While globalization and improperly designed social welfare programs have been bleeding the economic wealth from this country, the political leadership of both parties has engaged in expensive militarism under the guise of fostering and expanding democracy. The litany of presidents who have used military adventurism without any intent of winning the war is long: Presidents Truman, Kennedy, Johnson, G. H. W. Bush, Clinton, Obama, Trump, and Biden. If President G. W. Bush had responded properly to the 9/11 attack, we would not have been in Afghanistan for 20 months, much less 20 years. The trillions of dollars these political leaders have spent could have and should have been spent on needed economic improvement in this country. History will not be kind to these presidents. The largest tragedy of these episodes over the last 63 years has been the culpability of both the monetary authorities, who deliberately debased the currency to allow these adventures, and the military leadership, who understood that there was no strategy for winning a conflict yet still sent America’s youth to be maimed and to die for nothing.

Financially, the country has used a significant amount of its credit capacity for corrupt and ineffective social and military adventures. The debt to GDP ratio is now above 100%. Even though the country’s asset base is still huge, the country is in a financially fragile position from the sums of debt that now have to be serviced. This is a fact and is crucial to understanding the various potential outcomes of the current geopolitical situation. Here are the critical issues facing the country:

1. President Biden knows exactly what he is doing. The blatant misinformation that energy prices are skyrocketing because of Russia’s invasion of Ukraine is evidence that his administration is trying to orchestrate an even more severe energy crisis to push citizens faster into using unreliable renewable energy. The entire climate controversy’s long-term effects on the world are debatable. This is not the forum to debate climate change, but it is interesting that the last three dramatic climate changes (since 500 AD) that significantly impacted civilizations around the world, leading to famines, starvation, and economic stress, were periods when the weather turned colder than usual rather than heating up.

It’s not unusual for political leadership to instigate completely uncontrollable and unsolvable situations where it can persuade the electorate or population to focus on the supposed crisis rather than on the leadership’s enhancing of its wealth and power and its friends’ wealth and power. Who are the friends of political leadership? The answer is complex, but it is helpful to examine the political leadership’s actions rather than its words. Take the time to read Senator John Kennedy’s March 22, 2022, opinion piece in The Wall Street Journal concerning the Biden administration’s signing off on giving Russia, Iran, and China billions of special drawing rights (i.e., money) from the IMF last fall. When Secretary Yellen and President Biden did so, Russia had 100,000 troops massed on the border of Ukraine, and the U.S. European Military Command had warned that Russia was preparing to take steps against Ukraine. Iran was still shipping weapons to and supporting terrorists in the Middle East while moving at full speed to build a nuclear bomb. China was continuing to steal as much intelligence as it could from this country. So why would the administration do such a thing?

2. Don’t believe that the Federal Reserve didn’t know that its deliberate monetary policy in its work with three administrations created the latest inflation surge. Secretary Yellen and Chair Powell will go down in the history books as willing partners with the political leadership of both parties in the transfer of incomprehensible amounts of money to political supporters and friends, both within and outside this country, through their policies. Both Yellen and Powell have the education and experience to know that the huge amounts of federal government debt accumulated from the militarism and political payoffs of both parties’ past administrations can only be reduced by the devaluation of the currency relative to the purchasing power of Americans. The stock market remains high because stocks represent an inflation hedge. Owning stocks is crucial to making it through the current and coming economic cycles. There will, however, likely be a volatile period of deleveraging and a selling panic as interest rates rise.

3. Financial engineering (the creation of exotic securities) and the use of leverage, much of which is embedded in the securities being created, are bound to lead to an implosion of deleveraging, causing the cascading of forced liquidations that will likely spill over to the public stock and bond markets. If the deleveraging happens, it will be critical to acquire some companies at opportunistic prices and dividend yields to maintain and improve your net worth. Having liquidity during these coming months will be important.

The Fed says it is going to raise the fed funds rate from 0% to 2.75% over the next year. Economists with monetary policy experience, even those deeply committed to the Democratic Party, believe the fed funds rate should go much higher than that. Inflation will continue to be elevated for a long period. If the Fed stops manipulating and suppressing interest rates, there will be a window of opportunity when markets set interest rates and compensate for future inflation. There will be an opportunity for the fixed income portion of portfolios to lengthen maturities.

The political leadership and the monetary authorities have, through their regulations, pushed the ordinary consumer and small business owners into the arms of unregulated lenders and deposit firms. Part of the deleveraging implosion will be the capital loss through lending by these unregulated firms, leading to foreclosures on small businesses and the loss of depositors’ money. On their own, the capital markets would likely experience a period of sharply lower stock prices and higher yields. The problem is that the markets are not on their own.

4. Just as President Biden and his administration know what they are doing with their energy, immigration, and crime policies, President Putin knows what he is doing with his policies in Ukraine and elsewhere. He is not crazy, demented, or any of the other adjectives used to describe him. He is evil. Most people do not accept the fact some humans can be completely evil. They can be. Pol Pot in Cambodia, Hitler in Germany, and Stalin in Russia, were serial killers who were evil beyond the comprehension of ordinary, morally thinking people. There is an important characteristic of evil people: If they can’t get their way, they will try to hurt anyone and everyone who is keeping them from succeeding.

The First World War began with the assassination of an heir to the Habsburg throne. The various treaties on both sides caused the explosion of violence. The Second World War was started by Hitler’s desire to restore Germany’s territory to what it was before the loss of the First World War. The various treaties on both sides caused the explosion of violence. In the current situation, an evil person has taken the first step in reconstituting what he feels is historically Russia. If he succeeds and goes for the next country of the former Soviet Union, the NATO treaty will bring most of the European continent and the United States into an explosion of violence.

Putin has been the leader of Russia for over 22 years. Even before he became the supreme leader, he professed that the greatest debacle of the 20^th century was the breakup of the Soviet Union. He is now 69, his country’s population is aging and slow growing, his economy is increasingly reliant on fossil fuel energy and raw materials. If he doesn’t want to go down in history as a failure, he must try to restore some semblance of the former Soviet Union. In preparation for his current moves, he worked for years to build his country a strong financial base to offset any sanctions by others. Do not assume he is thinking in the same way as his adversaries. Before this episode of evil is over, there is a reasonable probability that political and financial institutions as we know them in this country and Western civilization will be altered. There is a reasonable probability that any widened war in Europe will find its way to the North American continent. For the second time in over one hundred years (9/11 being the first), there could be devastating hostile actions within the borders of the continental US; moreover, they could dwarf the tragedy of 9/11. The political and financial ramifications are significant. The country’s precarious financial position due to over 60 years of financially irresponsible political leadership is putting the stability of the US dollar in jeopardy. Having a balance between real estate, fixed income securities, and common stocks is crucial to getting through this unknowable period. Liquidity is paramount to making it through the next few years. On the other side of this potential economic crisis, the value of the currency will such pressure that owning real assets will be the only way to avoid poverty.

5. China’s focus is on becoming the dominant power in the world. It has no interest in going to war with the U.S. It does have a burning desire to be more powerful, both economically and militarily, than the U.S. Its economy is fragile right now. It is focused on improving its internal issues. It knows our political leadership in the U.S. is in a precarious position due to internal strife and with our alliances in Europe. It expects our political leadership to further weaken the U.S. financially, while China works to strengthen its economy.

Now, you know why I didn’t want to join the crowd professing that these times would pass without much heartache. The longer the Ukrainians stalemate the war with Russia, the higher the probability of Putin striking back in a way that will alter the world order as we know it. Ask yourself the question: If I were an evil despot, and somebody stood in the way of my achieving my aims in a war, what would I do?