The Economic Consequences of the War, 3/10

Is the Twitter Mob encouraging its own form of war crime?

Peter Zeihan writes,

lost in the noise of the burning of Ukraine’s large population centers is Russia’s far more methodical, downright Hitlerite, annihilation of Ukraine’s towns and villages. The towns and villages that are the bone and sinew supporting the Ukrainian agricultural sector. Ukraine will not plant crops this spring or summer. The world has lost one of its largest and most reliable sources of wheat, sunflower, safflower and barley.

Nouriel Roubini writes,

the Ukraine war is not just another minor, economically and financially inconsequential conflict of the kind seen elsewhere in recent decades. Analysts and investors must not make the same mistake they did on the eve of World War I, when almost no one saw a major global conflict coming. Today’s crisis represents a geopolitical quantum leap. Its long-term implications and significance can hardly be overstated.

The war is taking Ukraine out of the world economy, and the sanctions are taking Russia out of the world economy. Refugees from both countries will have difficulty integrating into their new homes. And our government’s desire to decouple from China will only increase. Less global trade means lower global output.

Governments in the U.S. and Europe will attempt to shield their populations from pain the only way that they know how: by increasing deficit spending. More paper wealth with less global output can only raise prices. In short, more inflation is in store.

Among banks and other financial institutions, we will find out who is swimming naked, so to speak. I believe that the chance of another financial crisis within the next three years is at least 70 percent, although it probably will start outside the United States. Banks could get in trouble in countries where they are poorly supervised and/or countries that rely heavily on trade. In the latter category are China, Japan, and Germany.

Urbanization will stall, as many countries will suffer from a high cost of food. Poverty and starvation will return to China, India, Russia, and sub-Saharan Africa will suffer another setback.

Around the world, it has become fashionable on the left and right to argue for more government and less globalization. We are about to find out what that looks like.

Everyone has to look at payment systems, from MasterCard and Visa to SWIFT, with the thought “If they will cancel Russia, will they also cancel me?” The Twitter Mob has many targets for animosity, at home and abroad. In the short run, progressives may feel energized by the idea of using financial sanctions as a new tool of enforcement. But in the long run, the result may be a more fragmented financial system, as individuals and governments struggle to find stores of value that are more secure from their political enemies.

Perhaps in a decade we will see distinct financial systems. There will no longer be a world economy, but instead there will be separate trading blocs.

Richard Hanania notes that the track record of economic sanctions achieving their desired results is a poor one. Moreover,

in recent years, scholars have presented evidence that in addition to the economic damage that they do, sanctions are associated with a number of undesirable outcomes. These include increasing repression within targeted countries and making transitions to democracy less likely.

Let me try to draw a line between war sanctions and civilian sanctions. War sanctions would be attempts to keep Russia from re-supplying its military. I support war sanctions.

But war sanctions would be narrow in scope. They would come from governments, not from virtue-signaling corporations. We would not have Coke and Pepsi pulling out of Russia.

We might try to punish individuals who we know are involved in the decision to go to war. That does not mean confiscating the property of every “oligarch,” which I suspect has become an epithet that is wantonly applied to any wealthy Russian.

With war sanctions, we would not be trying to cut Russia off from the international banking system or to wreck its economy. We would not be trying to make life miserable for ordinary Russians. If the Russians who bomb civilians are committing war crimes, perhaps the sanctions that hit civilians should be regarded similarly.

What is the purpose of civilian sanctions? As far as I can tell, the hope is that they will indirectly cause Mr. Putin to be driven from office. It is not unlike the hope that bombing civilians will cause an enemy to capitulate. That is the potential upside of Twitter-Mob diplomacy. The down side is that we are exacerbating human suffering by magnifying the economic damage from the war.

Because I think that the probability of a positive outcome is low, I think that the additional suffering due to Twitter-Mob diplomacy far outweighs the expected benefits. I oppose the civilian sanctions, whether they are imposed by our government or by corporations trying to please the Twitter Mob.

When somebody tells you that the civilian sanctions are working, ask what they are accomplishing. Who is feeling the pain in Russia—Putin, his allies, his opponents, or ordinary Russians who have no influence on him? What is the probability that the civilian sanctions will shorten the war? What is the probability that the Ukrainians will get a better deal from Russia as a result of the sanctions?

I do not know the answers. But my best guess is that Putin will suffer very little from civilian sanctions, that the war will not be shortened, and that the Ukrainians will not get a better deal. Meanwhile, innocent people, in Russia and around the world, will suffer a lot. Yet if we become convinced that economic sanctions are”working,” then the Twitter mob will soon be looking for other enemies to bully.

Pay attention to the consequences of civilian sanctions before you decide to join the Twitter Mob. For those of us opposed to these sanctions, it takes courage to speak out and it is difficult to be heard.