No. 5
It was the early 1950s and a high school student sat uninterested in history class. His teacher called on him and instead of answering his question the student commented, “Why do we need to know the history of Choson? I’ll never go there.” Two years later, that same student, now an Air Force private, sat in his barracks and penned a letter to his teacher. ”Hi, guess where I am? Choson!” He was actually in South Korea, but Choson was what North Korea was called before the Korean conflict.
That soldier was my father. He loved recanting this story whenever I complained that a topic that I was studying seemed disinteresting to me. My father’s education only extended through high school, but he was a very curious person who read two newspapers a day and watched the evening news. In our home the news was discussed and debated on a regular basis. Being American meant knowing what was going on in America, around the world, and in your own backyard. It meant working for candidates in local elections and making informed voting decisions.
My father felt that democracy was a full contact sport. Sitting by idle like a spectator in the stands was not an option. He understood that elections had consequences. Most of all he understood how government decisions and policies affected his wallet.
Right about now you’ve either stopped reading, or you’re asking yourself, where the hell is he going with this and what does it have to do with personal finance? Well, let’s examine the developments in the Ukraine. Perhaps by now, you’ve posted the Ukrainian colors on your Facebook or Instagram page and declared your support for the Ukrainian people. Wonderful, the Ukrainian people deserve your support. Democracies around the world appear to be supportive of sanctions against Russian interests, but there will be financial consequences wherever you are in the world for which you need to be prepared.
In a previous post I wrote about the effects of inflation. At that time, I was hopeful that proposed actions by the Federal Reserve (the Fed) would address inflation and perhaps it would be short lived. Today, I fear that the Fed has been put in an increasingly challenging position.
What has changed?
Today, Russia is being cut off from the international financial system. Russia’s largest banks are now unable to operate in the system that is U.S. dollar based. The Russian Central Bank just increased its interest rate from 9.5% to 20% in an effort to prevent a run on the banks. (Think Jimmy Stewart in It’s A Wonderful Life, but with Putin as Old Man Potter) Russian banks have also been kicked off the SWIFT system, which will make it almost impossible for them to transact in dollars and euros. These and other sanctions may crater the Russian economy and will most certainly make the price of oil, gas, and other critical commodities rise to record levels. We are in uncharted territory here and there is the possibility that banks experience their own supply chain like issues. If money flows between banks internationally become snarled, we could see a brief liquidity crisis like that seen in 2007. Let’s hope that there is a slim probability of this happening.
Much of Europe doesn’t run on Dunkin’. It runs on Russian oil and gas, much of which flows through Ukrainian pipelines. America buys Russian oil as well. We also purchase commodities like aluminum and palladium that are used in everything from soda cans to EV electronics. Both Russia and Ukraine are large exporters of wheat. In a protracted war, the price of these and other commodities will likely spike. The price of goods that are made using these commodities will also rise. You will pay more at the pump, more to heat your home, and more to purchase other goods that use these commodities as key ingredients. Wars take a horrible toll on infrastructure and humans alike. Wars also increase hoarding and slow business operations. Wars are inflationary.
Prior to the invasion of the Ukraine, the Fed was hopeful that an increase of 50 basis points (0.5%) in March might help slow inflation since the economy appears to be strong. We’ve yet to see what affect sanctions will have on inflation, but it is safe to say it won’t be good. The Fed may now decide to raise rates higher and faster to combat inflation, which could toss the economy into a recession, which means slower economic growth. Slow growth and high interest rates equal “stagflation.” Saying stagflation to an economist is equivalent to saying “shank” to a golfer. It’s That Seventies Show without the comedy. In short, it sucks. It means that your recent raise does not even come close to covering the inflated cost of goods that you purchase on a weekly basis. Slow growth might also mean layoffs like those seen at Peloton, but on a much broader scale. I sincerely hope that none of this happens.
Sticking your head in the sand is simply not an option. The world is much more connected now than it was 80 years ago. Everyone has a responsibility to know and understand what is happening and be prepared to deal with the consequences of shifting positions and policies globally.
“The hottest places in Hell are reserved for those who in time of moral crisis preserve their neutrality.” - Dante
So, pay attention to what you are paying for various items. Look for cheaper substitutes where you can and try to save any way that you can. Build your rainy day fund (4-6 months of expenses in cash). Find a reliable balanced news source, be curious, ask questions, get informed, get involved, and avoid being surprised by events as they unfold.