THE BARBER’S CHAIR: Floyd the Barber presents common sense views on the intersection of politics and the markets
This past week witnessed a Russian incursion into Crimea and threats of moving into Ukraine. This was all prompted by Ukraine removing its pro-Russian premiere.
But the moves by Russia were not the real news. The real news—the important, very positive news was the reaction of the US and the world to what the Russians did.
The US and its allies did not immediately threaten a military response. They did not load up their weapons and threaten a confrontation. No. That was off the table from the beginning. Instead, they readied their financial weapons. There was talk of boycotts, and sanctions and loss of trade. And then Putin responded. Not by moving more guns and soldiers, but by calmly noting that sanctions and financial repercussions would hurt many countries. The fallout—pardon the pun—would not be confined to Russia.
This is the world in which we live. A world where countries rely on each other economically, and where economic strife in one country affects many, many others.
This is also a world of the ultra-super rich. There are Russian oligarchs and – lest you think otherwise – American oligarchs. In the past week, the Russian oligarchs, many of whom provide political support to Putin, felt threatened. Their concern over economic sanctions, and their resultant pressure on Putin, likely played a huge role in toning down the current Ukraine crisis.
And speaking of oligarchs, the American ultra-super rich may today have similar power over foreign policy. When President Bush invaded Iraq a decade ago, certain business interests talked about the invasion leading to $10 a barrel oil.
Things did not work out that way. Oil is sky high and the Iraq war cost the US billions of dollars, adding to our deficit. Thus, anything similar to an Iraq invasion in the future will likely have to pass a much harder “financial effects” test, as well as a strategic military test and “doing the right thing” test. Moreover, after Iraq, it may be close to impossible for any President to have the political will to invade another country—unless the situation is dire beyond belief. That’s right, financial considerations may make another Iraq highly unlikely–and this is favorable for our country.
In short, we live in a world of interconnectedness and financial integration. Having the oceans protect us from foreign enemies has been a fallacy for a long time. Likewise, the ability of the military to protect the US is clearly waning. Our country is much more likely to fall victim to a massive computer virus, or a financial crisis, than a military annihilation. For example, for years true thinkers have feared that China (or to a far lesser extent Russian) could dump their US Treasury bonds on the market, intentionally devastating the US economy. This could occur as the result of ONE strategic financial decision made in China. Every realist knows this.
But to me this is a good thing. I would rather be threatened by a Treasury bond sale than by a nuclear attack.
So this is the world in which we live. Where boycotts, sanctions, and bond sales are the new international weapons of power. Some will curse this; others will welcome it. But it is clearly the brave new world in which we all live.
Floyd at KOTM
Follow me on Twitter @USKOTM
