Ominous Optics, Closer Than We’d Like

By Dian Cohen
Ominous Optics, Closer Than We’d Like

Here in peaceful Quebec in polite Canada, our lives are consumed with the day-to-day – what to have for dinner, which bills need paying this week, am I saving enough for retirement, will it be vacation or stay-cation this year? Inflation and supply-chain shortages are irritants to be dealt with. Hanging over all this is what makes us tell pollsters that we are more pessimistic than we used to be: untold numbers of people experiencing trauma on par with that of the biblical Job; a plague rages and refuses to fade away; a disgusting war brings with it an appalling nuclear threat.

Pessimistic feelings rise when we feel helpless to find solutions. While there seems to be little we can do directly to make it all the bad stuff go away, it’s often helpful to think through where we may be headed. True, we can never know the future because it’s not here yet. Forecasts may or may not be correct, but the forecasting process has great value, by helping us think through the possibilities and how we can react if necessary.

Six hundred words is not quite enough to think through ALL the possibilities, so let’s look first at why Russia’s war on Ukraine is so shocking. That Russia coveted Ukraine to have a buffer on its western border has been known for decades. The shock is that neither Ukraine nor NATO members capitulated. The war, unlike the Belarus and Crimea takeovers, has become ugly, and unintended consequences are proliferating. Among those unintended consequences is one real biggie: the end of the global order as we’ve come to know it.

The last half century has been one in which humanity has come to believe that widespread military war was over. No country since 1945 has been wiped off the world map. Military budgets have declined since the last world war from 15-20% of GDP to between 3-6%. All that “extra” money has gone into healthcare, education, social welfare, better communications and generally creating more prosperous economies. Russia did not go this route – military spending there continued. It has lots of weapons but remains a poorer country than it appears — its 2020 GDP ranks just behind South Korea’s, and on a per person basis is just $10,000, compared to ours at $43,000.

Now the whole world has indicated that it will spend more on defense. For the first time since 1945, Germany has announced that it will remilitarize. None of this will add to productive capacity. The International Monetary Fund has slashed its expectations for global economic growth over the next two years. Thus our standard of living will be less than it might have been.

Not only that. Even if this ends “peacefully”, western businesses will not easily invest in Russian projects or joint ventures for fear of another conflict. Without western technological investment, Russia’s oil and manufacturing production will continue to deteriorate and Russia will get poorer. The economic sanctions other countries are imposing are both necessary and risky: Russia can’t impose equivalent sanctions, but it can threaten the global trading system – with bombs.

The war and the lingering pandemic has convinced many businesses to shorten their supply chains – bringing manufacturing closer to home sounds productive, and it may well be. But the complexity of actually doing it may take years.

As this new geopolitical and global economic order unfolds, many of our precious assumptions, hopes and dreams for the future are vanishing. Only a few decades ago, the fall of the Berlin Wall, the collapse of the Soviet Union, the demise of South Africa’s apartheid regime led us to believe there was no alternative to liberal democracy as the only legitimate form of government. Today we wonder if it’s on life support.

Can we consider any of this a good thing? Only if we open our minds to change. We need to let go of what we “know” and get ready for what is coming. It’s unfolding before our eyes. Don’t look away.

Dian Cohen, C.M., O.M., economist

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