The Second Cold War

 Only sixty years ago the U.S. and the Soviet Union fought a bitter Cold War to decide what hemisphere and economic/political ideology would be the most influential on the post-WW2 stage. After years of "police action", proxy wars, economic battles, and general geopolitical tension, the Soviet Union fell and the U.S. emerged as the paramount world power. 

With the ongoing crisis in Ukraine and increased Russian aggression in the East, many experts believe that yet another Cold War is beginning between the U.S. and modern Russia. Since that no major Western country has actually entered Ukraine to help the invasion through military force, instead the West is fighting an economic war. The large amounts of economic sanctions that have been placed on Russia and its most rich citizens is meant to totally isolate Russia from the contempary market economy. Banking sanctions are the most notable way that economic pressure can placed on Russia. In response, the Russian government has sought out allies to help keep their economy secure, the most notable being China and other OPEC nations that tend to side with Putin's regime. This comes while most Russians are suffering through these drops in living standards while their government continues an unpopular war. 

For now economic weapons appear to be the main way this war is being fought on an international level, one should hope that more direct means of intervention are not needed.   

Sri Lanka in crisis

 Sri Lanka is facing its worst economic crisis after it got independence from Britain in 1948 when its foreign reserves were nearly empty. The nation is again on the verge of collapsing. Two Sri Lanka newspapers have stopped printing newspapers due to the unavailability of paper. Upali newspapers and The Island daily English language newspaper will be only available online. Many other newspaper organizations have limited their pages due to rising costs of paper and also because of lack of paper. School exams for almost 4.5 million students have been postponed last week because the authorities were not able to arrange basic facilities like paper and ink. Sri Lanka is facing high inflation of 17.5 percent because the shortage of dollar had affected all the economic/industrial sectors of the country. 4 people died in the past week due to insanely long waiting for lines to fill up gasoline in vehicles. The energy ministry of Sri Lanka has managed to raise $42 million to import diesel and aviation which was stuck at Columbo port for two weeks because the country did not have any dollars to pay for it. The Sri Lanka government has allowed depreciating rupee and has asked IMF for assistance with their foreign debt. Sri Lankan foreign reserves have decreased from $7.5 billion to $2.4 billion since the new government took charge in 2019. Looking at the current situation, it seems next to impossible for Sri Lanka's economy to rise.

Another Sanction

US government another sanction on Russia to further cripple the Russian economy and to condemn the Russian violation of human rights. The US along with the Group of Seven and European Union Allies announced that gold transactions with Russia have been banned. Russia has the fifth largest gold reserves in the world. The US also announced sanctions against 48 Russian state-owned defense companies, 328 members of Russia’s parliament, and Herman Gref, the head of Russia’s largest lender, Sberbank. The purpose of the gold sanction is to further pressurize the Russian economy and also to cover all the loopholes through which other countries still do business with Russia. It will also affect Russian people who trade in gold in Russia and in other countries as well. The previous sanctions on Russia did not affect the gold reserves of Russia so the US is now directly aiming to attract the Russian gold reserves. Russia has used gold to back its currency and also to purchase goods and services so the gold sanction is primarily to restrict Russia from any economic activity.

The Potential Threat of Cyber Weapons

     With the conflict between Russia and Ukraine continuing, things have only become worse.  President Biden has warned United States citizens and companies of a threat of cyber-warfare.  This is potentially very scary, and we see Russia already using cyber weapons against Ukraine.  Although Ukraine seems to be holding up against these cyber attacks relatively well, it is hard to say how many more cyber weapons that Russia could have in their arsenal.  Additionally, Russia has threatened other countries including the U.S. that their nuclear program is on high alert.

    This situation is slowly getting more and more out of hand.  Even a large scale cyber attack targeted at Ukraine could have a significant impact on other countries like the U.S. due to the complicated world economy of using goods and services from other countries.  Possible implications of being hit by a large scale cyber attack could include mass power outages, silenced communication, and much more.  Everyone should be aware of what is going on in Ukraine, so I would suggest giving this article a read.

https://www.newyorker.com/news/daily-comment/the-threat-of-russian-cyberattacks-looms-large

Ukraine's Government is Willing to Make Big Concessions to End the War

 

Earlier this week, Ukrainian intelligence officers shared what they claimed was Russia’s invasion blueprint. The classified document, supposedly compiled before Russian troops crossed the border, envisages the complete takeover of Ukraine: seizing private property and taking over banks, transport, ports and elected institutions. Unfortunately, and understandably so, the recent discovery of this information has not made recent peace negotiations between Ukraine and Russia any less abrasive. However, Ukraine has continued to display a high caliber of integrity and honor in these recent meetings of powers, despite Russia’s persistent stubbornness.

In how this situation relates to the world’s economic health, Ukraine’s continued devotion to ending this conflict with Russia cordially is very encouraging, as the longer it persists, the more adverse effects it is going to have on prices, supply-chains, and international trade policies in not just Russia and on Russian goods, but on goods and services throughout Europe and the East.

Another effect that has resulted from this conflict is that many nations within the G20, which is basically an intergovernmental forum comprised of 19 countries and the European Union that works to address major issues related to the global economy, such as international financial stability, climate change mitigation, and sustainable development, are threatening to boot Russia from its ranks. While banning Russia from this committee could destabilize them in several ways, possibly leading to an end of the conflict by discouraging the spending of more funds on weaponry and military vehicles, Russia is still one of the world’s largest economies and controls a large portion of highly valuable internationally traded commodities such as fossil fuels. Anyone living in the United States right now is experiencing the effects of what happens when such strain is placed on the flow of goods and I don’t think that continuing to punish Russia financially, while deserved, is going to do anybody or any economy any favors down the line.

https://www.economist.com/europe/2022/03/23/ukraines-government-is-willing-to-make-big-concessions-to-end-the-war 

An economic shock just hit the housing market

When the pandemic struck two years ago, the Federal Reserve used nearly every lever at its disposal to combat the COVID-19 recession. That included cutting its benchmark interest rate to zero. Lower interest rates incentivized businesses to invest and borrow cheap money. It also encouraged buyers—enticed by record low mortgage rates—to jump into the housing market. The Federal Reserve has moved its focus from helping the economy recover to getting inflation under control. Last week, the central bank raised rates for the first time since 2018. In anticipation of the hike, the average 30-year fixed mortgage rate spiked from 3.11% in December to 4.16% as of last week. 

The real estate industry knew higher mortgage rates were coming—but they didn't expect it to be this high. Indeed, heading into the year, Fannie Mae predicted that the 30-year fixed mortgage rate would average 3.3% in 2022 and 3.5% in 2023. Industry insiders told Fortune that this swift move up in mortgage rates amounts to an economic shock. For example, a borrower who took on a $500,000 mortgage at a 3.11% rate would get a monthly mortgage payment of $2,138. At a 4.16% rate, that jumps to $2,433. If rates this week do cross 4.5%, that payment soars to $2,533. 

Not only do higher rates mean buyers' monthly mortgage payments rise, it also will result in some buyers losing their mortgage eligibility. One of the industry's fears is that home price growth remains at an unsustainable level and leads to an overheated market. After all, home price growth can't outpace income growth forever. At its latest reading, year-over-year home price growth was still increasing six times greater the rate of incomes. "Rising mortgage rates could eventually be good for housing by trying to bring the market back to a healthy place, but there will likely be some inequality collateral damage along the way," Wolf told Fortune.


https://fortune.com/2022/03/23/housing-market-interest-rate-economic-shock/

Fertilizer prices are at record highs. Here’s what that means for the global economy

         Supply shortages fueled by the Ukraine-Russia conflict, as well as other pre-existing factors, have driven fertilizer prices to record highs. Prices for raw materials that make up the fertilizer market are up 30% since the turn of the year and now exceed those seen during the food and energy crisis in 2008, according to British commodity consultancy CRU. Russia and Ukraine are among the most important producers of agricultural commodities in the world. They export many supplies in the food and fertilizer industries to other countries. Due to the invasion of Ukraine, trade between Russia and the rest of the world has been severely disrupted. 
Since the beginning of 2020, nitrogen fertilizer prices have quadrupled, while phosphate and potash have tripled. While farmers in developed markets have benefitted from high agricultural commodity prices, helping to partly offset high input prices, demand destruction is increasingly likely due to high prices and supply shortings. Economies around the world have been dealing with historically high inflation driven by soaring food and energy prices. The U.N. Food and Agriculture Index shows food prices are at an all-time high. 
The intensity of this supply shock can have big consequences as inflationary pressure can grow and broaden. The food and fertilizer industries have an influence on the industrialization and transport industries too which then lead to even more markets being affected. Shipping and transportation difficulties plus the impact of Russian sanctions on global supply are set to stretch global markets even further like the 2008 global food crisis had. Global food prices before the 2008 crisis shot up quickly and it is quite possible that the food market and other markets can repeat and go through the same crisis that occurred in 2008. The food and fertilizer industries being hurt will affect the global economy.

https://www.cnbc.com/2022/03/22/fertilizer-prices-are-at-record-highs-heres-what-that-means.html

Business Impact from Russia's invasion of Ukrain

 

Business impact from Russia’s invasion of Ukraine

The war has caused a lot of destruction in Ukraine and has consequences on the US as well. Some retailers have temporarily stopped their operations in Russia to show corporate condemnation of the war. Other retailers had to stop their operations in Russia because of sanctions. This could have a lot of influence on businesses around the world. Because of COVID retailers already are in difficult times. Retailers are trying to gauge future demand, so they can have the right amount of stock. However, this will be trickier now, because the war in Ukraine could be the cause of continued disruption in the global supply chain. Companies' costs will likely rise during the war. The increase in cost will come from high oil prices and the extra burdens of the disrupted global supply chain. Most companies pass their increase in cost onto the consumer, this will lead to an increase in prices. One of the retailers that will suffer the most are companies that use a lot of energy because Russia is one of the oil suppliers. Other retailers that will suffer a lot are retailers in food because Ukraine and Russia are major agriculture regions.

https://www.cnbc.com/2022/03/03/ukraine-news-retailers-start-warn-of-business-impact-from-russian-invasion.html 

Scott Rozelle and Natalie Hell, "Invisible China: How the Urban-Rural Divide Threatens China’s Rise"

A wonderful conversation about the growth of the Chinese economy and the importance of education for sustained growth. This conversation relates to our theoretical discussion of one-time vs sustained efforts to increase human growth.

Market Gyrations Ease with Traders Recalibrating Russia Risk

 According to the article by Bloomberg, traders are reevaluating the effect go the Russian-Ukraine War on trading strategies. 

Volatility in both stocks and bonds have fallen in the past few days. Russia has paid off some of its debts using dollars instead of a default, thus avoiding a default on payments. However, the country is till on hooks for more foreign-currency payments, thus maintaining a significant default risk. China has pledge to boost its economy. 

Investors will also be analyzing the effects of the Fed' first rate hike on the U.S. economy, when there is concern regarding a recession following an inverted yield curve for Treasury bonds (this article is only available for Bloomberg Professionals subscribers). 

Commodity linked currencies are in spotlight due to the high price of natural resources. Japan has asked the UAE to increase the export of crude oil, and Australia has stopped exporting shipments of aluminum to Russia.

Officials at the Bank of Russia are looking to purchase domestic sovereign bonds soon in an effort to stabilize the country.

Source: https://www.bloomberg.com/news/articles/2022-03-20/market-palpitations-ease-with-traders-recalibrating-russia-risk?srnd=markets-vp