According to Timothy Garton Ash, professor of European Studies at Oxford University, writing in The Guardian newspaper, “we are at war”. Garton Ash writes that Russia’s President Putin is embarked on a “campaign” to “defeat not only Ukraine but also the west”.
There’s now too much evidence amassed to doubt this assertion. President Putin wanted to join NATO, according to the NATO head between 1999 and 2003. But he didn’t want Russia to have to stand in line “with a lot of countries that don’t matter”. A missed opportunity.
When he was told that Russia would need to apply rather than be invited to join, President Putin saw it as a snub. Disenchantment set in and grew until it exploded in February this year. The result is that the west is now engaged in a proxy war with Russia, which is busily gathering sympathisers – not only China but even European Union leaders such as Viktor Orbán, who has said recently that “Hungary needs to make a new agreement with Russia”. Images of destroyed Ukrainian cities, credible reports of violations of civilians, the horror of the war are undeniable – but if it is a proxy war with the west, it must be somewhat uncomfortable to realise that Ukraine is scarcely less tainted a country than Russia, occupying as they do positions 122 and 136 respectively on Transparency International’s Corruption Perceptions Index of 180 countries. Criminal smuggling of weapons supplied by the west to Ukraine has become a concern.
But a bigger concern is also a more hidden one – if we are at war, does the west have the will and the money to sustain it? The real test is just a short time away; European resolve might crumble when cold weather arrives and gas prices soar or rationing spreads as a consequence of shortfalls in Russian supply. In the UK, the former Prime Minister Gordon Brown has warned that a “financial timebomb” will explode in October as fresh fuel price rises push “millions over the edge”.
At the start of July this year the Kiel Institute for the World Economy’s Ukraine Support Tracker said that it had recorded total support commitments to Ukraine since the start of the war of €80.7 billion ($82.25 billion), although there is a “large gap between pledged and delivered support”, and the momentum of support is “slowing”. The cost of the war doesn’t even begin to consider how much it might cost to rebuild Ukraine (around $1 trillion has been estimated), to assist millions of refugees, and Ukraine’s plea for several billion Dollars per month in support. Where’s the money coming from?
The US last had a federal budget surplus – an excess of revenues over spending – in 2001. The US has only been debt-free in 1835-1837. In 2021, the US federal government ran a deficit of $2.8 trillion in the last full fiscal year, which always starts in October. The deficit for the first nine months of the 2022 fiscal year is running at 23% lower year-on-year – but it’s still a deficit.
US federal deficits/surpluses since 2001
Wars are not only expensive, they also stoke inflation. According to one study, US prices rose by about 120% between 1913 and 1920 during the First World War and its aftermath, and by 200% in the UK and 400% in France. The “hyperinflation which reduced the value of money in Germany to zero from 1919 to 1923 would have been inconceivable without World War I and its aftermath… Wars and revolutions without taxation to cover the cost have been the principal causes of hyperinflation in industrial countries in the last two centuries”.
The key words there are “without taxation“. In other words, if a country decides to go to war and wants to avoid inflation, it would be advised to ensure it can pay the costs from the revenue it takes in. Otherwise, it simply builds up debts for its children and their children. Currently, the US national debt is fast approaching $31 trillion (£25.6 trillion), which means the US debt to gross domestic product (the monetary measure of all goods and services produced by the US) is around 124%. As a share of the economy, the US debt was a mere 2.7% in 1916.
The huge debt is sustainable for as long as the US’s creditors continue to think the country’s economy is sound; the World Bank says that an additional percentage point of debt costs 0.017% of annual real growth when the debt-to-GDP ratio is above 77%.
It’s alarming to be told that we are “at war”. It’s twice as scary to think that we might lose it, not militarily, but financially.
Even if sustainable, the debt acts as a huge drag on the American economy. The US resembles an elderly boxer slugging it out with an opponent while tethered to a ball-and-chain, clamped on during previous wars. And it’s only round three in a ten-round bout in this one.
But maybe President Putin has bitten off more than he can chew. He may not be a Russian ‘Rocky’ after all.
According to a paper published by Yale School of Management towards the end of July, “business retreats and sanctions [against Russia] are catastrophically crippling the Russian economy”. Its authors state that Russia faces “economic oblivion… as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia”.
The two main boxers in this fight are Russia and the US – without the support and encouragement of the US Ukraine would have crumbled by now, for all its soldiers’ bravado.
As the west inches closer to a recession – technically already in place in the US, with a 15-month-long one for the UK forecast by the Bank of England (BoE), and consumers in the Eurozone now the “gloomiest on record” – it’s not in a good position for a lengthy fight.
Neither is Russia, perhaps.
The future might be one in which a pair of bloodied, bruised, battered opponents, stagger around the ring, clinging to one another to avoid falling over. Meanwhile, the global economy shrivels, set back decades – restoring it, restoring trust, will be tough, and it is conceivable that we may never return to globalisation. From the ashes will slowly emerge a new political – and monetary – hegemony.
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