War is usually a sign that a global economy is doing badly and it needs to create chaos. The current situation is global. All the major economies have been doing badly, and each is waiting for the opportunity to take advantage of the situation - which is to reposition itself strategically in the new world order. Eyes on the US, China and Russia.
The current story started with the Russian invasion of Ukraine. Russia wants to reposition itself better strategically by wanting to open a sea access to the world through the Black Sea. This has caused food and oil prices to rise.
The US attacked Iran by taking out its political leadership. The new Iranian authorities now emerging has to show revenge to save face. They respond by attacking the enemies' military bases in its neighbourhood and inflicting economic pain by blockage sea routes for oil of its enemies. This is causing oil prices to rise further.
Rising global prices for food and other essential goods immediately suck up the purchasing power of everybody. This means people buy less things with the same cash. To return the consumption of the people to the previous level or even to help increase the consumption of the people, the government must give extra cash and run a bigger budget deficit.
It is not correct to raise interest rates to lower aggregate demand to stave off inflation. Higher interest payments by debtors will lower further the consumption of the people and make things worse for them. Higher interest rates will also lower loan demand and investment and creates less jobs. In fact, monetary policy should be loosened to maintain a stable financial environment, while the economy tries to cope with the supply chain problems.
Furthermore, war diverts resources from the ordinary people to the war effort. More people will die unnecessarily either from undue poverty or the war itself.
This war comes at a time when both the government and households are facing deficits to their limits. This was will have to break those barriers further and create now debts and deficits and bring them to historic heights.
Because of the diversion of resources to higher prices and the war, markets for financial assets and real estate will soften. Unsupported by slower loan growth and investment and lower purchasing power, we make see the start of a major downward asset price adjustment.
Brace for tough times ahead and keep cash.
