Money knows no emotion and, sometimes, even less morality.
There was a cruel irony at play last week as surging commodity markets propelled Australian shares just as a previously unthinkable horror rained down over a nation helpless to stop the onslaught of its much bigger and more powerful neighbour.
As more than a million mostly women and children fled Ukraine to Poland and other NATO countries while the men stayed behind to fight, the world plunged deeper into a malaise that bore all the hallmarks of a macabre re-run of the events of a century ago.
Eight decades have passed since the last great global conflagration, interspersed with regional and bilateral conflicts of varying scale.
But the hope 30 years ago that the world finally had been brought together by common goals of peace and prosperity now seems to have evaporated.
Peace has been shattered with four great superpowers – America and NATO on one side facing off against Russia and China – dividing the world right down the middle.
Prosperity, meanwhile, for millions will remain an elusive dream as nations fortify themselves and look ever more inwards.
If it wasn’t already on the skids, the dream of a single and open global economy is now a smoking ruin. Globalisation, along with its many benefits and significant cost, is officially dead.
The question is, hostilities aside, what does all that mean for us?
National balance sheet good, but hip pocket pain
No wonder they call us the lucky country. If you wanted to be anywhere on the planet right now, it would be here, at the opposite end of the globe, as far away from conflict as possible.
While Russia has done its best to retreat from the West during the past decade, isolating itself as best it could financially in preparation for its military adventures, it now is facing a forced withdrawal from the global economy.
Now an adversary militarily, for decades Russia has been a competitor to Australia.
Like us, it is a major exporter of food, energy and minerals and its ejection from global trade flows, if the sanctions continue to hold, directly will benefit us, at least as far as the national balance sheet goes.
In fact, our terms of trade have never looked better, even compared to the mining boom of a decade ago. Terrific news huh?
When it comes to individual hip pockets, however, we’re all likely to be far worse off.
Basics like petrol and bread will become more expensive in the short to medium term, at least until trade flows stabilise.
Right now, they are anything but stable. The West steadfastly has refused to sanction Russian energy, its enormous gas, oil and coal trade in a bid to minimise self-harm.
But the financial sanctions imposed just over a week ago are hitting those very energy exports as banks refuse to offer trade credit.
While global oil prices are soaring, Russian oil is now being offered at a huge discount as buyers have boycotted purchases and shippers refuse to handle it.
The world’s third-biggest supplier, Russia accounts for about 10 per cent of global oil output. If sustained, the boycotts will punch a massive hole in President Vladimir Putin’s national income and play havoc with global trade.
While many have compared these events to the economic upheaval that came about in the 1970s when Middle East oil producers formed the OPEC cartel and boycotted America, this time around the boycott is from buyers rather than producers.
The boycotts have extended to all parts of Russia’s economy. The rouble has crumbled and while the Moscow Stock Exchange remains closed after a catastrophic 40 per cent single day plunge, global markets in Russian stocks have obliterated almost their entire capital value.
Check out this clip of Alexander Butmanov, a Russian stocks strategist, in a morbid toast to the death of the Moscow stock market. He’s planning to resume his career as a Santa Claus, even if it is only once a year.
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Will rates soar? Maybe not
The accepted wisdom is that the soaring price of crude, gas and coal will add fuel to an inflationary bonfire, initially lit by a resurgence in demand as the world emerged from the pandemic amid a global lockdown-inspired shortage of almost everything.
That means even higher interest rates imposed at an even quicker rate than expected. The fear factor makes pretty good headlines.
And the argument sounds plausible. Fuel is a major component in pretty much everything we consume, from production to transport. If costs rise, they’ll be passed on to consumers.
For some goods, that’s absolutely correct. But the economists warning of this are forgetting a basic fundamental of economic theory, which is that our demand patterns aren’t the same for all goods and services.
You’ll pay whatever you have to for basics like food staples, rent and clothing necessities. But that will leave you short of cash for other things. Maybe you’ll delay that new car purchase or the home renos.
Higher prices driven by supply shocks, such as this, can act like a tax. They take money out of your pocket. And that lower spending power can hurt economic growth.
Those same economists are warning that the higher prices will lead to demands for higher wages. Again, it is a reasonable argument. That’s what happened back in the 1970s, the last time inflation spiralled out of control.
But the world has changed since then. Workers no longer have the power they once did.
This graph shows the dramatic drop in strike action, and trade union power, from 1967 to 2007. At its peak in 1974, more than 6 million working days were lost to strikes that year.
Not including the pandemic, when industrial disputes all but disappeared, working days lost since 2007 has averaged around 25,000 a year with a corresponding sharp drop in the number of workers involved.
Given workers no longer hold the whip when it comes to pay increases, raising interest rates to battle supply shock inflation would only serve to take even more cash out of workers’ pockets. And that could put a serious handbrake on growth.
It is the very reason the Reserve Bank governor Philip Lowe has been at pains to point out that the RBA won’t be in a hurry to hike rates until wage rises can cover them. Given many Australians are bound by Enterprise Bargaining Agreements and other contract arrangements, it could take quite a while before wages catch up with inflation.
Higher interest rates certainly are coming. But rather than speed up rate hikes, Vladimir Putin’s Ukraine invasion instead may dial back the pace.
Uncertainty and fear
Last week, the head of America’s central bank, Jerome Powell, reinforced what everyone already knew: The US Federal Reserve would be raising interest rates this month.
Instead of the widely anticipated 0.5 per cent hike, however, Mr Powell made it clear that it would be just 0.25 per cent.
Even before his announcement, global bond markets had begun scaling back interest rate bets for this year.
The uncertainty surrounding Russia’s military campaign, made all the more dangerous by concerns around the Russian President’s dictatorial nature now that he has all but rid himself of oversight, has rattled markets.
In addition to creating untold misery, Mr Putin has thrown a chaotic curve ball into the global economy and no-one knows where it will land.
Our markets took a dive on Friday after heavy fighting around one of Ukraine’s nuclear power plants resulted in a fire, igniting fears of another Chernobyl-style nuclear meltdown. The fire, in an adjoining building, was extinguished, as were the concerns on markets.
If anything, soaring energy and food prices (Russia and Ukraine account for a quarter of global wheat production) are likely to hit global growth.
That means a slower recovery from the pandemic and interest rates that are likely to rise at a much slower pace than expected at the beginning of this year.
Unless, of course, Mr Putin backs off. That was a remote possibility a fortnight ago. Not any longer.
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