What happens to asset prices after a war with Ukraine?

In late February, I wrote this article:

Russia-Ukraine War, the turn of the great wheel of history

As a result, a post discussing finance and future trends in asset prices had a tit-for-tat argument between pro-Russia and pro-Ukraine supporters in the comments below. Few people pay attention to why I make this judgment:

1971 America refused to exchange gold ≈2020 Federal Reserve “unlimited QE”;

The Yom Kippur War in 1973 ≈ the Russia-Ukraine War in 2022.

For more than 20 years before the dissolution of the Bretton Woods System, Western countries, including the United States, Japan, Britain, Germany, France, Italy and Canada, had been basically thriving economy, stable currency value of each country (the dollar was bound to gold, and the exchange rate of each currency and the dollar was basically fixed), and sustained economic growth. If we do not consider the threat of war against the Soviet Union in the Cold War, It was almost the most successful phase in the history of western capitalism:

Debt-laden Britain’s economy is growing at around 3%;

Germany, on the front lines of the Cold War, was growing at about 4 per cent;

The US, the world’s dominant economy, is growing at around 4%;

In France it is around 6%;

In Japan it is around 10%;

After the Yom Kippur War of 1973, however, growth rates throughout the West, which had entered stagflation, fell sharply to around 3% and by the early 1980s to around 2%.

If you look at the chart above, you can see the difference in economic growth over ten years, using 1973 as the dividing line.

Why does this gap exist?

This is because, in August 1971, the US government refused to convert gold, which was a default by the world hegemon to the whole world and destroyed the basis of the value order of the whole world. When most people have doubts about the value of money as a benchmark for transactions, it means the world is becoming unsafe, uncertain and unreliable.

It was during the financial crisis of 2008 that so-so-so said:

Confidence is more important than gold.

Trade among the world’s major countries was thrown into disarray by sharp fluctuations in exchange rates, and confidence began to shake. After the outbreak of the Yom Kippur War in 1973, the price of crude oil doubled twice in just two months, proving people’s suspicions that the dollar, unfettered by gold, was worthless, and that the U.S. government was using waste paper to loot the world’s wealth.

The insecurities and doubts that lurked in my heart during the previous two years quickly gave way to insecurity. People began to buy physical goods, and various demonstrations demanding higher wages led to an inflationary spiral. Worsening economic stagnation plus rising inflation became the dominant color of the era.

According to the above chart, we can see that after Nixon announced the closing of the gold exchange window, the US stock market rose in nominal dollar terms, and the dollar prices of all other assets, including gold, silver, crude oil, copper, wheat and so on, rose for more than a year. Only the official CPI inflation rate and housing price in the US did not raise much.

The arrival of the “Yom Kippur War” and the outbreak of the exchange rate chaos in Europe completely detonated people’s distrust of the dollar, the prices of crude oil, gold, silver, copper, grain and other commodities soared, and the stock market, which had been rising, began to continue to decline…

That’s right!

Just like the outbreak of the Russia-Ukraine war on February 24, 2022, the prices of gold, silver, oil, copper and grain soared while U.S. stocks fell.

It was not until 1982, when Paul Volcker, then chairman of the Federal Reserve, forced the U.S. money supply to shrink, and the U.S. government reached an agreement with Saudi Arabia and other oil producers in the Middle East that crude oil was settled in dollars and gold stopped rising that the value of the dollar finally stabilized.

Then, the economic success of the United States in the 1990s led to the gradual acceptance that a government with fiscal discipline, a central bank with classical monetary principles, and a cooperative currency of credit could also act as a stable standard of value.

Even after the outbreak of the global financial crisis in 2008, faced with the possibility of the Great Depression of the century, the Federal Reserve implemented QE to frantically print money; people still chose to accept the value of the credit dollar, and in the following 12 years, as the value standard of the world, basically maintained the whole world.

Yet when the pandemic hit in 2020, the Fed defiantly declared “unlimited QE”. In order to please voters, two successive US administrations from the Republican Party to the Democratic Party in 2020-2021 chose to “hand out money” without any bottom line, which was just like Nixon’s announcement to close the gold exchange window in 1971, undermining people’s basic belief in the value of the dollar.

Americans, who earn an average of $30,000 per household without having to work at all, started the pace of shopping around the world. The pandemic has disrupted production in most countries, increasing shortages in everything from consumer durables to consumer goods and further tightening the supply of raw materials. As a result, commodity prices, from energy to metals, have continued to rise.

Like the Yom Kippur War, the outbreak of the Russia-Ukraine War greatly accelerated the historical course of this round of inflation.

Russia is the world’s second largest exporter of crude oil, a significant exporter of natural gas, the largest exporter of wheat and a major global supplier of nickel metal. In the immediate aftermath of the war, the prices of these commodities soared, which in turn drove up the prices of other metals and food, almost exactly as they did during the Yom Kippur War.

We can also see that after the Yom Kippur War broke out, the prices of gold, oil, wheat, and copper began to skyrocket, inflation continued to rise from high levels, and the U.S. stock market began to decline significantly.

More importantly, from the perspective of geopolitics, Russia’s invasion of Ukraine and NATO and EU’s assistance to Ukraine marked the first military confrontation between more than two of the five permanent members of the United Nations since the collapse of the Soviet Union, which also meant a major breakdown of the principles of the international order. This was not only to compete for the local interests of a certain region, but also a challenge to the entire international political order.

The Yom Kippur War of 1973 was ostensibly between Arab states and Israel, but behind them stood the Soviet Union and the United States, respectively, in a way that could be described as a classic proxy war between the two most powerful countries of the time. It was because the war ended with the most important country in the world that it brought about deep and lasting capital market turmoil.

This time, Russia has ended up on its own, while Ukraine can be interpreted as a proxy for the West as a whole, and the consequences of the war are just as profound. If history since 1973 is any guide, the boom in commodities, including oil and gold, is likely to be just the beginning. After a period of correction, commodities, including oil, copper and various grains, could well be poised for another epic rally.

What’s more, as Western public opinion grew over Russia’s aggression in Ukraine and sanctions were rolled out, Russian assets listed abroad fell almost overnight to a fraction of their former value. Russia has also been largely cut off by the SWIFT system, almost all major multinational companies have withdrawn from the Russian market, and even the assets of wealthy Russians have been seized. Even Switzerland, once a neutral country, has announced that it will follow the EU’s steps to impose sanctions on Russia.

A series of European and American financial sanctions have hit Russia’s revenues, but on the other hand, operations such as cutting off SWIFT are also a bomb to the credit dollar and the modern financial system.

After all, since the collapse of the Bretton Woods system and the freeing of the dollar from gold, between 1971 and —

The Fed’s balance sheet has grown nearly a hundredfold from $90 billion to $9 trillion today;

The M2 money supply in the United States expanded 35-fold from $626 billion to $21.8 trillion today.

Under these circumstances, the Fed and the U.S. government’s expectation that the “dollar will remain strong,” that rising prices will be temporary, and that the dollar financial system will be unconditionally accepted by all is a fantasy.


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