David L. Bahnsen on the Economics of War

I asked David to prognosticate the likely effects of the Russia-Ukraine war, and particularly the Western sanctions, on Russia, Ukraine, and the United States. His response is below. David is CCL’s Senior Fellow of Economics and Finance; Managing Partner and Chief Investment Officer of The Bahnsen Group, a wealth management firm based in Newport Beach, California; and has been named as one of Forbes Top 250 Advisors, Financial Times’ Top 300 Advisors in America, and Barron’s America’s Top 1200 Advisors.

For Russia, the economic consequences will be devastating. No amount of exports to China or imports from China will make up for their lost output of goods, and China cannot sell them anywhere near what they have been cut off from buying from the rest of the world. It is highly unlikely China will remain interested in getting paid in collapsed rubles for what Russia does buy from them, either. The trade consequences to Russia (in her role as a buyer and seller) are devastating. But most importantly, Russia’s access to her foreign reserves through the cutoff of central bank transactions puts Russia on a life line before she, well, goes broke. $640 billion of excess reserves essentially became $190 billion of excess reserves the second the central bank was cut off. This is a severe but not immediately fatal act that will play out in the weeks and months to come.

For Ukraine the consequences are obvious – significant uncertainty, reliance on foreign aid, erosion of imports and tourism, and massive wealth destruction out of the violence and destruction of war.

And for the United States, the only substantive implication in the short term is the exacerbation of supply/demand imbalance in global oil leading to higher commodity price inflation (the same can be said of several agricultural imports like wheat). This is not a reference to a new event but rather an acceleration of an already-in-motion event. It may very well turn into the catalyst that reforms beltway thinking about American oil and gas. Longer term, it is fair to wonder if some foreign countries may worry about the U.S. doing to their foreign reserves what we have done to China, and other countries becoming afraid of leaving foreign exchange reserves in dollars. But that is a ways off, and a likely needed trade-off to our geopolitical strategy, here.


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