Recently, Maxim Oreshkin, Vladimir Putin’s advisor,
sat down with a Russian mainstream newspaper reporter.
Specifically, he claims the Russian economy is doing great as it breaks up
with Western economies and hits it off with robust Eastern ones.
According to him, there’s no unemployment, the GDP is on the rise,
and the country is cashing in on domestic production.
Besides, the sanctions are more deleterious to Europe than they are to Russia.
A lot of people are convinced that wars push economic growth.
Granted, wars connote death, destruction, and misery.
But defense contractors are driving the GDP growth big time.
One example would be the U.S.
The country’s economy was catapulted into the international lead by WW2
as they shipped weapons, canned meats, and steel to Europe.
Let’s figure out if a war can be an economy’s backbone.
Let’s debunk the alleged rationality of the case made by Putin’s advisors.
Before we kick things off, here’s a small reminder for you.
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The kickoff is 7.30 PM Amsterdam time.
And if you happen to be in Amsterdam, Vienna, or Israel,
snag your ticket to attend a live gig next week.
Okay, let’s roll.
WAR & ECONOMIC WONDER
So, the WW2-era U.S. economic miracle, what’s it all about?
Why do many people believe that wars tend to push the economy?
Let’s momentarily rewind the tape to that era.
The early 1940s saw the Great Depression,
which was essentially caused by overproduction, begin to subside.
Simply put, American businesses of the early 20th century
began to thrive off the industrialization.
New technology led to eye-watering amounts of cash.
The urban standard of living exploded, and urban residents created a demand
for the nifty doodads, like cars, Hollywood movies, phones, and washing machines.
The wealth levels spiraled big time.
It seemed like the manufacturing industry would keep churning out new goods,
the workers’ wages would keep growing, the demand would be ballooning, etc.
But there was a catch.
Industrial workers only made up a sliver of the U.S. population.
Most Americans never joined the party.
Far from it, they were only getting poorer.
Mass production required mass consumption, and that latter part caused big trouble.
By today’s standards, it seems like a trifle.
The government has a wide range of tools to drive consumption levels,
like welfare plans.
The disenfranchised will consume more,
and both the production and the economy will boom.
But the Gilded-Age U.S. government swore
by the laissez-faire economic policy and did nothing.
The country ended up producing more groceries,
clothing, fridges, and radios than ever before.
But there wasn’t enough money to buy it.
The prices took a nosedive, triggering deflation.
It’s worse than inflation, mind.
Suppose you want to pay $10,000 to buy a car.
But a year from now, the same car will cost you $8,000.
Two years from now, the price will be $6,500.
Will you buy something that you know will cost less soon?
Alternatively, let’s say you decide to save up
for retirement or your kid’s college tuition fee.
If you stash your cash at home, a year later,
it’ll be the same amount of money against lower prices.
But if you invest your money in real estate, a year from now,
you won’t be able to sell it at the current price.
In short, deflation poses a serious threat to economy.
It was a trap.
Well-off people bought nothing as they waited for a dip in prices.
Those who were worse off bought nothing as they couldn’t afford anything.
Those who invested in the manufacturing industry
enjoyed no ROI against the lack of demand.
All the while, the government expected
the market to get over the hump on its own.
At the outbreak of WW2, things got better.
But much of the manufacturing industry was still sitting idle,
and the unemployment rate hit 17%.
There was still not enough money to drive the domestic demand.
That’s where the defense contracts kicked in.
Money got infused into the economy.
The equipment eventually resumed operations and became profitable.
The defense contracts injected the money into the U.S. economy,
spurred industrial growth, and created new jobs.
But the fact that the U.S. aided its allies didn’t make it rich.
Much of the Lend-Lease aid was never paid for.
So, for the U.S. government, it was by no means a profitable business.
Those were just aid packages for their WW2 allies.
The Allies were only required to pay for the intact products.
Damaged or destroyed goods went unpaid.
For one, the USSR received $11B worth in packages,
but the USSR and Russia only paid a total of $722M.
Most of the amount was paid in the mid-2000s,
and so, it was several hundred percent less.
The manufacturing industry was paid by the government,
but that money came from taxpayers.
That money could be used to build new roads or schools.
That being said, the U.S. economic growth spurt had something to do with WW2.
The thing is, the U.S. was the only economically advanced nation
that wasn’t blasted by WW2.
Europe turned into a pile of rubble.
Once it began to recover, it started ordering from the U.S.
It boosted the U.S. manufacturing industry
and led to a longtime economic growth that lasted into the early 1970s.
That’s what prodded the U.S. economy to the top.
So, in a sense, the U.S. benefitted from the war
only because it wasn’t directly affected.
ISOLATION
Now, let’s discuss why economic growth isn’t on the cards for Russia.
The pro-Kremlin economists may well be telling you that Russia’s economy
is on par with the U.S. economy of the 1940s.
Like, we are involved in the war effort, we are drafting people,
and we’ve got huge defense contracts boosting the economy.
The growth spurt will be just like it was under FDR.
Except it’s the opposite of what happened in the U.S.
Back then, the U.S. was recovering from the effects of overproduction:
he surplus of goods, the lack of money, and the deflation.
In Russia, it’s the reverse.
We have a surplus of money and a lack of goods this money can buy.
As a result, the prices are rising, driving the inflation.
The U.S. was struggling with unemployment.
Russia, by contrast, is lacking in workforce.
The U.S. had more means of production than it could handle.
Russia is seeing foreign investments pull out, and there’s a lack of equipment.
The economy is hamstrung by the sanctions that hinder
the procurement of foreign equipment.
It hasn’t happened in a flash, though.
For decades, domestic production was unprofitable and economically unviable.
First, you can’t draw much investment if the property rights
in your country are constantly under threat.
Second, the manufacturing industry tends to struggle
if your economy is predicated on free petrodollars.
That constant talk of oil highs and Gasstationland
made a lot of sense.
Producing stuff in Russia was unprofitable.
However, importing stuff benefitted the economy.
The share of imported goods in Russia’s consumption portfolio was huge.
However, after invading Ukraine, the country got cut off.
The imports were affected by the sanctions,
which has led to the lack of goods in the market.
It’s not just about the imported products
but those produced in Russia using foreign-made equipment and raw materials.
The prices are growing against the shortage of goods.
Meanwhile, the labor market is losing 100s of thousands or even millions of workers
as some are getting mobilized, while others are leaving the country.
Against this backdrop, the Russian government follows the U.S. WW2 example
and creates ginormous defense contracts
Besides, it steals people from the economy, sends them to fight in this war,
and pays them a fortune.
Thus, it shepherds even more money
into the economy that’s about to collapse from the lack of goods and the surplus of cash.
It even gets worse as the government money spent on the defense contracts
can’t be used to produce non-military goods.
Instead, it’s used to manufacture battle tanks, missiles, uniforms, and UAVs.
It doesn’t help produce anything people can routinely shop for or resell:
no underwear, no burgers, no tractors, no road surfacing materials.
Except it overproduces something that’ll wreak havoc on Ukraine.
Everything Russia’s military-industrial complex
is now producing won’t boost the economy.
No one will be using tanks to commute to work or drive their kids to school.
You won’t resell a battle tank in a couple of years
following some minor repairs and upgrades.
A new owner won’t use it to land a job with Uber or DoorDash.
And no one will be paying tax fees for using it.
A tank is only paid for once.
It brings $2M to the GDP, and then it’s gone.
A battle tank will only create more money, spur the inflation,
and drive the reparations Russia will pay once the war is over.
The production tanks will only boost the defense industry.
But once the war is over and we don’t need any more tanks,
the economy will face the conversion crisis.
After the USSR had collapsed, military factories proved almost useless
when it came to non-military production.
Contrary to what people may believe, military production equipment can’t be used
to assemble cars or manufacture ballpoint pens.
Russia’s economic resources are shrinking.
The equipment gets old, the available workforce has plummeted,
and the investment in non-military domains is on the decline.
Russia’s economy is facing a perfect storm as the investors
are pulling out along with the capital they own,
while the ruble’s value stops immigrants from coming to work in Russia.
Moreover, Russia is now an unsafe country.
They can grab you and send you to fight in the war you want no part in.
The remaining economic growth potential is now being milked by defense contractors.
This will degrade the economy
with a reduced product range and lower quality of goods.
Worse still, if the government sets out to manage the pricing,
it’ll devolve into a shortage economy.
Remarkably, the GDP will keep rising as it responds
to the growing number of tanks and their operators.
But the real economy will only be quashed by this growth.
BURY THE ECONOMY 101
A misconception that wars push the economy
pertains to the realm of magical thinking.
Your economic system isn’t the magician’s hat that converts pigeons into rabbits.
It’s not about Houdini stuff at all. It’s driven by cogent, logical processes.
Sometimes these processes lead to a booming economy, growth, and wealth.
Sometimes resources, institutions, and businesses work in unison.
But no magical shenanigans
like reigniting a stagnating economy with a war effort will ever pan out.
Saying so or believing it is egregiously unprofessional.
Russia has only two ways of coping with the current crisis.
One scenario is that it becomes the post-WW2 U.S.,
the only country with an operable manufacturing industry.
But for this to happen, it takes the rest of the world to start faring way worse that Putin’s Russia,
wiping off entire cities, razing the economies, and bombing their manufacturing capacities.
In short, staging a domestic Mariupol worse than what Putin did to the actual city.
That’s where Putin’s Russia will get the chance
to thrive off the recovering economies of everyone else.
But if that’s the plan, the odds are vanishingly slim.
Alternatively, Russia can get rid of Putin, end the war, strive to get back to normal,
stop churning out armaments, start paying the compensation money, and prove
that we are decent and predictable country that everybody else can deal with.
This will help get the sanctions lifted
and save Russia’s withering economy from the banes of isolation.
A decent government can reform the current policies and reduce inequality,
which will drive the domestic demand.
Functioning property rights will help attract foreign investment.
We will start recovering.
But for all of this to happen, we need to stop the war.
There’s no other way.
See you tomorrow!