War, Inflation, Food Shortages: What Else Could Go Wrong?

Just as the Covid narrative fell apart and life started getting back to normal, 2022 drops a bombshell on the world. Russia wages a proxy war against the US and NATO. Inflation destroys purchasing power¹. And food is quickly becoming scarce with the breadbasket of Eurasia at war².

If you routinely follow my blog, you’ll know that I’m not a doom-and-gloom writer. However, something fundamentally changed. This time feels different. It feels similar to February 2020, when I learned about a new, strange virus from China. Only this time nuclear powers are warring with one another, billions face starvation, and America’s economic is on the verge of disaster. What else could possibly go wrong?

Mass Starvation Equals War

In the modern world, most people live such comfortable lives that fighting for survival seems ridiculous. However, take food away from a peaceful population and even the weakest will fight. The horrifying combination of war, sanctions, and inflation could force millions to starvation this year. And when people are starving to death, war is an inevitable consequence.

This is exactly the scenario that most of the poor world faces this summer, especially in Africa and the Middle East. Sadly, these areas are already unstable from poverty, terrible governments, and war. To understand the true scale of this pending disaster, you need to understand how Russia and Ukraine fit into the global food market.

Globalization

I’ve written against globalization, specifically with regards to food security. When a nation hyper specializes its agriculture sector to compete globally, its people rely on global markets for most of their day-to-day calories. On the margin, their food is cheaper. However, their reliance on global markets creates long term food insecurity. When nations embrace globalization, embargos, wars, and sanctions have outsized impacts on food security. This is especially true for small or densely populated nations.

In many cases, these nations could be food independent with OUT globalization. Also, in many cases, these dependent nations are poor. Therefore, when global food prices skyrocket, millions of people face starvation. And worse, there is nothing they can do about it since their local farms are geared towards exports. For example, farmers can’t just tear down orchards and plant wheat overnight. It takes years, specialized equipment, and specific knowledge to change farming patterns.

Russia and Ukraine

Americans don’t need to worry about food. We have a nation the size of China with a quarter of the population. And American farmers are the most productive in the world. Russia isn’t as productive, but has almost double the land of the US with less people. Both nations are huge exporters of food. The same is true with Ukraine³. Combined, Russia (17%) and Ukraine (8%) account for a quarter of all the world’s grain exports.

On the flip side, Egypt and Turkey import most of the wheat their people consume. The same is true for most North African and Middle Eastern nations, like Algeria and Iran⁴. All of these places are relatively poor and politically unstable. And places like Egypt are wildly over populated, compared to their size and food production capabilities.

Why War Matters?

With the war raging in Ukraine, wheat production will inevitably suffer. As I’ve previously written about, the war has forced millions of Ukrainians to flee their homes. And no doubt many of these refugees are farmers. Compounding the issue, the Ukrainian government is forcing all able-bodied men into military service⁵. This group includes most farmers. Obviously, there is no way to grow food if they are busying defending their nation. Finally, a lot of the fighting occurs on farmland. This is especially true for tank warfare.

So, clearly Ukraine’s exports will be anemic this year. Normally, global markets could easily overcome the loss of Ukrainian exports. After all, pooling global resources is one the alleged benefits of globalization. However, most of the world has sanctions on Russia, the world’s top wheat exporter. With only bilateral options, Russia will continue export, but only to specific countries like China and India. And without Russian wheat on commodities exchanges, prices have more than double since last summer⁶.

Money, Money, Money

The other major problem facing the world is inflation. During Covid, the government forced millions to reduce or stop working. Simultaneously, central banks printed their currencies into oblivion⁷. All of the extra money created during Covid is finally working its way to the average person and leading to extreme increases in consumer prices.

Everywhere you look, the economy is “overheating”. Housing prices mirror the peak of the housing crisis from 2005-2006⁸. The stock market is overvalued compared to fundamentals, and also likely in a bubble⁹. And interest rates are rising¹⁰.

Add to all of these issues, NATO governments send billions of military equipment that will literally be used to destroy life and property. Clearly that can’t be good for the economy. Along with the recently inverted yield curve, all signs are pointing to tough economic times ahead, possibly even recession¹¹.

Butterfly Effect

The Butterfly Effect describes how small events cascade into progressively large events¹². I believe the war in Ukraine will have a butterfly effect that leads to larger, more dangerous events. These events will affect the entire global. Between inflation and war, food prices will continue to rise the reminder of the year, especially as grain reserves diminish. Along with a sick economy, the outlook for the year 2022 is bleak.

Nobody knows for sure what will happen. But starving people in politically unstable countries will surely result is some form of protests and/or violence. Besides civil unrest, there will be tremendous political pressure to end the war and resume trade with Russia. To maintain US/EU sanction on Russia, the US may need to send aid to struggling allies. Otherwise, these poor countries may break ranks and side with Russia.

Conclusion

Both the US and Russia have escalated the conflict in Crimea and the Donbas into an ever growing tragedy. The war could end tomorrow with strong and determined leadership. However, never side is willing to give an inch. Worse, both sides believe they can gain by prolonging the war. Russia clearly sees war as a way to secure control over the Black Sea coast. The US sees war as a way to sell more arms, renew the justification for NATO, and solidify its position as the policeman of the world.

Unfortunately, by prolonging the war, other dominos may fall. It is possible that all of these forecasts are wrong. Maybe the warring governments will come to a truce and restore trade. Maybe central banks will raise interests to reverse inflation without leading to recession. But to believe in those outcomes is wishful and naïve. You should plan for the worse and rejoice if none of these come to pass. I hope I’m wrong, but the US and Russia are involved in a high stakes game of chicken. And both seem happy to continue escalation.