War Footing

The world is six months into the war in Ukraine. Or eight years, or 239 years, or more than 1,000 years, depending on how you’re inclined to conceptualize and date the conflict.

Although the parabolic surge in gas and power prices witnessed over the last several weeks prompted European officials to concede the existential nature of the economic threat, I’m often troubled by the suspicion the West still isn’t according the conflict the proper level of concern.

Ukraine rarely receives top billing on the nightly news in the US, and often enough finds itself below the digital fold even on the websites of European news outlets. That’s highly unfortunate because… well, because the West is at war with Vladimir Putin’s Russia. There’s no news more pressing than that — no threat greater, or at least not until one of the semi-apocalyptic killer asteroids NASA missed due in part to funding shortfalls slams into a large city at 40,000 miles per hour.

You might be inclined to suggest it’s “only” (merely) a proxy war. But that wouldn’t be quite accurate. Russian boots are there, on the ground, in the mud. And Western arms are flowing into the country at a rate that’d make Viktor Bout blush. There’s no pretense. None at all. This is war.

Yet, on most days it still feels like Western politicians haven’t fully accepted that reality despite their role in perpetuating it with weapons shipments. Sure, the US and its allies in Europe loudly tout the most comprehensive sanctions regime ever assembled, and during weeks when energy prices skyrocket, another official compares the European energy market to Lehman while someone else warns about “tough choices” during the winter months. But there’s a conspicuous lack of panic. Real panic, I mean. The kind of panic where the nightly news warns viewers that “the Russians are coming.” Because they might be! The kind of panic when officials caution citizens that NATO is one “tactical nuke” headline away from having to remove Putin’s army from Ukraine by force. Because it is!

More broadly, the entire post-War order is facing a coup attempt with China as the (mostly) silent controlling partner and guarantor. This is an emergency, and it calls for a war footing. Not just footing the bill for Ukraine to fight a war.

There’s some evidence to suggest European officials are coming around to this reality. “The European Commission is seeking emergency powers to force companies to make key products and stockpile goods in a crisis,” Reuters reported late last week, citing an EU document which proposes a “Single Market Emergency Instrument” aimed at addressing supply bottlenecks.

“The Commission will need to thrash out details with EU countries and EU lawmakers before the proposal can become law in a process that will take months [but] if passed, the Commission may ask EU states to reorganize supply chains and increase supplies of crisis-relevant goods as quickly as possible,” Reuters wrote, noting that “companies may have to prioritize the production of certain critical goods” or face fines. I’d gently suggest that “or else fines” might be too soft. “Or else…”, with an ellipsis, might be more effective.

Writing in reference to, and editorializing around, the linked Reuters piece, Rabobank’s Michael Every underscored the urgency of the situation. The excerpted passages (below, from a September 5 note) should be considered in the context of everything said above.

MMT will need to back state spending in vital areas. Such hypothecated credit will reallocate scarce resources towards supply-chain restructuring and away from the likes of too much high-end housing. Indeed, the question is when/if we also get non-fungible credit to key firms that can only go into specific physical capital rather than being arbitraged. It might take a central bank digital currency to do it, but it will happen: You don’t win wars with SPVs and spivs.

MMT will probably also be used to suppress energy prices to maintain as much industrial supply as possible, and to minimize household pain. In which case, we will have to see the [EU] Commission’s proposed industrial policy too: Because if we do not have energy rationing by price, which the Soviets avoided, then we will have it by diktat, as the Soviets then had to do. And note the Soviets only avoided a currency collapse with capital controls and fixed exchange rates.

We will also require friendshoring or onshoring to recycle capital and keep production in ‘safe’ hands. [T]here are rare examples of countries selling weapons to their enemies [but] the more a war is seen as existential and/or long-term, the more trade is disrupted, whatever the costs — and business lobbying has little effect on such national security decisions.

It’s existential to get this call right. It goes without saying this war is existential for Ukraine; and Russia says it is for it too. The above hypothesis suggests the Commission’s latest policy proposals say the war is also existential and/or long-term for Europe. By contrast, the G7’s laughable oil-price cap says Ukraine is a far less important, shorter-term struggle.

The alternative policy call stemming from the populist right and left is to say ‘give Putin Ukraine to get cheap gas.’ However, this is a simplistic view which fails to see the logical and historical risks that a Western retreat could open the door for more, and more global, war; for more, and more global weaponization of commodities and trade; and, though nobody in the West will publicly admit it, for a huge tail risk to the living standards it (fairly or unfairly) enjoys.

This is not a drill, as they say.

But I’m not particularly optimistic. The West has been too comfortable for too long, and doing what’s necessary will entail having the sort of discussions “comrades” have while sitting atop command economies. Indeed, as Reuters wrote, top-down industrial policy “is contested by some EU countries worried about a power grab by the EU executive, while critics say it smacks of China-style state capitalism.”

The irony, then, is that the market-obsessed West may need to adopt a version of central planning to defeat Putin’s wayward Soviet successor state and its hugely powerful communist benefactors in Beijing. Only without making all the mistakes that generally go along with central planning. Again: I’m not optimistic.

In a follow-up note, Rabobank’s Every offered an exhortation of sorts. “This is not a joke. This is not a blast from the past. This is not an abstract exercise,” he said. “This is a thought process undoubtedly already underway at the highest levels of some governments, or which I hope to goodness already is.”