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It's been a tough week. The images from the Hamas terrorist attacks on Israel and the subsequent retaliation and bloodshed has been difficult to see. The Palestinian-Israeli conflict is one of the world's longest ongoing conflicts and has several layers of nuance that I don't wish to discuss here. One, because I'm not an expert and don't intend on trying to add to the complexity of the conflict, and two because it is not additive to learning about what's going on.

Trying to come up with conclusions is intellectually dishonest and I challenge everyone who reads this to push back on people claiming to know what has transpired over the past week. There was a terrorist attack and multiple escalations leading to thousands of civilian casualties. Outside of that, we need to listen and learn.

Part of what I do try to unpack is how the baseline economics complements and shapes the world we live in. Whether it is destabilization of the Middle East as a United States policy, or understanding how geopolitics and economics are intricately linked, I want to continue to ask questions to learn, and then openly share ideas I have with my close friends and family to try and make sense of the world.

As we think about the link between geopolitical conflict and economics, I'm reminded of The Times newspaper cover on January 3, 2009 in the midst of the Great Financial Crisis:

The two headlines jump out: "Israel prepares to send tanks and troops into Gaza" and "Chancellor on brink of second bailout for banks."

As much as we think things change, a lot stays the same, and history does more than rhyme: it tends to repeat itself. When economics of the world are inherently unstable, it seems to be that conflict and civil unrest generally follow.

Let's take the start of COVID in early 2020 as a proxy for a war-time like spend. It was an equivalent spend of World War II and while the consensus of looking at the headlines is that inflation is coming down, unfortunately that is not correct. While CPI is now at 3.7% the rate in which inflation is increasing is coming down, yes. But what if I told you that since January of 2020, you lost 23% of your purchasing power? Meaning $1 in 2020 is worth only 78 cents today:

https://truflation.com/

That is high even for historical standards. We are in a fiscal crisis without authorities and mainstream outlets saying as much. Purchasing power is eroding which inherently hurts the poor and vulnerable, while continuing to engage in foreign conflict (like Ukraine, now Israel/Palestine). Our $33 trillion of growing debt must be monetized and the printing must go on.

The FDIC has even published the unrealized losses on bonds that banks have had since the middle of 2021 when the Fed began it's unprecedented rate hiking program. They convinced all the banks to splurge on bonds, while simultaneously jacking rates, devaluing the bonds.

It would be like if Apple convinced Best Buy to buy a billion iPhone 9s, knowing that they had the iPhone 10 to release in 6 months. After Best Buy buys the old iPhones, Apple releases the new iPhone, devaluing the phones Best Buy just bought. They're stuck. This is similar to how the Fed sold bonds.

These are 'unrealized' losses meaning unless people come to the bank for their deposits, nothing happens. But, if individuals and businesses start to default on their loans and banks need to sell some of these assets at a loss, we have a problem. The last time we had something like this in 2009 was much less severe as we didn't have the war-time printing of COVID to act as an accelerant for a lot of these bond losses.

As we've discussed here before, the privilege of having the world's reserve currency is that there is a huge demand for dollars around the world and in countries with triple digit inflation rates. We can export our own inflation to the rest of the world because of the demand for dollars. Additionally, our politicians can spend like drunken sailors since we can safely run large deficits, as we have this reserve currency status. I went to the White House website to map the surplus or deficits the U.S. has seen from 1789-2028. They've projected our fiscal deficits over the next few years:

Two things stand out: 1) for most of our countries history, we ran surplus's or minimal deficits to balance trade, and 2) large deficits didn't start until 1971 which, you guessed it, is when Nixon took the U.S. off the gold standard. The untethering of a fiat currency from a hard asset allowed both democrats and republicans to expand the budget and deficit for political purposes. We're now at an unsustainable level of debt that will likely be monetized by higher base rate inflation, leading to domestic unrest as people see their purchasing power erode and then subsequent foreign unrest.

Purchasing power is key and there seems to be a disconnect by things like the jobs report increase and how people feel in their day to day. Well as we recently found out, jobs seem to remain resilient because people that hold two full time jobs are now at record levels. The 23% erosion in purchasing power has caused people to have to work multiple jobs:

A record 447,000 Americans are now working 2 full-time jobs : r/antiwork

Looking past headlines is a must to be able to navigate the informational complexities of today's world. My view is that economic unrest precedes civil unrest and we've seen that across empires from the Ottomans to the Romans to the Americans. If you feel like things are crazy right now, that's correct. Crippling inflation, unrealized bank losses, and the largest fiscal deficits we've seen in our country's history have led to discontent.

While I'm not suggesting that economic factors alone drive the complexities of the Middle East conflict, they undeniably play a significant role in shaping the broader global landscape. It's crucial to recognize that these economic issues are not isolated incidents; they echo through history, reminding us that the stability of nations and the well-being of their people are intricately tied to their economic foundations. As we confront the challenges of our time, we must remain vigilant, critical, and open-minded in our pursuit of understanding. By addressing the economic factors that contribute to unrest and inequality, we can hope to build a more stable and just world for future generations. In this ever-changing landscape, the power of knowledge and informed discussion remains our best tool for positive change.


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