While Americans fawned over Hollywood stars on Oscar night, Vladimir Putin executed a bold plan to return Ukraine to Russia’s fold, defying President Obama, the U.S. and our enfeebled Western alliance.
An “Iron Curtain” has descended in eastern portions of Ukraine, where stage-managed crowds have welcomed Russian forces. Meanwhile, families are fretting throughout western Ukraine, where Moscow’s influence is hardly a fond memory.
We are witnessing a geopolitical and human tragedy whose consequences for investors in fiat currencies such as the U.S. dollar, the euro and the Japanese yen could prove devastating.
The sinews of peace are stretched to the breaking point
Russia is subjecting 44.6 million Ukrainians to its dominion, a move that increases Russia’s population of 142.5 million by 31 percent.
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In this naked aggression, Russia is following the dangerous precedent set by the U.S. in fomenting “regime change,” but it is using military force overtly.
Gone in less than one week are pretenses that Moscow respects the rights of sovereign nations to self-determination.
Gone as well may be the “Pax Americana” that broke out in 1991 with the demise of the Soviet Union.
Regarding Ukraine, Mr. Obama’s weak-kneed response has not stopped Russia and likely emboldens enemies and rivals in contested flashpoints worldwide.
As bad as the situation is in Ukraine, much larger threats loom should Russia decide to attack the overleveraged and poorly regulated Western financial system.
Exploiting the potential demise of U.S. dollar dominance
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Mr. Putin must understand that the “Achilles heel” of the global financial system in 2014 is its reliance on the “cheap” money loaned by Western central banks at interest rates lower than the annual increases in consumer prices.
As Russia advanced into Georgia in 2008, Mr. Putin challenged Treasury Secretary Hank Paulson by encouraging China to join Russia in dumping dollar-denominated securities.
The U.S. is much worse off in 2014 than at the start of the 2008 financial crisis. Economic stimulants such as deficit spending and monetary easing have not restored the U.S. and Western allies to a robust growth track.
To see how painful a Russian-led assault against the U.S. dollar could become in 2014, we must look to 1979. Then, the interest rate that large U.S. banks charged to attract overnight dollar deposits (the “effective federal funds rate”) was 11.2 percent per year, slightly less than consumer price inflation, which raged at 11.3 percent that year.
In 1980, the effective federal funds rate rose to 13.35 percent, just shy of the rate of inflation, which climbed to 13.5 percent.
The real pain for the U.S. started in 1981, when the effective federal funds rate jumped to 16.39 percent, well above inflation, which was 10.3 percent. For the next 10 years, the effective federal funds rate averaged 215 percent of the inflation rate.
In contrast, during the period 2010 through 2013, the effective federal funds rate averaged just 7 percent of inflation.
As Mr. Putin himself saw in 1998, when Russia defaulted on its debt and devalued its currency, defending a fiat currency under determined assault has calamitous consequences.
No fiat currency is immune from attack today, and especially not the U.S. dollar.
Is the American Dream a hustle or a realistic hope?
Ukrainians face brutality while eyes everywhere look to see what the largest keeper of liberty’s fragile flame will do next.
Sixty-eight years ago almost to the day, Winston Churchill warned a crowd in Missouri: “We must never cease to proclaim in fearless tones the great principles of freedom and the rights of man which are the joint inheritance of the English-speaking world.”
Make no mistake, Vladimir Putin’s unchecked moves in Ukraine spell unprecedented trouble for the United States, for our freedom-loving allies and for investors.
• Charles Ortel serves as managing director of Newport Value Partners (newportvalue.com), which provides economic research to executives and to investment firms.