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The war in Ukraine has gone global. Spiking commodity prices are on track to see their sharpest rises since 1970, sending a shock wave of suffering across the world as the prices of essential goods every human needs to survive are surging upwards. Wheat prices are up 60% since February. Food prices are now higher than during the global food crisis of 2008, which pushed 155 million people into extreme poverty. Cheap Ukrainian wheat that vulnerable nations including Egypt, Libya, Somalia, Syria, and Lebanon rely on lies stranded. If we aren’t careful, the “Ukraine shock” could fast be approaching the awesome scale of the OPEC and Iran shocks that rocked the 1970s.
But the “shock” metaphor is deceptive. This is not a momentary blast; all the warning signs point to the fact that this could turn into an avalanche. If that happens, we are just at the beginning of a decade-long deluge.
Two historical episodes offer a guide to these tumultuous times: the 2010s and the 1970s. Both periods saw commodity spikes trigger a cascade of crises that tumbled year after year. The protracted disorder was powered by a feedback loop between chaos in the markets and chaos in the real world. Conflicts triggered price shocks, and those high prices sparked more conflicts, causing prices to spike again, and so forth.
The first avalanche began in 1973 with the Arab-Israeli war. In retaliation for the US supporting Israel, the newly confident Opec energy cartel deployed the “oil weapon” by doubling – and then quadrupling – the international price. Across the world inflation surged, unemployment soared and stock markets suffered their biggest crash since 1929. Facing extortionate import bills, many countries turned to Wall Street banks to borrow dollars to pay for the oil their economies desperately needed.
But in 1979, when the Iranian Revolution sent prices higher still, the Fed chairman, Paul Volcker, hiked interest rates to 20% to battle a fresh bout of inflation. The indebted countries defaulted, triggering the third world debt crisis. The rescue package the IMF offered the defaulting countries was conditional on slashing government expenditure, especially on food and fuel subsidies. People in those countries could not afford to live, and protests erupted. The governments of Peru, Brazil, Argentina, Mexico, Jamaica, the Philippines, Panama, Sudan, Tunisia and Haiti were all eventually either voted out or overthrown.
The chaos had cascaded from a Middle Eastern war to the international oil price to a global recession to a Wall Street bonanza to a developing-world default to a revolutionary wave. Disorder in the markets and disorder in the real world fed off each other. As a consequence of this economic dysfunction, the Keynesian economic theories that had been hegemonic in the postwar period were declared ineffective and a free market revolution ascended. And when these free-market revolutionaries deregulated the commodities markets in 2000, they allowed financial speculators to dominate price formation. Now, just the traders’ anticipation of future chaos in the real world was enough to bring chaos to the markets as traders began “pricing in” the perceived risk. Perception could trump reality.
The second avalanche began in the summer of 2010 as wildfires raged across Russia’s farmland and speculators feared a global shortage of wheat. These anxieties were ultimately unfounded – American farms had a bumper crop that year – but panicked trades on wheat futures nearly doubled the international price. A wave of demonstrations swept one of world’s biggest regional importers – the Middle East – triggering the Arab spring revolts. In Syria and Libya, these revolutions descended into civil wars and awakened the dormant Islamic State in neighbouring Iraq. By 2015, the refugee crisis these conflicts had created went global, driving a rightwing populist insurgency across Europe that pushed the UK towards Brexit and gave Trump ample ammunition for his presidential campaign.
As these civil wars raged across a region populated by oil-exporting nations, commodity traders “priced in” a disruption to global oil production that never came. After a brief outage in Libya, the oil continued to flow. But the speculative oil bubble from 2011 to 2014 showered an awesome wave of black gold upon Hugo Chávez right before his re-election campaign, upon IS as their white Toyotas advanced through Iraq, and upon Vladimir Putin as he prepared for his first military incursion into Ukraine. Many of these petrodollars were also invested in western real estate, creating enormous wealth inequality, which, together with the refugee crisis, further fuelled the rise of rightwing populism across Europe and led a decisive swath of former Obama voters to pick Trump in 2016.
Putin’s invasion of Ukraine has triggered the third avalanche. The market reactions have been so chaotic that the London Metal Exchange had to cease trading. In the weeks ahead, the commodity price spike could bring a surge in inflation, a global recession, and a rising tide of hunger and poverty. If this crisis isn’t averted, incumbent politicians across the advanced economies will see their approval ratings sink as the cost of living crisis deepens. For the many countries already teetering on the edge of chaos, this will mean protests, riots and perhaps even revolutions, as we have already seen this year in Kazakhstan. Some of these conflicts will become civil wars as they did in 2011.
Oil exporters such as Saudi Arabia and Iran – and even Russia, if it can find buyers for its oil – will be enriched and emboldened, free to escalate their existing military adventures and start new ones. Mining communities across sub-Saharan Africa will see violence spike as the metal deposits they hold surge in value. The cartels will be looking to expand their operations to agricultural commodities with high prices, as Mexican avocado farmers can attest. These conflicts, whether realised or anticipated in the future, will raise prices as traders factor in the “risk premium”. And, in turn, those high prices will fuel the very conflicts the premium is supposed to hedge against.
Three additional global flows could further power this engine of chaos. Commodity riches may flow into financial assets, especially real estate in the west’s most desirable cities, widening inequality which, as we saw in 2016, could foment political polarisation and populism. Dollars to pay for these commodities will also need to flow from US financial institutions to vulnerable nations, creating the possibility of a new developing-world debt crisis with the austerity and instability that follows. Insecurity – be it from hunger or violence or both – creates flows of people: the 2 million who have already fled Ukraine will soon be joined by others as new crises and new conflicts erupt.
These doomsday scenarios are founded on one assumption: that market prices will be free to react to events, be they real or imagined. Wars are, by definition, times of extreme volatility. In such volatile times, policymakers have historically found it necessary to impose controls on prices until normality returns. The sooner politicians embrace this necessity, the sooner this engine of chaos can be dismantled. Each day of delay, the potential avalanche grows bigger. We must act to stop it now.
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