Tuesday, March 25, 2014

The Cost of Economic Ignorance ?

I'm trying to feel sorry, without much success, for Vladimir Putin.  After all, he grew up in the old Soviet Union, with no understanding of capitalism.  When communism fell, it was replaced with "cronyism" which created the oligarchs . . . but certainly not replaced with capitalism.

Following his invasion of Crimea and imminent invasion of eastern Ukraine, the Russian people are going to pay a price for Putin's ignorance of economics.  Their economy was already weak, with less than 0.3% over the last twelve months.  Inflation is running at 6.9%.  The stock market is already down 13% this quarter.  The ruble is the second (after Argentine) worst performing currency in the world.  And, even their own Economy Ministry estimates $70 billion of capital outflows during the first quarter alone, which means it will be much more.

This is grim!

You'll recall Reagan was able to crush the Soviet economy by forcing them into an arms race they could not afford.  Putin could well be making the same mistake of trying to out-duel the U.S. economy.

Nothing brings the mobs into the street faster than inflation and unemployment.  With inflation already running almost 7%, just wait until their imports soar in price due to the falling ruble.  Russian doesn't report unemployment like the U.S., but just wait until the sanctions start to bite.  Unemployment is certain to rise!

Of course, maybe the Russian people deserve the hardships ahead of them, since they now give Putin a 71% approval rate.  But, they've already suffered greatly after the fall of communism, leaving them with a poor first impression of what they thought was capitalism.

If history repeats itself, -- is it because history MUST repeat itself?