“An unpredictable or unforeseen event, typically one with extreme consequences.” That’s the definition of a Black Swan event. At its core, markets are a counting machine and measuring or counting Black Swan events or geopolitical risks are not usually part of the daily valuation of a stock or bond market due to the extremes this would require. This year, the free world has been shaken by the dark events set in motion by Russia’s violent and barbaric invasion of Ukraine, and the free world’s reaction to it. The result? An economic war with Russia.
Extreme geopolitical events, however, do set the long-term trajectory for countries’ economies, which eventually affects investors’ outcomes. The fall of the Berlin Wall on November 9, 1989, heralded a new and positive era for investors and the wider citizenry of the world by allowing a peaceful end to the Cold War.
The U.S. won the peace and the foundation for a new globalized world economy was framed, which would lead to an era of worldwide prosperity as measured by per capita income increases for much of the developing world and, of course, a booming stock and bond market as capitalism and market-based economies spread worldwide.
Throughout the 1990’s and beyond, political policies such as taxation and deficits, education and military funding, as well as treatment of innovative technologies in communications, would be seen through the lenses of profits and liberal economic advancements and less so through the old Cold War lenses of national security ramifications.
Twenty-one years after 9/11, the subsequent U.S. surrender to the Taliban, and a Sino-Russian alliance not seen since 1960 — attacking civilian cities by missile strikes in Ukraine — leads one to believe the world has reverted to a disturbing, crisis-prone dichotomy between war and peace among superpower nations again.
Implications For Inflation In The U.S Economy
The end of the Cold War brought major defense budget cuts in the 1990’s as America was given a “peace dividend.” The military budget shrank from somewhere near 7% of GDP to 3.5% over the ensuing decades.
The peace dividend also allowed for a prolonged period of low inflation — or deflation from 1994 to 2021 — to take effect until Covid pandemic shutdowns upended the globally-connected supply chains of commerce. A younger generation of Americans is now learning how devastating price inflation is to household budgets and business profits alike.
Military spending, by its nature, is inflationary as government dollars compete with the private sector for raw materials and other resources to build weapon systems of all kinds. The new B-1 bomber recently unveiled by the Pentagon, after years of secrecy, is projected to cost $2 billion per plane. Per military sources, the U.S. Air Force bomber fleet is the lowest by size as it has ever been in its history.
American tax policy is nowhere near a level necessary to support a rebuilt American military. Still, the defense budget is the largest discretionary item in the U.S. federal budget and in seven years or so, the interest on the federal debt alone will reach parity with that of our military budget.
Even with Zoom technology and brave reporting by journalists, the war in Ukraine can seem so far away. A previous generation of Americans who were alive on December 7, 1941, felt a jolt like an earthquake when news reached them of the Japanese military surprise attack on our U.S. Naval base in Pearl Harbor.
Today is the 81st anniversary of Pearl Harbor – a Black Swan event that launched a reluctant, depression-racked and restless America into a war fought for unconditional surrender against the barbarism of the Japanese Empire and the German Third Reich.
The attack in Hawaii hit home for Missouri, 22-year-old Lt. George A. Whiteman from Sedalia, Mo. was among the first U.S. pilots killed as he tried to take off in his P-40 fighter plane. Lt. Whiteman was a graduate of Smith Cotton High School in Sedalia and the former Rolla School of Mines (University of Missouri-Rolla), now Missouri S&T. As the casualty lists from that day made their way stateside, Lt. Whiteman’s mother, Mrs. Earlie Whiteman, was quoted in the Sedalia Democrat on the news of her son’s death. She said “It’s hard to believe. It might have happened anytime, anywhere. We’ve got to sacrifice loved ones if we want to win this war.” Mrs. Whiteman lost another son in the Korean War in 1952 and passed away in 1972.
Anytime, anywhere might describe American military and foreign policy readiness during the post WWII period. On December 3, 1955, 10 years after the Japanese surrender to the Allies, former President Truman and other dignitaries commemorated the old Sedalia Air Base with a name change to Whiteman Air Force Base after Lt. Whiteman. Whiteman Airbase would become the location of American long-range strategic bombers, and during the height of the Cold War, Minutemen II ICBM nuclear armed missiles siloed along Highway 23 near the base in Knob Noster, Mo.
December 7, 1941 is a date that will live in infamy as President Franklin Roosevelt stated in his address to Americans the day after the attack. Eighty-one years later this date can serve Americans as a touchstone with experiences and lessons to be carried forward into the 21st century on how the peace was won in the 20th century, so it can be won again in the 21st century.