The ‘advantages’ of the new cold war

. Bond markets are nervous. And investors are selling their assets as they grow increasingly tense over Russia’s invasion of Ukraine. In addition, a new Cold War is emerging between Russia, her biggest ally, China, and the West.

But, a conflict can also be perfectly good for the economy. Rearmament kicks off a spending spree, creates jobs and often stimulates new technology. Investment increases by having to reconfigure supply chains. And in the medium term there is always the prospect of victory, which will lead to the reconstruction of the Russian economy. Investors will be anxious these weeks. But they will soon realize that a new cold war will actually be very good for the world economy, and maybe even .

It remains to be seen how the battle in Ukraine ends. However, it is clear that Russia, and above all China, will face the US and Europe for a decade or more. Has started . It’s no wonder, therefore, that investors have been spooked by it. On Wall Street, the Nasdaq, of great technological weight, falls. The same as the German Dax or the Moscow index. Volatility has skyrocketed. The only price that has risen is the traditional haven of gold, which is recovering some of the highs it reached during the last financial crisis.

Of course, it is easy to understand why. First is the risk that the war will cut off the flow of Russian oil and gas, plunging Germany and much of the rest of Europe into an energy crisis. But the great danger is in China’s performance. If this country is ever sanctioned for whatever reason, global supply chains will immediately collapse. “There is a risk of an export embargo by China to all NATO nations, and then, we would have a huge and critical supply shock to the global economy on our hands,” High Frequency Economics warned in an analysis this week. . “European economies would collapse, in a shock similar to the impact of the October 1973 oil embargo.” It is true that the short-term impact would be very bad. But in reality, in the medium term, a new Cold War could be good for the markets. Here’s why.

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First of all, rearmament. Governments will have to start spending much more on defense, especially in Western Europe. The paltry 1.4% of GDP that Germany spends on its armed forces will have to increase drastically, as will the Netherlands, also with 1.4%; while Poland, right on the front line of the conflict, will have to spend more than 2.2% of the production it currently spends on protecting itself. All that extra spending will create new jobs and industries, as it has in the past. Similarly, it will stimulate the creation of innovative technologies; in fact, a new Cold War may bring drones and robotics, created in state-funded defense labs, to the mass market, just like the Internet, which was basically the brainchild of the previous Cold War . In addition, it will trigger a wave of new investments. , and the most likely options are nuclear and wind. Both are viable, but it will take a lot of money to replace Russian gas pipelines. Similarly, if Chinese suppliers of parts and finished goods are blocked in the United States and Western Europe, we will have to replace them with our own factories, creating new jobs and wealth in the process. Finally, in the medium term there is the prospect of victory. After all, Russia lost the last Cold War and may lose this one too, especially if Ukrainian fighters put up a strong resistance, which is what is happening, and their troops get bogged down in trench warfare. If Putin’s military adventures are met with a forceful response, they could bring about his downfall, paving the way for meaningful reform. Keep in mind that if Russia could grow as fast as Poland or the Czech Republic, it would be a huge economy, at least twice what it is now, and that would stimulate demand and investment across Europe.

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No one wants a war, be it hot or cold. But the harsh reality is that conflicts can boost economic output. The last Cold War was also, at least until the inflationary 1970s, a golden age for Western economies, with full employment and a consumer boom. And growth recovered quickly from the wars in Korea, Vietnam and Iraq, and so did the markets, and usually surprisingly quickly. When North Korea invaded the South, for example, in 1950, the stock market (as measured by the S&P 500) fell 12.9%, but recouped all those losses in just 82 days. The stock’s 17% drop after Iraq’s invasion of Kuwait in 1990 recovered within six months. And even the 20 percentage point drop after the Japanese attack on Pearl Harbor – a serious setback, by all accounts – was recovered within a year, after which the market resumed its ascent. There is no reason to think that this time it will be any different. And once investors catch on, they will buy back into the market.

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