Wars And Rumors Of Wars

The sudden and well-planned attack on Israel by Palestine's Hamas group took the world by surprise. Israeli intelligence services apparently had no warning of what was about to happen.

Israel has now blockaded the Gaza Strip and formally declared war on Palestine. The question remains of what wider significance this conflict will have, and what impact that will have on the global economy.

The Middle East

There is the immediate risk of violence spilling over into other parts of the Middle East.

It's no secret that Hamas is backed by Lebanon's Hezbollah group, which in turn is funded and equipped by Iran. Since the attack by Hamas, Hezbollah has already made a number of incursions into Israel from the north. Engaging militarily with Iran would escalate a local conflict to a whole new level. Whether or not this takes place will likely depend on the nature of Iran's involvement, and what can be proven.

The US is a long-term and strategic ally to Israel, and an aircraft carrier is already en route to the Eastern Mediterranean (hopefully to help prevent regional escalation rather than join the conflict). However, the US is already heavily involved in the Russia-Ukraine war, and its funding of Kyiv is becoming increasingly controversial, particularly among Republicans—though for various reasons they are more likely to be comfortable funding Israel than Ukraine.

Russia, meanwhile, is already being armed by Iran, which provides the Shahed-136 "suicide" drones. "The enemy of my enemy is my friend," as the saying goes, and Palestinians have called for Russia to up the pressure on Kiev.

China: The Great Unknown

The big uncertainty in all of this is China.

China has played both sides of the Russia-Ukraine War, though seems more intent on "supporting" Russia, which in practice means reducing it to a vassal state dependent on China for oil revenues. China is one of the few wealthy countries left that is prepared to do business with Russia directly.

China will be watching closely as the US becomes stretched ever-thinner, financially and militarily. Recent months have seen greater posturing in the South China Sea. Many analysts believe that a Chinese invasion of Taiwan is a only matter of time—and what better time than when the world's cop is looking the other way?

The Inflationary Nature Of War

Wars are typically inflationary. This has always been the case throughout history, since a war effort requires money and economic activity. (Whether or not this can be considered healthy economic activity, or of long-term benefit to the economy or the world, is entirely another matter.)

Henry VIII's foreign wars were famously funded by debasing the currency, raising money by increasing seigniorage (the difference between the face value of coins and the cost of the precious metal used to produce them). Ultimately, "The Great Debasement", as it became known, was so extreme that many coins contained just a third or even a quarter of the gold and silver content of earlier money. Henry took to coating copper coins with a thin layer of silver, which would rub off over time, particularly on raised parts of the profile—something which resulted in the name "Old Coppernose" (also a reference to the effects of his heavy drinking).

Mass mobilization in World War 2 caused the British economy to grow by more than 20% from 1938 to 1941. The high inflation following WW2 was, in part, a political decision that allowed the government to reduce its massive wartime debts in real terms. Similarly, in the US, GDP soared in the years following the attack on Pearl Harbor. Again, inflation took its toll afterwards.

In the era of fiat and central bank money, debasement is even easier. QE gives governments and central banks the opportunity to fund any amount of activities, without being dependent on the will of the population to buy bonds, and pushing the consequences down the line to the next administration, or beyond.

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