The Law of Unintended Consequences

In economics, the law of unintended consequences holds that economic actions may have unexpected outcomes. It has been my experience it's a rule that holds true for anything we do, and in the field of international relations it's a rule that translates as "Think before you jump." Think Iraq, as if you needed that prompt. 

Over at The Atlantic magazine, Derek Thompson does some thinking about what are likely to be some unintended consequences of the massive economic sanctions levied on Russia, governmentally and commercially.

The immediate consequences are already breathtaking. On both sides of this new iron curtain, commodity prices are skyrocketing and economic indicators are falling. Oil is at all-time highs, and the Nasdaq is in bear territory. Nickel prices went vertical, and the ruble crashed by 50 percent. Wholesale energy prices in Europe have blown past historic records, and a European recession looks almost certain. Yesterday, the economist Mark Zandi put the odds of a U.S. recession this year at “one-in-three.”

Yikes!

But Thompson looks into his crystal ball and sees three big things that might be on the horizon:

• The Green Energy Revolution Goes into Warp Speed.
• A New Chinese Empire.
• A Global Food Fight. 

To which we will add a fourth:

China, like Russia, was probably shocked to see how western financial institutions were able to collapse a large country's financial system in a world where the dollar is the de facto international currency.

In his book, The World: A Brief Introduction, Richard Haass wrote (in 2020):

As other econmies grow and become more open, they may be both willing and able to take on the role of a reserve currency. China obviously comes to mind here....

...[T]here is the increasing U.S. propensity to "weaponize" international financial transactions to sanction select governments and individuals, a practice that could well hasten a move to dollar alternatives.

China has certainly looked at this in the past, more as a financial powerplay than anything else. They're probably looking at it as a security issue now.

We heard one commentator recently opine that, as a result of the world reaction to Russia's invasion of Ukraine, invading Taiwan has moved from second to seventh place on China's to-do list. Although we cannot dismiss the possibility that China may decide to take advantage of the uncertain state of things to launch such an attack, we think the demotion is correct.

Be sure to read Derek Thompson's article, then do your own thinking about it. It's alternately fun and terrifying.