March 7th 2022 - Yellow for Yellow

At this point it is quite futile to predict long term consequences of the war in Ukraine on global economy. What appears to be certain, though, is that we are witnessing the greatest disruption of global economy since WW2, or perhaps, even since Summer of 1914.

One of signs of this disruption is price of oil which reached around 125 US$ per barrel. This was accompanied with even more dramatic price of natural gas in Europe, which reached around 3700 US$ per cubic meter, with most dramatic price increase happening in matter of few hours, when price rose from around 2000 US$.

All that would, of course, put additional strain on markets and economies which were far from recovering from the chaos created by COVID-19 and lockdowns. Inflation, which was already breaking decades-long records is going to get much, much worse. Simple reasoning tells us that if the price of oil goes up, so does the price of transportation and in the end it is ultimate buyer who will see price of everything go up.

But, there picture gets even more sinister if we take into consideration another, more ominous aspect of current severing of global trade links. Russia, which is subjected by sanctions, produces 30 pct of the world’s wheat. Ukraine, which is currently a battlefield, is the world’s 5th largest producer of wheat. And, unless, by some miracle, war doesn’t stop soon, it is unlikely that global markets would see most of Ukrainian wheat. Things can even darker if we take into consideration that Russia produces around 40 pct of world’s fertilizers.

This, of course, means that not only the global fuel, but also global food supply will be disrupted. During inflation, average people can develop strategies to cope based on frugality. They will most likely find good reasons not to purchase that car that they wanted, buy that Gucci bag, subscribe to Disney Plus or take vacation in Tunisia. But what they must get is food.

In practical terms, this would mean that the food will dramatically increase percentage of everyone’s life expenses. The only people likely to evade their personal financial and existential Armageddon are those who happen to possess real estate and enough gardening skills to grow food for their personal needs.

And what of those who remain stuck in big urban centres? Well, some anecdotes from history might give the answer. One of them was described in Velo misto (“The Little Big Town”), novel by Croatian writer Miljenko Smoje. Segment dealing with German occupation of port city of Split during WW2 was especially telling. Allied bombing and Partisan activity in the countryside has disrupted the regular food supply. Peasants that actually managed to bring food to the city was demanding ludicrously high prices for corn and demanding payment exclusively in gold, using the phrase “yellow for yellow”.

It remains to be seen whether the sanity would ultimately prevail and the world, or at least those parts that haven’t seen such situations in many decades, would evade such nightmarish scenario.

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