The ‘War Tax’ on Americans

The Russian invasion of Ukraine is going to cost you.

For now, it won't be obvious exactly how much. Uncle Sam won't pry more cash from your wallet just yet.

War bonds – which countries issued to help finance World Wars I and II – aren't coming to a brokerage house near you.

But you'll eventually pay for Russian President Vladimir Putin's adventurism in other ways.

Let me explain how this could pan out...

Inflation in the U.S. hit a 40-year high in January, when it reached 7.5%. That means everything from used cars to ground beef to refrigerators costs more.

To help fight inflation, the Federal Reserve is expected to start raising interest rates. (That will also make borrowing money more expensive.)

But the war Russia launched against Ukraine is driving prices even higher...

In response to Putin's aggression, the world (the U.S. and Europe in particular) unleashed a blast of sanctions. Obviously, the goal is to punish Russian leadership for its actions... and force it to end hostilities. While sanctions are a painful tool, they're the strongest weapon available, short of sending in troops and triggering another world war.

Part of those sanctions involve freezing much of Russia's banking sector out of the global financial infrastructure... They're also blocking its central bank from using the U.S. dollar. That means Russian commodities producers won't be able to sell iron ore, gold, and aluminum on global markets. And without the Russian supply, prices will continue to rise.

Russia is home to many of the natural resources that power global commodities markets...

It's the world's biggest natural-gas producer and the second-largest oil producer and exporter. Russia is also the Earth's largest source of palladium (which is used for catalytic converters in cars, microchips, and electronics) and the second-biggest producer of platinum. Further, it's the third-largest maker of nickel (which is used in wires, gas turbines, and alloys) and the fourth-largest producer of uranium. What's more, Russia and Ukraine together make up 25% of wheat production and 20% of corn production in the world.

Major importers have been looking for alternative suppliers in the wake of the Russian invasion.

The oil and gas industry is a key exception... Europe depends on Russia for 40% of its natural gas and 25% of its oil. Those resources can't be easily or quickly replaced, and since Russia needs cash, it will continue to sell to Europe... war notwithstanding.

During the past year, the S&P GSCI All Metals Index (which measures investment performance in the precious and industrial metal commodity markets) is up 25%, and the S&P GSCI Agriculture Index (which measures performance in the agricultural commodity markets) has risen 44%.

And they're going to rise even more...

When supplies of key industrial inputs decrease, their prices increase. So if Volkswagen, General Electric, Samsung, the corner bakery, and the gas station have to pay more for their inputs... you can bet that you'll pay more for their output.

That's what I mean by a "war tax."

The Chain With Weak Links

Then there's our old friend, the global supply chain...

On top of the COVID-19-related strains on the supply chain (with the exception of "zero COVID" China), we now have a war. And that further weakens the overall chain...

The world is grappling with restricted shipping lanes, closed air spaces, and rerouted land shipments.

As the Wall Street Journal explained earlier this week...

Russia's invasion of Ukraine is piling new troubles onto the world's already battered supply chains. The fighting has shut down car factories in Germany that rely on made-in-Ukraine components and hit supplies for the steel industry as far as Japan. It has severed airways and land routes that had become crucial since the pandemic began gumming up sea trade.

When it takes longer for goods to reach their destinations, costs are passed on to consumers. That's part of the war tax... and it contributes to higher inflation.

But there's one sector that stands to benefit from the Russia-Ukraine War...

Defense Spending, Here We Come

War is good business if you're in the defense industry.

With the end of hostilities in Afghanistan, defense contractors, weapons makers, and the military needed another golden-egg-laying goose.

Defense expenditures have been falling for decades. In 2021, they hit an all-time low of 15.2%. (That year, total spending was around $700 billion.) That's down nearly 10% since 2010... and less than half the levels of the 1980s Cold War.

The Russia-Ukraine War is just what defense contractors need... By reframing the geopolitical environment war as one rife with danger and uncertainty, it might give the Pentagon a carte blanche to keep America "safe."

But someone needs to pay for the $2.1 billion B-2 Spirit stealth bomber, the $350 million F-22 Raptor fighter jet, and other high-priced defense equipment... the taxpayer.

As taxpayers, we know how inflation eats away at our standard of living...

At current inflation rates, the U.S. dollar in 10 years will be worth half of what it is today, in terms of purchasing power.

So what should we do in the meantime?

For your cash to simply tread water – and not lose value in real (inflation-adjusted) terms – you currently need to earn a return of 7.5%...

We must also keep a close eye on inflation trends... and how the Fed ultimately responds in the coming months.

The trends that were driving inflation before the hostilities in Ukraine (like supply-chain problems) – are still present.

And they can impact your financial security over time.

The war between Russia and Ukraine will just make things worse.

Best Regards,

Kim Iskyan

Editor's note: If you're worried about inflation, you need to read Doc Eifrig's inflation survival guide. Doc offers a practical walk-through of the current inflation statistics, shows where they are, and demonstrates that the threat of inflation sustaining at 4% or higher is very real... and already underway. And he shares four ways you should prepare your portfolio for it.

Click here to learn more.