Moneybeat - Short-term costs

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

DAVID BAHNSEN, GUEST: Well, good morning, Nick, good to be with you.

EICHER: Let’s just begin with the economic sanctions against Russia. How effective so far, obviously, just the early going right now.

BAHNSEN: Well, yeah, I mean, militarily, of course, the whole world is sort of watching how it’s shaking out. But there's no question that it has been devastating to Russia already. And I think we are in early innings. There's a lot of these sanctions that are designed to sort of strip them away from global financial markets over time. So I spoke, I think it was a couple weeks ago about how Russia had $640 billion of foreign exchange reserves, and that gave them about $450 billion, maybe 400 billion, of an advantage over what they've had in past distress events. Once you factor in the central bank's lack of access to Forex reserves that are held on deposit with other central banks, they're down to 190 billion. So they can run through that quite quickly. So effectively, they've cut them off from about 70% of their global capital.

They haven't exactly pulled the plug on everything so far; there are still some banks that are on the SWIFT system, they gave their central bank some time for certain transactions. But you saw with the ruble collapsing as much as any major currency has ever collapsed in a single day, and the fact that Russia felt the need to close their stock market entirely, that oligarchs are scrambling all over the world to try to sell major assets. So this is certainly in the early innings of what will be an incredible toll on Russia economically.

EICHER: I want to pick up on what you said there, they haven’t pulled the plug on everything so far. You’re saying there’s still an economic weapon available to the West, the United States.

BAHNSEN: Well, yeah, the one sanction still on the table that is being avoided thus far, is being avoided not to avoid putting too much pain on Russia, but to avoid putting too much pain on counterparty nations. And that's a ban on the imports of Russian oil and gas. And so that would be further devastating to Russia. As much as the banking steps taken so far are a somewhat nuclear action, this would be the nuclear action of trade.

But it has been resisted to some degree, because of the short term cost it would impose on Europe. The argument or politically for the Biden ministration to avoid it is it escalates the global cost of oil and gas, and further exacerbates the heat he's taking for high oil and gas prices. But I think that that damage is already done politically, I think it's very baked in, there's a frustration about high elevated commodity prices. And so at this point, you may as well get the leverage out of it that you are desiring geopolitically.

And of course, as I've spoken with you about before, and I think many people both left and certainly right are pointing out now, the fact that it would be damaging, to some degree, in the price levels in the U.S. is entirely a self-imposed problem we're dealing with. The fact that we do have constrictions on our own production that would serve to offset some of that. So that's the remaining sanction on the table that could further drive some sort of punitive impact.

But imposing costs on Russia via sanctions, doesn't necessarily mean, ‘Okay, the next day, let's put down the guns and the bombs.’ Ultimately, I think they intended, they assumed that he was going to take care of Kyiv by now, and that the sanctions would be meant to be a sort of slow drip punishment for doing so, and kind of hurt them to a point where they have to back off as a pariah on the world stage. But right now, we're in too-early innings of the way this is going militarily to be able to unpack more of the economic impact.

EICHER: President Biden’s State of the Union address was this past week. I wonder what are your economic takeaways from the president’s message.

BAHNSEN: Yeah, there were two things in the State of the Union that I've chosen to focus on this week. Just anecdotally, announcing that he will release 30 million barrels from the strategic reserves. I just want listeners to understand that Americans consumed 17 million barrels per day. So by releasing 30 million barrels he gave us you know, less than two days worth of oil supplies.

But when he talked about inflation, and referred to the pressure they're going to put on companies to lower prices, of course, unless you're talking about their aspirations for minimum wage, where they want to put pressure on companies to raise prices, I do get confused sometimes as to whether or not prices are supposed to be going lower or higher in the governmental edict.

But this is an economic fallacy more than a political fallacy, more than a governmental overreach. Of all the different problems people listening may have with the idea of a head of state and saying we want to tell people what prices ought to be. Fundamentally, I hope all of us understand and remember that prices are not something that can be imposed. Prices are something that must be discovered, because prices are signals of information that organically flow out of human action. That when in a market, which is when a producer and consumer get together to do something, a price comes out of that transaction and that price becomes a signal to other market actors, and is a signal of information. A state can force a market clearing transaction level, but they can't change the price of what is organically set in the market.

And so it becomes what we would call a distortion. It does not become anti-inflationary, and so ultimately talk of government imposition of prices is not merely government overreach and big government and excessive and totalitarian or authoritarian, all of those things, many of which I totally agree it describes. But far more basic than that, it's economic ignorance prices are to be discovered, not imposed.

EICHER: All right, David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group.

You can catch David’s daily writing at DividendCafe.com. Sign up there for his daily email newsletter on markets and the economy. David, thanks again!

BAHNSEN: Thanks for having me, Nick.

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