Thankfully, unlike many others around the world, my experiences of war are sanitised and indirect. Two of my mother’s brothers were conscripted into the Vietnam War. One uncle decided fighting in the steamy hot Vietnamese jungles was not his idea of a good way to spend a portion of his youth, and was imprisoned for not fighting. Another went, and when I asked him what it was like, he said he felt like two angels were there protecting him from getting maimed or killed by enemy fire. My father fought in the Korean War, but he never talked much about his experiences, so I don’t have any idea on what he thought about the topic.

As a child growing up, my knowledge of war came from the television. The video game of war played out on nightly news broadcasts. Americans fighting in Iraq, Bosnia, Afghanistan, Iraq again and various other proxy skirmishes dotted the news casts. Luckily I did not suffer rationing of food or consumer items, or experience the effect of crushing inflation during the times America was at war.

Many in the world, likely including some of you readers, have experienced real hardship as a result of war. Family members you loved were injured or killed. You might be a refugee displaced by conflict. Or you have gone hungry because food was scarce or extremely expensive so that the soldiers could eat.

When viewed from a macro humanist perspective, war is always destructive and energy wasteful. Human civilization converts the potential energy of the sun and the earth into food, shelter, and entertainment. War is the act of spending energy to destroy the fruits of human civilization. While one side “wins”, and achieves some political or resource-driven goal by defeating their enemy, humanity loses because the things destroyed by kinetic energy weapons must now be rebuilt using additional energy. The potential contributions of the humans slain on both sides are also lost forever.

Because this is an essay that covers the crypto capital markets, we must consider humanity as a whole. Our currencies and assets are for the benefit of everyone, not just one particular imaginary construct that is a “nation”. There is no righteous war at a systemic level. Forget what the media on either side tells you about the justification for why this war is good for some nation state. Rather, consider that every life lost and structure damaged took energy to rear and construct. That energy is not inexhaustible, that is waste. The more we waste, the more negative consequences will be visited upon humanity as a whole. And the most obvious outcropping is inflation.

The war effort always crowds out the ordinary consumer. In order to supply the armed forces, production must be shifted away from satisfying the needs of the ordinary consumer to satisfying the needs of the military. The side that musters the most resources and energy with the least impact to the everyday life of their citizens is the side that usually prevails.

Many of you have probably studied various aspects of WWII in extreme detail. Your country may have even been created in the aftermath when the winning Allies carved up the world into spheres of influence that are still present today. Germany and Russia started as allies. Hitler needed the oil and grain of Stalin’s Soviet Union in order to power the war effort and feed ordinary Germans. However, Hitler needed more and more energy as the war went on, and he erroneously believed that if he invaded Russia he could easily capture Ukraine — the breadbasket of Europe — and the Caucasus oil fields.

Obviously, like Napoleon, he failed; Hitler invaded Russia and total exports of grain and oil from the USSR plummeted. Hitler would have been better off continuing to trade on fair terms with the USSR than invading it. As the war dragged on, morale in Germany declined in the face of food rationing and crushing inflation.

I only mention that vignette to illustrate that it usually is a net energy loss to take something via war, rather than trade. So anyone who believes war on a systemic macro level solves any of humanity’s problems, probably never watched their child go hungry so that a soldier in a far-off land can fight.

As we enter a period where the global order of flag-waving nations shifts and the probability of possible conflagrations rise, the prospect of persistent global inflation caused by military needs crowding out civilian ones is here. Now, putting aside the misery and suffering that war visits upon humanity, what should we do with our portfolios? I don’t mean to diminish the sorrow of war by immediately switching to commercial concerns — but we must prepare ourselves and our financial assets in an attempt to maintain a certain lifestyle vis-à-vis our personal and familial energy consumption.

The spectre of global conflict exists against a backdrop of the most accommodative monetary policy ever. I know that every major central bank talks about rising inflation and their commitment to dealing with it, but almost every major central bank is still printing money. Let’s observe some charts that depict policy rates vs. official measures of inflation. “Official” measures of inflation can never completely represent the prices an ordinary citizen faces. I believe these are massaged statistics that paint the best possible picture. Real consumer price inflation is acutely worse. But even the official statistics are a complete disaster.

Fed Funds — US CPI = US Real Interest Rate (Currently Negative 7%)

The three charts above display the [Policy Rate — Official Consumer Price Inflation]. As you can see, real rates have become deeply negative since the start of the pandemic. Imagine you hold one dollar, euro, or pound in your wallet. Next year, that piece of fiat is suddenly worth 5% to 7% less. If workers’ wages rose by that amount, then that wouldn’t be an issue. But for most salaried or hourly workers, their wages are not rising at the pace of the destruction of the currency in their physical or digital wallet.

As you can imagine, the average Zhou, Jane, Johny, Jaewon, Jesus, et al. aren’t too happy that their wages are not keeping pace with prices of food, energy, and transportation. The politicians are now instructing their “independent” central banks to tame inflation. Central banks must now raise policy rates — that bit is not controversial. What is controversial is how much they decide to raise rates by and how quickly they want to accomplish it.

The entire financial world paints an apocalyptic picture should the Fed raise rates six times this year. That is what the Fed funds futures markets predict. If they raise rates by 0.25% six times, that would leave them with a policy rate of 1.5%. Even if the 7%+ US CPI inflation rate halved by year end, that would still leave real rates at negative 2%.