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Monday, February 21, 2022

Geopolitics And Uncertainty — Brian Romanchuk

At the time of writing, there are considerable fears about the diplomatic situation between Russia and Ukraine. One complaint I have seen multiple times that people were annoyed that macro analysts were opining on the topic, despite a lack of qualifications in international relations. Although that might feel satisfying, the reality is that macro analysis is quite literally the analysis of everything going on in the world, and so you have little choice but to have opinions on a wide range of topics. Although one might hope that one can focus on technical issues within markets (essentially, relative value analysis), but even there, it is very difficult to avoid macro.

From a theoretical point of view, we get back to the issue of uncertainty versus randomness. Even if someone tried attaching a probability to a war, estimating the economic effects is an intractable problem. We have no hope of attaching a probability distribution to all possible future states of the world — which is a core assumption of neoclassical theory. Instead, we need to make decisions in the face of radical uncertainty.
Bond Economics
Geopolitics And Uncertainty
Brian Romanchuk
http://www.bondeconomics.com/2022/02/geopolitics-and-uncertainty.html
 

See also

"Pay for" doesn't mean here what you probably think it does. Rather, it means economic costs borne by the various parties, which in the present case would not be limited to Russia but would also affect the US, UK, Europe, China, and also the global economy in varying degrees depending on the sanctions imposed and on whom, e..g, secondary sanctions, which would affect the political and economic relationship of the US and China. 

Moreover, the different parties have different national interests and domestic politics and sanctions would not affect all in the same way. Even in the simplest case, it is impossible to game all the effects, so there would be unintended consequences that are not readily foreseeable.

The article is an attempt to put some numbers on alternative scenarios with respect to sanctions. This requires delimiting the scope, which means that "exogenous" factors are not incorporated in the modeling.

While this kind of analysis is far from definitive, putting numbers on an issue in considering alternatives can be helpful in understanding the ramifications, even if they are broad estimates and best guesses that won't be terribly accurate once the ball is set in motion. The danger, of course, is being seduced by the numbers.

The article considers three alternatives, the worst case scenario being beyond even guessing at.

Not important but interesting from the POV of how finance people think about this kind of thing. 

Zero Hedge
How We Would Pay For The War
Michael Every, Hugo Erken, Michiel van der Veen, Ryan Fitzmaurice and Stefan Voge of Rabobank
https://www.zerohedge.com/geopolitical/how-we-would-pay-war

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