A liberal president plus a war plus inflation? What does that equal for the US economy? wonders Shmuel Langer. Already worried about a toxic socialist trend in Washington, Shmuel was shocked when Russia invaded Ukraine. Beyond the catastrophic human toll, draconian economic sanctions against the invading country are roiling financial markets. The war’s impact on commodities is heaping inflationary pressure on a world already struggling with post-Covid inflation.

How is the war in Ukraine affecting inflation and President Biden’s stalled economic agenda? Are there any financial steps that can be taken to protect ourselves from further economic turmoil?

Biden’s Socialist Agenda

When President Joe Biden took office, I wrote two articles (TVOL issues 3/04/21 and 3/18/21) about his economic agenda and what it meant for the economy and investments. The liberal-influenced agenda was based on four themes: Covid relief, economic inequality, strengthening American workers, and decarbonization. The proposed prescriptions were higher taxes, more government programs, a push for unions, and working toward a “greener” world. The articles concluded that Bidenomics would lead to higher inflation and a less dynamic US economy but political realities meant that a militantly progressive agenda could easily falter.

Inflation and Growth Boomed

The warnings about inflation were on target; we are now enduring pricing spirals not seen in half a century. However, as the March 2021 article explained, “Deficit spending and inflation are also double-edged swords. At some level, these become toxic to an economy…but in the short run, at least, pumping money into an economy usually boosts income and wealth.” And indeed, while many lost out over the past year due to inflation, plenty of others’ incomes and assets have mushroomed far beyond their daily cost increases.

But “Build Back Better” Failed

Beyond an initial inflationary stimulus bill, the President’s progressive agenda went nowhere. As anticipated (in the 3/18/21 issue), “an overly ambitious ‘green deal,’ for example, will be a hard sell in blue states whose economies depend heavily on oil (New Mexico, Colorado, Pennsylvania), coal (West Virginia), and auto production (Michigan, Illinois, Ohio).” Indeed, West Virginia’s senator Joe Manchin single-handedly delivered Progressives a bitter loss on their proposed multitrillion dollar plan to remake the US economy in one swoop, partially because the energy component would have been economically damaging for his state.

Democrats Regrouping

With inflation raging and their agenda stalled, Democrats will likely lose their control of the Senate in November. That doesn’t mean they won’t regroup in 2022 to pass the pieces of their original agenda on which they can get unanimous caucus consent. To the contrary, with progressive hubris lowered and a broad desire to show their voters something—anything—it’s likely that Democrats will get their act together to pass some significant legislation. And considering that voters have the economy at the top of their list of concerns, expect some real legislative focus in that realm.

On a War Footing

One thing no one predicted a year ago was Russia’s all-out military assault on Ukraine. Since the region is a major supplier of wheat, oil, gas, and metals, etc., the war in Eastern Europe is disrupting commodity supplies significantly. The developed world, which has rallied to support Ukraine and its refugees, will ramp up production of weapons and basic supplies. We are seeing the irony of environmentalists begging oil companies and OPEC for more oil production – quite the turnaround. Finally, countries all over the globe are considering the national risks of leaving supply chains dependent on adversaries. All of this is super-inflationary and adds significant risk and uncertainty.

Recalibrating the Socialist Agenda

I’m not sure the Democrats are savvy enough to do it, but the war actually provides them good cover to adjust their public relations message for their progressive agenda. Accurately or not, quickly pivoting to renewable fuels can be presented as a way to gain independence from and weaken autocratic countries like Russia, Saudi Arabia, and Iran. Rebuilding American manufacturing and strengthening union workers can be promoted in a similar light—as something of national interest, not as tilting the scale in favor of special-interest groups and Democratic voters.

Uncle Same Wants You…To Pay More Taxes

To increase government spending without raising the deficit, Democrats will surely posit, “Shouldn’t the country’s wealthier segments patriotically be glad to step up their contributions toward national—even global—security?” Taxes to fund wars are the norm, and I think the Democrats will play this card strongly to justify higher government spending funded by higher taxes. That a good chunk of that new revenue will be directed toward the lower-income voters, more likely to vote Democrat, will be obscured. Holdout senator Joe Manchin was very open to paying for more government programs with higher taxes (though Arizona’s Senator Sinema’s position is unclear).

More Inflation, More Taxes, More Handouts

Democrats may even gamble that higher inflation will be tolerated politically when coupled with significant subsidies for lower- and middle-income families. The Federal Reserve will probably keep raising interest rates, but at a slower pace than expected before the Ukraine war. Inflation and low interest rates helps the federal treasury pay off its debt, and as long as it can blame global issues for it, a Biden administration may be okay with it.

So, high inflation and moderate interest rates coupled with tax hikes to fund increased government spending on social programs, American manufacturing, and green projects are looming on the economic horizon.

So Buckle Up

Assuming this pans out, it’s time to double down on commodities, real estate, gold, and even stocks on a selective basis (see our articles in the 5/27/21 and 9/9/21 issues). Prices may be high, but strong inflation, assuming it does continue, will drive them higher yet while cash and bonds deteriorate in value. Solid leverage can turn mediocre investments into excellent ones during an inflation cycle (see our 8/12/21 article). If government spigots open up, it’s important to be prepared to capitalize on that too. On the other hand, it becomes even more crucial than usual to have good tax accountants to navigate rising tax burdens.

Don’t Bet the Farm. Daven.

That said, as the Ukraine war and Covid remind us, the world is an uncertain place. There are lots of unknowns at play which can upend all assumptions. Will the war end as suddenly as it began? Or will Russia turn to unconventional warfare? Will energy producers open the spigots leading to an oversupply sooner than expected? Will Democrats manage to get anything substantive passed? Will Donald Trump throw the midterm election into disarray? Will an overheated, overstressed global economy collapse into a deep recession? We don’t understand or control nearly as much as we may think we do, which is why the Gemara recommends that we diversify and hedge our bets. Tefillah to the real Controller is the only definite item on the agenda.