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In America, inflation is so high that if it doesn't exceed 8.5 percent, we're meant to believe it's "moderating." That was at least the subtext in much of yesterday's conjecture about the Consumer Price Index inflation data for April. Much of the "consensus" was that inflation would be around 8.0 percent, that inflation had peaked, and that it would thus moderate. It's too soon to say if inflation has peaked, but one thing is certain: there's no cause to rejoice about another month of wealth-destroying inflation at levels not seen in decades. After all, in our modern economy, once purchasing power is lost to inflation, it is lost forever. The central bank will never allow inflation to endure for an extended length of time, so that dollar holders will never regain buying power.

As it is, the Bureau of Labor Statistics’s new official inflation numbers today showed an 8.3 percent year-over-year increase for April. This is the second highest amount in forty years, but it is down somewhat from March's 8.6% year-over-year inflation increase. Food, energy, automobiles, and transportation all contributed to price increases. Food prices up 9.4% year over year in April, while energy prices increased 30.3 percent. Used vehicles increased by 22.7 percent. All items, except food and energy, increased by 6.2 percent.

Yet again, wages were not keeping up. In April, year-over-year growth in average hourly earnings were up 5.4 percent. However, this is down from the 5.6 percent increase in March. The difference between earnings and inflation now stands at –2.8 percent. Earnings have now slipped behind price inflation for the twelfth month in a row.

That is, for more than a year, ordinary people have been getting poorer. The cost of groceries has continued to rise, and the price of gasoline, while unpredictable, is not on the decline. In May, gas prices have reached fresh highs. The national average for gas prices hit $4.37 per gallon on Tuesday.

In April, the misery index, which combines unemployment and inflation, reached 11.8 points, the fourth highest level in more than a decade. Low unemployment figures have been trumpeted by the White House and regime supporters, but with salaries that can't keep up with inflation, low employment rates aren't translating into true wealth creation. Some workers may be picking up on this, since labor force participation in the 25–54 age range has still not returned to 2019 levels.

The news was grim enough that the White House put out a new statement on inflation this morning:

While it is heartening to see that annual inflation moderated in April, the fact remains that inflation is unacceptably high. As I said yesterday, inflation is a challenge for families across the country and bringing it down is my top economic priority. 

This starts with the Federal Reserve, which plays a primary role in fighting inflation in our country. I thank the Senate for confirming Dr. Lisa Cook to the Board of Governors last night, and urge the Senate to confirm my remaining nominees without delay. While I will never interfere with the Fed’s independence, I believe we have built a strong economy and a strong labor market, and I agree with what Chairman Powell said last week that the number one threat to that strength – is inflation. I am confident the Fed will do its job with that in mind.

Beyond the Fed, my inflation plan is focused on lowering the costs that families face and lowering the federal deficit. Already this week, my Administration has announced new steps in partnership with the private sector to lower the price of high speed internet for tens of millions of Americans. 

In a similar address yesterday, Biden busied himself with blaming Moscow and covid for inflation. In this new statement, Biden essentially says that inflation is the responsibility of the Federal Reserve, and then moves on to listing the welfare that the administration is planning for constituents.

The FOMC's New Plan

After more than a decade of massive asset growth, the Fed has announced that it will begin to reduce its holdings. Fed Chairman Jerome Powell announced decreases to the balance sheet will begin in July and accelerate after three months at a post-FOMC press conference on Wednesday.

But here's the rub: the Fed's proposed actions are so little that even six months from now, the total size of the balance sheet will be largely unchanged. Furthermore, if the economy enters a downturn, we expect the Fed to abandon normalization and resume balance sheet expansion.

In other words, the roughly $9 trillion in freshly produced Fed money isn't going anywhere unless the Fed makes some major changes, and the Fed isn't doing anything to reverse the decade's massive monetary inflation.

Consider the balance sheet at the conclusion of current calendar year, provided everything goes according to the Fed's plan.

First, here’s the plan. According to the Fed’s press release this week:

The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps. …

For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.

For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.

These cuts amount to very small changes.

The balance sheet as of May 2022 is $8.9 trillion, as shown in the first graph. A hypothetical balance sheet is also depicted in the graph till the end of the year. If the Fed starts making the cutbacks in June as planned, the balance sheet will shrink by 37.5 billion in the first three months and 95 billion in the following three months. So, by December, the balance sheet should be around $8.3 trillion. That was the state of the financial sheet in August 2021. And, under this approach, how long would it take to get back to the balance sheet that existed before the Fed started its covid buying spree? Approximately 46 months (four years).

Of course, if experience is any guide at all, there is approximately a 0 percent chance that the Fed will stick to a quantitative tightening plan that lasts 46 months. Even the odds of doing it for the rest of this calendar year are very small, given that the economy contracted in the first quarter and the signs of a weakening economy are everywhere.

Also expect the political needs of the regime to take over if tax revenues begin to slip. As we’ve shown here on mises.org before, the Fed’s bond purchases play an important role in keeping the federal government's debt service payments low. The Fed has been able to back off on this role in recent months as inflation-fueled tax collections have surged. But if we see tax revenues begin to fall, expect the federal government to demand the Fed once again facilitate deficit financing by buying government bonds.

As a result, both economic and political considerations work against any meaningful quantitative tightening.

When we consider interest rate policy, we can see how unlikely quantitative tightening (QT) is. The Federal Reserve raised the target federal funds rate by fifty basis points on Wednesday. The aggregate target rate now stands at 1.0 percent. The Fed also hinted that it might keep raising rates by 50 basis points throughout the year. Powell also noted that no 75-basis-point hikes were being considered at this time.

So, even if the Fed raises the target rate by 50 basis points every month until the end of the year, the rate will only reach 4.5 percent.

What are the chances of that occurring? The possibilities are extremely slim. Yes, the Fed's decision to raise the target rate by 50 basis points is impressive. That hadn't been done since the year 2000 until this week. But what are the chances of another seven 50-basis-point hikes before the end of the year? That's practically unheard of, and you'd have to go back to Paul Volcker's era to see something like.

Why Have They Not Acted Until Now?

Some people who believe in the Fed as an institution could speculate that Powell is the new Volcker, and the Fed will take dramatic action to reduce inflation. But this begs the question: if Powell is the new Volcker, why hasn't he done anything yet?

Since the spring of 2021, inflation has been on the rise, and Powell's Fed has done nothing but repeat bromides about inflation being temporary. The Federal Reserve didn't raise the target rate to 0.5 percent until last month. Throughout it all, the Fed's balance sheet grew larger because it failed to undertake anything approximating quantitative tightening. So, why should we expect the Fed to act now since it has done nothing in the last year?

Indeed, we may look at inflation increase vs the target federal funds rate to get a sense of how far behind the Fed is on this. Even when Volcker began his tightening frenzy in the late 1970s, the target rate was still keeping pace with year-over-year inflation rates. Meanwhile, the goal rate is practically steady in 2021 and 2022, while inflation is at a four-decade high. This is not a group of central bankers with a strategy or the courage to carry it out.

Powell, it appears, understands this. Powell's tone in the Q&A session following his prepared speech yesterday was one of caution and skepticism that Fed policy will actually rein in inflation. Powell skirted the topic when asked by Rachel Siegel of the Washington Post when people will start to notice the effects of tightening on inflation, instead simply saying that the process of bringing inflation down will be unpleasant.

Furthermore, when questioned if the Fed's policies are likely to cause a recession, Powell responded that he is still hoping for a "softish" landing.

To put it another way, the entire process is a guessing game for the Fed. Powell also refused to say what he thinks a neutral interest rate would be right now during the Q&A, and he made it clear that the entire plan is based on "conditions evolving with expectations." That is, all bets are off if anything unexpected occurs. Then, in the midst of economic weakness and forty-year inflation highs, we might expect a new round of aggressive inflationary policy.

This is the Federal Reserve in 2022. The entire "strategy" is to try some minor tightening and hope for the best.

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Related Video:

President Biden on Thursday made two big admissions about the US-led economic sanctions on Russia. The first is that the sanctions will lead to food shortages for many countries other than Russia, and that this is simply the price that Americans ought to be forced to pay. 

What Exactly Did Biden Say about the Cost of Sanctions? 

After attending a meeting of G7 and NATO leaders on Thursday, Biden said food shortages "are going to be real." He then added "The price of these sanctions is not just imposed upon Russia, it's imposed upon an awful lot of countries as well including European countries and our country as well." 

If Sanctions Don't Work, Why Bother? 

Biden's admission that sanctions "never deter" contradicts weeks of claims by White House officials who have insisted that sanctions would force Russia out of Ukraine. For example, Kamala Harris claimed "the deterrence effect of these sanctions is still a meaningful one" and Deputy National Security adviser "Daleep Singh said "Sanctions are not an end to themselves. They serve a higher purpose. And that purpose is to deter and prevent."

Moreover, in February, National Security adviser Jake Sullivan said “The president believes that sanctions are intended to deter ... [a]nd in order for them to work — to deter, they have to be set up in a way where if Putin moves, then the costs are imposed.”

The fact that White House has been forced to change it's story has highlighted in a short period of time how the sanctions have already failed to achieve their goals. In an effort to explain away the failure, Biden then claimed in a rambling response that he never said sanctions deter anything: 

Let's get something straight. If you remember, if you have covered me from the beginning, I did not say that in fact the sanctions would deter him. Sanctions never deter. You keep talking about that. ... Sanctions never deter. The maintenance of sanctions. The maintenance of sanctions. The increasing the pain, and that's why I asked for this NATO meeting today, is to be sure after a month we will sustain what we're doing not just month, the following month, but for the remainder of this entire year. That's what will stop him.

What Are Secondary Sanctions?

More specifically, as outlined by the Atlantic Council, extraterritorial sanctions mean

the sanctioning country can extend its economic sanctions policy to apply to foreign-based firms outside of its jurisdiction. A well-known example is the Helms-Burton Act, which President Bill Clinton signed into law in March 1996 as the Cuban Liberty and Democratic Solidarity Act. The legislation tightened the conditions of the existing economic embargo against Cuba. It provided for penalties on foreign-owned (non-US) companies that engaged in the “wrongful trafficking in property confiscated by the Castro regime” through trade with and investment in Cuba. The Helms-Burton Act required US multinational corporations to extend their compliance practices to their foreign-based subsidiaries. The act was met with protests from countries where the foreign subsidiaries were located, which viewed the sanctions as illegal.

And secondary sanctions are cases in which

the sanctioning country can prohibit firms and individuals in other countries from conducting commercial transactions with US citizens and businesses, to inhibit their economic relationship with the country targeted with "primary" economic sanctions. A contemporary example is the secondary sanctions the United States has placed on Chinese firms and individuals for undertaking financial transactions with North Korea. On June 19, 2017, the United States imposed sanctions on a Chinese bank (Bank of Dandong), a Chinese firm (Dalian Global Unity Shipping Co.), and two Chinese citizens (Sun Wei and Li Hong Ri). The Bank of Dandong is banned from conducting any banking with US-based firms. Dalian Global is banned from commercial transactions with US firms and citizens. For Wei and Ri, the sanctions froze their assets and banned them from any business with US-based firms or individuals.

In geopolitical terms, what this means is the US government is directly attempting to punish and regulate foreign firms and foreign individuals even in cases where the United States is not a party to the trade or investment taking place. 

Why Much of the World Will Push Back

Needless to say, this irritates many foreigners and their regimes. Consider how Americans react when they are told that foreigners are interfering in American affairs. Furthermore, in recent decades, Washington has increased its use of sanctions in this manner, whether to sanction China, Iran, Russia, or other countries. This has led to growing pushback from many third-party states that find themselves targeted by these secondary sanctions. As one observer remarked back in 2021: 

This unchecked power to levy sanctions inevitably has met with strong opposition from across the globe, not only from governments and businesses targeted by US sanctions but also by those in third countries whose foreign policy and business interests are curtailed by US secondary sanctions. The EU and Canada and other nations traditionally aligned with the US have led the pushback up to this point, and now China has entered the fray, increasing the risk of geopolitical confrontation as well as increasing the compliance risks for multinational companies.

China Remains the Big Challenge

The White House has warned China not to provide Russia with an economic lifeline as the Kremlin steps up its onslaught on Ukraine. The U.S. says it fears China, a key strategic ally of Moscow, may seek to cushion the impact of measures designed to destroy Russia's economy if the war continues. . . .

Since Russia's attack on Ukraine, Beijing has refused to call it an invasion and said China would maintain normal trade with both countries. China has not joined the U.S., EU and other countries' sanctions on Russia.

Also recently, the Biden administration said that the president has laid out the "implications and consequences" for Chinese premier Xi Jinping if China gives Russia "material support." This is what they said. A lot of what "material support" means depends on how the United States thinks about what it is. Senate Republicans are already working on legislation that would punish China if it helped Russia find ways to work around the United States' attempts to cut it out of the global financial system.

Domestic Politics Matter for Beijing

From its perspective, however, Beijing—for domestic political reasons—can't be seen as being pushed around by US sanctions. For a glimpse of this we can look to a March 17 press conference intended primarily for the Chinese public. According to the state-owned Xinhua news agency:

Sanctions are never effective means to resolve problems, [Beijing spokesman] Zhao [Lijian] stressed, adding that China opposes all forms of unilateral sanctions and "long-arm jurisdiction" by the U.S., and will resolutely defend the legitimate rights and interests of Chinese companies and individuals.

Wielding the baton of sanctions while seeking China's support and cooperation simply won't work, said Zhao, stressing that the Chinese side urges the U.S. not to undermine China's legitimate rights and interests in any form. If the U.S. insists on going its own way, China will definitely take strong countermeasures.

Chinese nationalism—in no short supply either within the regime or among the general public—simply won't permit China to easily submit to US sanctions that approach anything like what we're seeing imposed on Russia. Should Beijing decide to push back, the US will find itself not only in a sanctions war with Russia, but with much-larger China as well. 

Long-Term Consequences 

In his book Unrivaled: Why America Will Remain the World's Sole Superpower, China scholar Michael Beckley notes there are many issues mitigating China-Russia "unity":

Russia and China currently maintain a strategic partnership, but this relationship is unlikely to become a genuine alliance…. In parts of the world that matter most to them, Russia and China are more rivals than allies…. For every example of Sino-Russian cooperation, there is a counterexample of competition. For instance, Russia sells weapons to China, but it recently reduced sales to China while increasing sales to China's rivals, most notably India and Vietnam. Russia and China conduct joint military exercises, but they also train with each other's enemies and conduct unilateral exercises simulating a Sino-Russian war. The two countries share an interest in developing Central Asia, but Russia wants to tether the region to Moscow via the Eurasian Economic Union whereas China wants to reconstitute the Silk Road and link China to the Middle East and Europe while bypassing Russia.

There is also the possibility of a continuous border conflict between Russia and China. China, for its part, is now involved in up to 18 border conflicts, while Russia is involved in multiple border disputes with both Ukraine and Georgia. In Siberia, however, both governments are embroiled in a low-intensity struggle over the Russia-China boundary, which has long been a source of contention between the two countries. While this border issue is unlikely to result in violent confrontation in the near future, it does present an instructive illustration of one of the numerous problems that the Russia-China "partnership" confronts.

What Is Russia's Far East Problem? 

With Russia's population declining, the Chinese side of the border seems to be a source of political instability and ethnic invasion into Russian territory. In the long run, this is likely to lead to greater dispute about the actual placement of the border and who controls the territory.

This has been noticed by many. Laurent Murawiec of the Hudson Institute, for example, released "The Great Siberian War of 2030" in 2008, which analyzed the likelihood of escalating tensions along the Russia-China border. Murawiec observes that as Russia's population declines and withdraws from Siberia—a phrase used in this context to refer to anything east of the Ural Mountains—relative Chinese geopolitical dominance in the area would also decline:

A hollowed out Siberia will be similar to a vacuum hole sucking in outside forces to make up for the vanishing Russian presence. Conflict is neither inexorable nor prescribed by some mechanical inevitability, but the likelihood that disequilibrium may lead to turmoil must be taken into account as a realistic possibility .

A similar thesis appeared in the New York Times in 2015 with an article titled "Why China Will Reclaim Siberia." The author, Frank Jacobs, lays out the basic dynamics: 

The border, all 2,738 miles of it, is the legacy of the Convention of Peking of 1860 and other unequal pacts between a strong, expanding Russia and a weakened China after the Second Opium War. (Other European powers similarly encroached upon China, but from the south. Hence the former British foothold in Hong Kong, for example.)

The 1.35 billion Chinese people south of the border outnumber Russia's 144 million almost 10 to 1. The discrepancy is even starker for Siberia on its own, home to barely 38 million people, and especially the border area, where only 6 million Russians face over 90 million Chinese. With intermarriage, trade and investment across that border, Siberians have realized that, for better or for worse, Beijing is a lot closer than Moscow.

There are two key concerns here: the first, as Murawiec also said, is that the demographic imbalance on both sides of the border is very disruptive. This could eventually lead to China employing a strategy similar to that used by Russia in eastern Ukraine: if the Russian borderlands end up with a sizable number of ethnic Chinese with ties to China, the Chinese regime could issue Chinese passports on the Russian side of the border and then pursue de facto annexation in the name of protecting the ethnic minority from Moscow's "encroachments."

Second, it is notable that the exact position of the boundary was created by nineteenth-century politics rather than ancient history. The fact that the present Russia-China boundary was established by "unequal treaties" in 1858 and 1860 links the current Russia-China border to China's "Century of Humiliation." During this time period (about 1840–1950), China was on the losing side of multiple wars and treaties imposed on it by the world's big powers.

This remains immensely significant in the thinking of certain Chinese nationalists who evaluate contemporary policy in Beijing on the basis of preventing another century of humiliation.

Indeed, Russian and Chinese forces harassed one other across the border in northeast China as late as 1969. This "escalated into a shooting match on March 2 and 15, resulting in significant fatalities," according to the report. Although a shooting conflict over such issues looks to be a long way off, worries about Chinese immigration in Siberia persist. Those who are interested may even see a 2018 documentary titled "When Siberia Will Be Chinese" on Amazon.

In 2020, China's official media made it a point to remind Russia's administration that Vladivostok was Chinese "until Russia conquered it through the unfair Treaty of Beijing."

This “tweet” of #Russian embassy to #China isn’t so welcome on Weibo
“The history of Vladivostok (literally 'Ruler of the East') is from 1860 when Russia built a military harbor.” But the city was Haishenwai as Chinese land, before Russia annexed it via unequal Treaty of Beijing. pic.twitter.com/ZmEWwOoDaA

— Shen Shiwei 沈诗伟 (@shen_shiwei) July 2, 2020

None of this means that China and Russia are necessarily going to come to blows in the near term. But it serves as an example of one way the two states face real potential conflict in the future. It is also reason to doubt that Russia and China are solid allies united in opposition to the West.

Two Populations in Decline

The fact that China's demographic bomb is even more catastrophic than Russia's may be Russia's greatest chance for preserving a firm grip on Siberia.

Russia's population has never recovered to pre-Soviet levels in the thirty years following the Soviet Union's demise. Furthermore, Russia's population is anticipated to fall much lower, maybe from 146 million now to less than 100 million by 2100.

That by itself would almost assure a Chinese takeover of Siberia were it not for the fact that China may be facing an even more dramatic drop in population. As the Asia Times noted last year, 

The Chinese Academy of Science predicts that if fertility continues to drop from its current rate of 1.6 children per woman to a projected 1.3, China’s population would be reduced by about 50% by the end of this century.

But a fertility rate of 1.3 is likely a high estimate. China's official records tend to stretch the truth, and the real fertility rate may be closer to 1.1. If true, the population decline could be dramatic indeed. Or, as the South China Morning Post put it, 

If China can stabilise its total fertility rate at 1.2, the total population will fall to around 1.07 billion by 2050 and 480 million by 2100. This decline will be accompanied by an ageing population structure. The proportion of the population aged 65 and over will rise from 10 per cent in 2015 to 32.6 per cent by 2050.

A rapidly aging population is less likely to have the resources needed to put considerable strain on Siberia.

So, at least on that front, population decrease may eventually satisfy both parties. The situation in Siberia, on the other hand, serves as a timely reminder that Russian and Chinese interests may not always align, and Russia is not the geopolitically secure juggernaut that many Russophobes seem to assume it is.

Population, GDP, and More

Let us begin with the only one in which the Russian government may be regarded a peer of the US dictatorship: nuclear weapons. In his Examiner piece, Rogan makes a point of ignoring practically every genuine measure linked to Russia's population or military budget. Rather, he cites just one fact to support his point: the Russian state has hundreds of nuclear weapons.

This is correct, given that Russia possesses around 6,200 warheads against the US's 5,600. However, in terms of strategy, this distinction is meaningless. Both the United States and Russia have nuclear triads and second-strike capability, implying that they have more than enough for deterrence. Furthermore, the point at which a nuclear arsenal achieves deterrence capability is closer to "dozens" rather than "thousands." The fact that the United States and Russia both have thousands of warheads is a result of Cold War public relations, paranoia, and internal political pressure to build greater arsenals. Russia is not "more powerful" just because it has more nuclear weapons. Both the United States and Russia are more than capable of annihilating the globe many times over. Nuclear weapons are defensive weapons that only constitute a real danger when the nuclear state in issue is forced to use them. 1

But what about military capacity assessments that show true offensive "great power" capabilities?

Economic and demographic issues are undeniably important. And, by such standards, Russia is a third-rate power.

For example, in terms of GDP, Russia will lag considerably behind the United States, the European Union, and a hypothetical Germany-France-United Kingdom coalition in 2020. Russia is even behind Germany on its own. The US and the EU, in particular, have GDP totals of approximately $20 trillion apiece. Germany, France, and the United Kingdom have a total GDP of around $10 trillion, with Germany having a GDP of $4.5 trillion. Russia is worth 4.3 trillion dollars. In other words, Russia's economy is barely one-fifth the size of the EU and US economies, and less than half the size of the combined economies of Western Europe's main three.

Source: World Bank Database.

But this tells a very incomplete story of just how far Russia is behind the wealthy West.

Thanks to decades of Soviet socialism, Russia today is much poorer than its supposed "peers" like the US, Germany, and the UK. For example, the GDP per capita in the US is over $63,000 while it is less than half that ($29,800) in Russia. By the same measure, Russia amounts to only two-thirds of the EU total, and only slightly more than half of GDP per capita in Germany.

Source: World Bank Database.

When we evaluate both GDP and GDP per capita, we can see that Russia's GDP total is mostly driven by its big population. That is, with 145 million inhabitants, Russia is the largest nation in Europe. Germany, with 83 million inhabitants, is the next biggest. In other words, despite its low GDP per capita, Russia's GDP seems to be rather huge due to the enormous number of people who reside there, despite their low salaries and productivity.

However, Russia's lack of substantial GDP per capita implies that the country's GDP covers Russia's relatively weak conventional war-making potential. This is due to Russia's comparatively low net resources.

According to foreign policy researcher Michael Beckley, a study at GDP must include consider net resources above and above the fundamental necessities of the people. A huge population may provide a high GDP, but it also needs massive quantities of food, shelter, and energy.

States can only grab so much of this for war-making until living conditions fall to politically unacceptable levels, causing a domestic crisis for the government. To put it another way, since Russians live far closer to subsistence levels than Americans or Western Europeans, the Russian state's capacity to dedicate money to conflicts is constrained.

How can this be quantified? A credible and predictive estimate of this "disposable surplus," according to Beckley and Klaus Knorr, may be calculated by "simply multiplying GDP by GDP per capita."

When the genuine net availability of resources is taken into account, Russia ranks dead bottom when compared to the bigger Western nations.

Source: World Bank Database.

Military Spending

So, given all of these constraints, how much does the Russian state spend on military capability? Unsurprisingly, it lags substantially behind the United States in terms of overall expenditure. In 2020, Russia spent around $66 billion on military capabilities, while the United States spent $766 billion. Germany, France, and the United Kingdom together spent more than $150 billion.

However, in terms of expenditure as a proportion of GDP, the Russian Kremlin outspent even the United States. Russia's military budget in 2020 was 4.3 percent of GDP, while the United States spent 3.7 percent. Western European regimes, on the other hand, who have long been used to allowing American taxpayers to flood North American Treaty Organization (NATO) members with military welfare expenditure, tend to spend significantly less than 3% on defense.

Source: Stockholm International Peace Research Institute.

Specifically, military spending in the UK, France, and Germany are 2.2 percent, 2.1 percent, and 1.4 percent, respectively.

It should be no surprise that we find these countries—being much wealthier than Russia—are not nearly as close as Russia is to hitting the limits of that critical "disposable surplus." Even if they doubled their current military spending levels, neither Germany nor France would match Russia in terms of the burden military spending puts on domestic resources. (This is all also why the US should massively cut back its own spending in European defense.)

Fertility and Demographics

Nor can the Russian regime put its hopes in demographics to provide an edge against the West.

Russia's fertility rate is similar to that of the EU, which is to say it is among the lowest in the world. It is lower, however, than the fertility rates in Germany, the UK, France, and the US.

Russia's population of 146 million is less than it was in 1989, when it was 147 million. Russia's population is anticipated to continue to fall. According to some predictions, Russia's population might decline to 100 million by 2100. This is a continuation of a pattern that existed across the Soviet Union at the time of its demise. The population of the Union peaked at roughly 290 million in the late 1980s and has never recovered.

Russia, like many other rich Western nations, is confronting a demographic dilemma in which the working-age population will have to labor more to meet the economic demands of the old, who are increasingly reliant on pensions. But, unlike the West, which is already affluent, Russia, like China, confronts a future in which it will be old before it has the opportunity to become prosperous. And this is a strategic issue for Russia.

Why Russia Matters, Even If It's Not a First-Rate Power

At this point, the reader may be thinking, "If Russia is so weak, it will undoubtedly be exceedingly simple to challenge Russia in Ukraine and get rid of it."

This, however, is not the case, despite Russia's many economic and demographic difficulties.

This is due to a significant disparity between how the West perceives Ukraine and how Russia perceives Ukraine.

Only the most ardent hawks in the United States—and most of the rest of the Western world—see Ukraine as a critical issue. In the United States, for example, it is difficult to find a political base that feels Ukraine is worth the blood of American soldiers and the expenditures of a full-fledged war. The Russians see Ukraine as a matter of utmost importance, much as the US does Mexico—and much as the US regarded Cuba during the Cuban Missile Crisis. If anti-Russian forces take over Ukraine, Moscow may consider it as something worth waging an expensive war for.

When it comes to Ukraine, the Russian state may be ready to pay extremely high prices that the West is not politically prepared to pay. Moscow may be prepared to cut severely into the "disposable excess" required for warmaking. Russia's history over the last 210 years demonstrates nothing if not that Russian administrations are ready to subject the populace to great suffering in order to defend what they regard as critical interests.

This, however, should not be mistaken with the capacity to engage in power projection or marshal offensive military forces. A nation with a low GDP and a shrinking population lacks these competencies. Russia is powerful enough – but only strong enough – to resist true big powers in defensive conflicts along its borders. This, along with the fact that driving Moscow into a corner may result in nuclear war, is all the more reason to avoid misinterpreting Russia's offensive capabilities.

All of these characteristics assist to explain why relatively weak regimes, such as Russia, are eager to seek catastrophe even when they are in a weak position. As Kelly Greenhill and Joshua Shifrinson explain in this week's Foreign Policy:

Why would states take such seemingly irrational steps as … military escalation that risk[s] antagonizing much more powerful states and triggering punishing retaliation? Why turn to the creation of crises as a method of influence? …

Far from irrational, crisis generation is a tried-and-true strategy of weak actors seeking negotiations and concessions from stronger actors opposed to granting either.

Russia's actions in Ukraine do not reflect the conduct of a powerful state capable of spreading its control over huge new areas. Rather, the Ukraine issue is the outcome of the West's failure to take Moscow's worries about pushing NATO closer to Russia's heartland seriously. The West's continuous disregard of Russian concerns has compelled Russia's relatively weak state to take more risks.

This is exactly what is happening in eastern Ukraine right now. But none of this implies that Russia is a big power on par with the United States or even Western Europe.

According to the Bureau of Labor Statistics (BLS), Consumer Price Index (CPI) inflation rose 7.5 percent in January, year over year. According to the BLS, this was the "highest 12-month gain since the period ending February 1982." Moreover,

The all items less food and energy index rose 6.0 percent, the largest 12-month change since the period ending August 1982. The energy index rose 27.0 percent over the last year, and the food index increased 7.0 percent.

For example, St. Louis Fed president James Bullard has been patting the Fed on the back for not crashing the economy so far. The Wall Street Journal quotes Bullard this week:

“We don’t want to be disruptive or surprising markets…. I would like to do this in the smoothest way possible, and we, so far, have achieved that,” [Bullard] said, adding that he would change his view “if the data went against us here.”