In today's Finshots we see how to finance a war
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Alright, on with the story now.
War is an expensive affair. Even more so if you’re facing a military invasion of epic proportions. You’ll have to arm people. You’ll have to protect them. You’ll have to rebuild infrastructure. You’ll have to worry about pensions for war veterans. You’ll have to source medical help for the wounded. You’ll be bleeding money.
And since nobody “budgets” for these extraneous circumstances you’re often left unfunded. You won’t have provisions for war — at least not nearly enough to repair the damage that will likely ensue. You could, however, try and raise money via taxation. But in a war-torn country, this move could be highly unpopular. If anything, it may exacerbate the economic recession. So what do you do if you find yourself in such a spot?
Well, you could turn to the more developed countries and seek financial aid. Take the war in Vietnam for instance. When the US invaded the country, the Soviet Union, China and other communist allies banded together and contributed military and economic aid worth a whopping $3.2 billion over a 20 year period. It’s an important avenue of financing.
And Ukraine, much like Vietnam is relying on this benevolence to fund the country’s defence right now.
So far, Western countries have promised military aid worth $1 billion. It’s mostly weapons and ammunition, but it’s still something. Meanwhile, the US is trying to raise $10 billion in a bid to aid the Ukrainian war effort. And you also have global institutions like the International Monetary Fund (IMF) and the World Bank. They could also step in any money and offer more financing opportunities over the next few days.
But the country isn’t just relying on institutions. They are also relying on people. People who believe in the Ukrainian cause. After Ukraine’s official Twitter handle sought donations via cryptocurrencies, money poured in from all quarters. All in all, they’ve raised $30 million in crypto alone. Meanwhile, people are also contributing through traditional fundraising initiatives — From meme pages to aid workers — Everybody’s chipping in at the moment.
But despite the outpouring of support, the money still won’t be enough. They’ll need more. Millions more.
So, Ukraine has finally decided to tap into a more formal avenue of financing — “war bonds”. That’s right. There’s a bond for everything, including war!
Now, this isn’t some radical new initiative pioneered by the Ukrainians. In fact, the playbook is at least 100 years old. During World War I, the British government tried to sell similar bonds in a bid to aid the war effort. It even ran advertisements saying, “If you cannot fight, you can help your country by investing all you can in 5 per cent Exchequer Bonds … Unlike the soldier, the investor runs no risk.”
So in effect, if you bought one of these bonds, you were entitled to risk-free returns of about 5% every year. But more importantly, you would have done your duty to the Motherland. And Ukraine is going down the same route. On Tuesday they sold war bonds worth $277 million. At a fat yield of 11%.
But here’s the thing. Back in 1914, when the British government tried to raise £350m through war bonds, it didn’t go as expected. They only sold about 30% of the bonds on offer. Now bear in mind, £350m in today’s money is something like £35Bn and that is a gargantuan sum of money. So you could argue that 30% is still a good figure. But Ukraine doesn’t have to worry about any of these. Their bonds are selling like hotcakes.
Big institutions, European citizens, and even common folk want to get in on the act. Reddit forums are filled with people asking brokers like Robinhood to make these war bonds accessible to the retail public. And with this level of demand, experts think that Ukraine could potentially raise even more money to fight for its cause.
And guess what? It doesn’t seem as if people are buying these bonds for the money. Ukraine may fall tomorrow. The blitzkrieg might destroy the country. The government may default on its obligations. But the people don’t care about any of this. They’re just doing it to help. I mean, why else would somebody in Greece (a country that’s already dealing with its own economic woes) buy such a risky bond?
This money is anti-Putin. Or maybe, it’s in support of Volodymyr Zelenskyy’s ideals.
Until next time…