Your humble blogger has pointedly ignored a lot of day to day excitement even though it might have made for fun and even instructive posts, like the repo panic of a few years back, SPACs, NFTs, cyrpto gyrations, because they weren’t of systemic importance and I didn’t want to dignify some of the prevailing story lines by trying to debunk them.1 I had thought to write about inflation tonight but was instead arrested by the front page of the Financial Times. It struck me that the evidence of a multi-fronted breakdown of our political/economic system is becoming too great to ignore.
Of course, when I looked again, hours later, warmongering had returned to the lead stories: Biden pledges to defend Taiwan militarily if China were to invade and The Big Read. How war in Ukraine convinced Germany to rebuild its army. But let’s focus on the mountain evidence of the current order unraveling.
The headline for the upcoming Davos (in person! gah!) is Business leaders warn that three-decade era of globalisation is ending. However, this group sees a reduction in trade as vexing rather than catastrophic:
The three-decade era of globalisation risks going into reverse according to company executives and investors, as world leaders prepare to meet in the Swiss town of Davos for the first time since the coronavirus pandemic began.
The geopolitical fallout from Russia’s war in Ukraine, combined with the disruption to global supply chains caused by the virus, recent market turmoil and the rapidly worsening economic outlook leave corporate leaders and investors grappling with vital strategic decisions, several told the Financial Times in interviews….
Onshoring, renationalisation and regionalisation had become the latest trends for companies, slowing the pace of globalisation, he [osé Manuel Barroso, chair of Goldman Sachs International and a former president of the European Commission] added: “[Globalisation faces] friction from nationalism, protectionism, nativism, chauvinism if you wish, or even sometimes xenophobia, and for me, it is not clear who is going to win.”…
Christophe Weber, chief executive of Takeda, which is headquartered in Tokyo, Japan, said drugmakers would continue to seek growth in international markets, particularly China because of its high potential. But corporate focus had shifted to a more sustainable form of globalisation, he said: “It’s a question of de-risking your supply chain.”…
Consumer industries are also experiencing a shift away from globalisation, according to Rachid Mohamed Rachid, chair of Valentino and Balmain.
Some luxury companies are rethinking their strategy, which tended to rely heavily on global branding, selling to tourists and shipping goods around the world, he said: “The business has gone local . . . Stores today in London or Paris or Milan are now catering for their local residents more than they used to before.”
There’s a whistling-past-the-graveyard quality to this discussion. Maybe they don’t want to spook investors, but they act as if they can’t see the train bearing down on them/ Capitalism in advanced economies is at real risk of not delivering on its promise of provisioning at least adequately for the majority of people, particularly those who work.
There’s also a failure to admit to the political and economic fault lines between the US and Europe, and their Asian protectorates, Japan and South Korea, versus China, Russia, India, the Middle East, and the Global South. That schism is made worse by Russia’s strong market position in many key commodities and the West having allowed China to become the factory of the world. If things get really ugly, China and India overwhelmingly dominate the production of active ingredients for the pharmaceutical industry, as well as making many end products. China also has a virtual monopoly in the production of Vitamin C, which among other things is an important food preservative.
Let’s look at the UK, which admittedly is serving as an advanced economy canary in the coal mine. It’s official inflation rate is already 9% YoY.
The headline story tonight is how by October (as in before winter cold really sets in), 40% of UK households will be facing fuel poverty, which is a polite way of saying you are like to have to choose between having a full belly and being warm. From the BBC:
Energy regulator Ofgem lifted the price cap on gas and electricity bills in April, adding around £700 to the average household energy bill to take it to £1,971.
For the 4.5 million people on pre-payment meters – which are typically used by people on lower incomes – the price of energy has now risen further, by an average £708, to £2,017 a year.
Due to the rising cost of wholesale gas, however, the price cap is expected to increase and take the typical energy bill to as much as £2,800, if not higher.
Mind you, the UK also had a petrol shortage last year and could have one again in as soon as a month if workers at the UK’s biggest refinery vote to strike.
And we have coming global food shortages, which will hit the UK hard by virtue of relying significantly on imports. Last week, Bank of England described them as “apocaylptic”. From the Telegraph:
The Governor of the Bank of England has warned of “apocalyptic” global food price rises and said he is “helpless” in the face of surging inflation as the economy is battered by the war in Ukraine.
Andrew Bailey said he has “run out of horsemen” when counting the shocks facing Britain, with runaway energy and food costs driven by global market forces beyond his control.
Prices are rising at the fastest rate in 30 years, creating a “very big income shock” that is expected to intensify in coming months with a risk of double-digit inflation before the end of the year.
Bailey singles out Russia for a “blockade” allegedly preventing Ukraine’s wheat and sunflower oil from getting to market. But experts were predicting food shortages for 2022 even before the conflict erupted. Ukraine is the #5 grain exporter, at just under 7% of global supply. The #2, #3, and #4 exporters are in order Canada, the US, and France. France is expected to have a very poor year due to drought. US winter wheat output is projected to be down 8%. Canada’s is projected be up due to very high prices leading farmers to shift acreage to wheat.
And the blockade charge is a fabrication. It’s Ukraine that mined Black Sea ports and is continuing to blockade them. The International Maritime Organization confirms Russia’s claims that it has established “humanitarian corridors” that remain open daily but that Ukraine that is preventing them from operating properly.2
Oh, and on top of that, the UK might have a rail strike in coming weeks. The Sky News headline gives a good overview: Fears ‘biggest rail strike in modern history’ will create ‘serious challenges’ in keeping goods moving and supermarkets stocked. From the article proper:
RMT general secretary Mick Lynch said its members had been praised during the pandemic as “key workers” but their pay had not kept in line with inflation and rising costs of living and there had been “repeated attacks” on their terms and conditions of employment….
“A national rail strike will bring the country to a standstill, but our members’ livelihoods and passenger safety are our priorities.”
There’s other fresj evidence of globalization breakdown. China’s house organ Global Times noted Unilateral sanctions add to evidence that it’s no longer safe to hold assets in US. While that may seem obvious, it’s one thing in China to think it and quite another to start making policy statements/official warnings. From the article:
US Treasury Secretary Janet Yellen said recently that it “would not be legal now” for the US to seize Russian government assets to pay for Ukraine reconstruction…
According to Reuters, US Treasury officials have expressed concerns about setting precedents and eroding other countries’ confidence in holding their central bank assets in the US. We believe Yellen is very aware of the severity of the problem. It seems there is a deliberate “good cop, bad cop” strategy in place – the White House plays an active role in calling for seizing Russian assets, in a bid to comfort its allies in Europe, while Yellen tries to comfort the market with a rational voice that helps to persuade investors it’s still safe to hold their assets in the US.
Their little trick is crystal clear for international investors and should be condemned. As a result of unilateral sanctions, the US has frozen tens of billions worth of assets belonging to Russians and their government. If foreign assets – public and private – can be frozen in a split second by a reserve-currency country with selfish political interests, politicians should not even waste their time to claim that it’s safe for people to hold their assets in the country. US credibility in the economic world was undermined by its decision to freeze Russian assets via unilateral sanctions. Even if the US transfers the proceeds to Ukraine, freezing the assets has been enough to make people lose trust in the country.
This adds to the evidence that the US is no longer a safe place to store reserves. The US has global financial hegemony, but such hegemony is two-way. The US needs to provide services to the world, and depends on the world’s support. If the US abuses its position to use sanctions as a geopolitical tool against rivals, it will be the death knell for its financial hegemony. Sanctions on Russia’s financial system, such as the freezing of the central bank’s reserves, will probably become a turning-point for US financial hegemony.
China having reservation about holding assets in the US is far more serious that it seems. The US runs ginormous sustained trade deficits with China. That means China accumulates US financial assets. The usual approach for a country in China’s position is hold a combination in pretty liquid form, as a defense against a run on the currency, and to invest the rest in the importer’s economy, ideally in productive investment like companies (foreign operations of Chinese companies, or “foreign direct investment” such as buying all or parts of US companies) or real estate, or if push comes to shove, buying stocks and making loans. Being restricted to holding liquid assets in Chinese or other friendly countries’ banks considerably lowers the attractiveness of trading with the US. It would not be crazy for China to start imposting export tariffs on shipments to the US to give preference to safer trade partners.
And to keep this post to a manageable length, we will only mention in passing that we can’t imagine the big news of the evening has made China any more trusting of the US. Recall that Biden himself in his last call to Xi reaffirmed that the US respected the “one China” policy. That just went out the window. See CNBC’s Biden says U.S. willing to use force to defend Taiwan — prompting backlash from China for one of many accounts.
Now of course WTO rules won’t allow China to do anything so crude as selective export tariffs (Japan in the old days had the wonderfully effective whisper and nod of “administrative guidance”). But in another smaller sign of how globalization is breaking down, India just imposed 15% “export taxes” on steel products, which will hit European buyers. Note they are already suffering due to the fall in Ukraine and Russian steel imports, as updated in the Financial Times a week before the surprise India tax imposition.
And on a pettier note, Poland is demanding that Norway sell oil and gas to them on the cheap….because Poland is having a very big hissy! That is not much of an exaggeration. From Notes from Poland:
Speaking to a youth forum in Warsaw, Mateusz Morawiecki noted that profits from oil and gas this year for Norway, “a small country of five million [people], will be over €100 billion” higher than in recent years.
“This is not normal, this is not fair” and Norway “should share this excess, gigantic profit”, continued the prime minister. “It is preying – unintentionally of course, because it is not Norway’s fault, this war in Ukraine – but it is indirect preying on what is happening, the war caused by Putin.”
“We are all indignant at Russia, and rightly so,” said the prime minister. “But ladies and gentlemen, young people, something is not right. Write to your young friends in Norway…They should share it, not necessarily with Poland [but] for Ukraine, for those most affected by this war. Isn’t that normal?”
Funny but I have yet to see anyone in Europe complain about US energy profiteering, particularly on the LNG it has promised to Europe….or admitting that the reason energy prices have spiked since the war started is not the direct impact on the conflict, which is actually not a very big war by war standards, but the sanctions, which the West did to itself.
Mind you, that’s only one of the “Things aren’t going the way they are supposed to” stories at the Financial Times tonight. Another is of Saudi Arabia continuing to reject US dictates regarding Russia: Saudi Arabia signals support for Russia’s role in Opec+ as sanctions pressure mounts. The IMF whistles past the graveyard in a global growth forecast that oddly does not mention sanctions blowback or even high energy prices and commodity, erm, sourcing issues. It’s a wee bit too oblique. From IMF warns of ‘multiple challenges’ to global economic recovery:
The global economic recovery from coronavirus will run into “multiple challenges” this year, the IMF said on Tuesday, warning of lower growth and higher inflation.
Significantly downgrading its 2022 forecasts for economic activity in the world’s two largest economies, China and the US, the updated economic forecasts from the fund show it becoming more pessimistic about the scope for a full recovery from the pandemic.
The outlook would be even worse, the IMF added, if central banks have to take firmer action to quell inflation or geopolitical tensions in Ukraine intensify.
The upside, one supposes, is at least the IMF is not making Russia, oh, Putin, responsible for everything bad happening in the world right now.
Although there were other sobering stories on the landing page, we’ll round out our Financial Times cheery sightings with Overdue reality check for Fed and markets has barely begun. Note that this piece does not include the fact that producer prices rose by 11% year on year as of April, a harbinger of future retail price hikes:
The US Federal Reserve and financial markets are experiencing a long overdue reality check on inflation and interest rates. But markets have barely begun to take into account how far the world has changed…
Markets anticipate that US economic growth will slow as we head into 2023 — and here I would agree….
Financial markets have been conditioned to believe that the Fed will react to this slowdown in growth in the same way it always has in the post-financial crisis period: by loosening monetary policy quickly and decisively. This is where I expect things will play out differently.
This time when growth slows, inflation will in all likelihood still be too high for the Fed to stop tightening. Month-on-month headline consumer price inflation has averaged 0.6 per cent since the start of last year. Even if that monthly pace halves, inflation will end 2022 close to 6 per cent year over year, and will be running at an average of 4.5 per cent in the first quarter of 2023.
If financial markets are nonetheless expecting the Fed to quickly ease policy again, it’s at least in part because their cognitive dissonance has been abetted by a significant degree of wishful thinking that seems to inform the central bank’s own outlook….
I therefore expect that even as growth slows, the Fed will keep hiking rates during the first half of next year, in order to bring inflation back under control. And that once markets realise the Fed cannot afford to reverse course, long-term yields will also move higher still.
We still need to acknowledge fully that inflation has become self-sustaining and bringing it back under control will be harder and more painful than the central bank hopes and financial markets are pricing in.
In other words, look out below!
In the headline, I referred to “paradigm breakdown”. This is from ECONNED, one of the four possible responses to the financial crisis, and the one I deemed most likely:
Paradigm breakdown, meaning key elements of the current system are no longer viable, but that is a possibility that no one is prepared to face, since the old system seemed to work well for a protracted period. Thus the authorities reflexively put duct tape on the machinery rather than hazard a teardown.
I must admit that I lacked the imagination to foresee that the ripple effects of the crisis could extend to the geopolitical realm, even though the neoliberal economic model depended on globalization to discipline worker wages in advanced economies. The fix to give the appearance of rising living standards was asset price inflation and rising levels of consumer borrowing. That hit its limit when subprime borrowers, on a widespread basis, were engaging in Ponzi finance: getting teaser loans that presumed they could refi attractively due to home price appreciation, and often extracting equity by refi-ing more than the old loan balance (we’re skipping over the derivatives turbocharging for now).
But how we got where we are, into what we’ve now admitted is a proxy war with Russia (and if you look back to 2014, we’ve worked hard to stymie Russia’s efforts to de-escalate the civil war in Donbass), the US could be argued to have had colossal bad luck in terms of how events played out. Obama’s failure to engage in adequate post-crisis reforms, and then give the banks a second bailout via a “get out of jail nearly free” for mortgage chain of title liability, deepened and extended the damage of the crisis via millions of otherwise preventable foreclosures. That widened inequality, particularly by destroying black wealth. Making the Fed primarily responsible for stimulus, as opposed to having the Federal government focus on increasing productive capacity, made matters worse by inflating asset values and promoting rampant speculation.
Widening inequality and a very slow recovery contributed to the hemorrhaging of Democratic party representation at all levels of government, resulting in a weak and geriatric bench. It also paved the way for the unanticipated rise of Donald Trump, due to the him having the unexpected break of running against an unappealing Hillary Clinton, who managed to make herself even more so over the campaign.
Hillary, via her tenure as Secretary of State and her warmongering (recall that Obama checked her worst schemes; she still campaigned on launching a hot war with Russia, coded as a no-fly zone in Syria), was deeply enmeshed with the Blob. Had she not been the candidate, the plan to mix things with Russia might not have been front burner. But we learned when she lost how many college tuitions in the Beltway depended on intensifying that conflict. Recall how the defense-intel state quickly and frontally attacked Trump, with its press stooges suggesting that he should not be President because the military did not support him (openly saying America should run on third world authoritarian lines), then trying to flip electors, then running unfounded RussiaRussia! allegations that went splat when investigated.
This is a very long digression on how outcomes are path dependent. If Obama hadn’t given Hillary the consolation prize of being Secretary of State, setting her up for another run, we probably would not have wound up at this juncture. America would never give up its hegemony gracefully, but it’s hard to imagine, absent nuclear war (which is not out of the picture) a more ferocious self-immolation.
1 Social psychology research has found that repeating a story line for the purpose of trying to refute it winds up reinforcing it, so if you are serious about the exercise, you have to be very careful in how you go about doing it. For instance, article that sought to disprove the claim that Saddam Hussein was in cahoots with Osama bin Laden wound up reinforcing the idea that they were connected merely by having their names in the same paragraph.
2 Now one could charge the Russian invasion as being the cause of the shipping freeze in the Black Sea, simply because the start of the conflict led commercial ships to high tail it out of there, due to correct concerns about their insurance not operating once hostilities broke out. Yet accusation that Russia is affirmatively cordoning the ports and therefore causing hardship is universal and it’s very hard to find the counter-evidence via search engines, such as the remarks by Russia’s UN representative Vasily Nebenzya. From TASS:
Nebenzya said that grain exports from Ukrainian ports have been blocked because of actions by Ukraine, not Russia.
“You claim that we are allegedly blocking the possibility of exporting agricultural products from Ukraine by sea,” he said at a UN Security Council meeting on food security. “However, the truth is that it’s Ukraine, not Russia, that continues to block 75 foreign ships from 17 states in the ports of Nikolayev, Kherson, Chernomorsk, Mariupol, Ochakov, Odessa and Yuzhny, and it was Ukraine that mined the waterways.”
“Given that, how can we talk about grain export?” he said. “And no matter what you say here today, only you can change this situation, gentlemen.”.
Exported Ukrainian grain does not go to countries in need, but is being loaded in EU storages – possibly as payment for arms shipments, Nebenzya said.
“A logical question arises: where do these shipments [of Ukrainian grain] go? What do they have to do with ensuring food security in the world?” Nebenzya said. “We have justified suspicion that the grain does not go to aid the starving global South, but is being loaded in European states’ grain storages. As we understand, this is how Ukraine pays for weapons being shipped by the West.”.
The International Maritime Organization confirms Russia’s claims that it has set up corridors to allow the safe passage of ships….but it’s Ukraine that won’t let them leave its territorial waters:
The Russian Federation has informed IMO that it had established a humanitarian corridor, to provide for the safe evacuation of ships once outside the territorial waters of the Ukraine. Despite this initiative, there remain many safety and security issues which hamper access to the corridor and the ability for ships to depart from their berth in Ukrainian ports.
Ukraine’s ports are at MARSEC (maritime security) level 3 and remain closed for entry and exit. Sea mines have been laid in port approaches and some port exits are blocked by sunken barges and cranes. Many ships no longer have sufficient crew onboard to sail.
Ukraine also provided their preconditions for the safe evacuation of ships from their ports. These include an end to hostilities, the withdrawal of troops and ensuring the freedom of navigation in the Black Sea and Sea of Azov, including carrying out mine-sweeping activities with the involvement of Black Sea littoral states.
The MARSEC level of a port is determined by the local authorities. Ukraine is simply prohibiting ships from entering or leaving the ports it controls. It has taken these hostage and makes unreasonable demands for their release.
Yet par for the course, the Financial Times ran a willfully, egregiously misleading story on the Black Sea impasse on May 19. It not ignored the fact that Russia has established “humanitarian” shipping corridors in the non-Ukraine-controlled Black Sea waters, but acted as if shipping corridors would have to be established by force against Russia’s will! And the pink paper referenced the International Maritime Organization report, but didn’t link to it, so they can’t pretend they didn’t know better.