War is inflationary. Wars come in many different shapes and forms. There are hot wars, cold wars, and hot wars in cold places – cyberspace. Inflation didn’t start with the hot war in Ukraine but the war has fanned inflationary currents that had been underway: understanding today’s inflation as the result of an escalating economic war and a lingering pandemic is important, for if war and zero-Covid policies stay, the view that inflation is mostly cyclical, driven by excessive stimulus, is wrong..
Wealth creation stands on three pillars:
First, cheap immigrant labor which keeps service sector wages stagnant
Second, cheap goods from China raising the standard of living amid stagnant wages
And third, cheap Russian gas powering the German industry and EU more broadly.
For decades, all these helped create wealth until, nativism, protectionism and geopolitics destabilized the low inflation world.
President Trump’s immigration policies to appease nativists has cost the U.S. two million jobs, which is driving the current labor shortages and wage pressures. Covid-19 changed labor markets further: early retirements and other changes have exacerbated the labor shortages and increased wage pressures further. President Trump’s hardline approach to China became a bipartisan stance that drove the imposition of protectionist tariffs on China, and what started as a trade war became a technology war: the U.S. went from tariffs on cheap goods, to banning ASML from selling state-of-the-art lithography machines to China to ensure the balance of technological power remains in U.S. hands.
President Xi’s zero-Covid policy continues to frustrate the flow of cheap goods, causing occasional cardiac arrests in global supply chains and backlogs at ports; trade and economic relations between the U.S. and China became inflationary, in contrast to previous decades when U.S.-China relations were deflationary…
President Putin’s efforts to make Europe dependent on cheap Russian gas – in order to tip the balance of economic power in Europe away from the U.S. – were frustrated by the U.S. sanctioning Nord Stream 2 last November, and President Putin’s frustration with the shifting balance of military power in Europe (NATO) then spilled over into a hot war in Ukraine on February 24th, which supercharged the economic war. Both sides went “nuclear” quickly, economically: the U.S. weaponized the U.S. dollar, and then Russia weaponized commodities. Welcome to the war economy where heads of state matter more than heads of central banks.
Think of Russia as a “hub of Commodities” and China as a “hub of Factories” that are the world’s biggest producers of commodities and consumer goods, respectively, providing two pillars of the low inflation world I described above. By extension, Russia and China have been the main “guarantors of macro peace”, providing all the cheap stuff that was the source of deflation fears in the West, which, in turn, gave central banks the license for years of money printing. But now that the pillars of the low inflation world are changing central banks are done with fighting deflation with asset price inflation, and are now fighting inflation with asset price deflation. Central banks are adapting to a world that’s gone from having too much stuff and not enough demand, to a world that has not enough stuff and too much demand. Today’s inflation is more about supply and less about demand, and is more about geopolitics than (domestic) politics.
There are four things that determine the price of a currency; par, interest rates, foreign exchange and inflation. Today’s inflation is impossible to forecast due to Xi’s zero COVID policy and an unrestricted economic war. It’s time to think more about the risk of inflation staying higher for longer due to economic warfare, and less about inflation being driven by a messy re-opening process after lockdowns and stimulus.
My introduction makes the point that what we are living through now is structural, and so we are not dealing with a business cycle, but rather with something straight from the Book of Genesis a “seven fat years, followed by seven lean years”-type of thing.
SocGen sees a peak in the dollar index and expects it to fall to in the coming months.
Wealth creation stands on three pillars:
First, cheap immigrant labor which keeps service sector wages stagnant
Second, cheap goods from China raising the standard of living amid stagnant wages
And third, cheap Russian gas powering the German industry and EU more broadly.
For decades, all these helped create wealth until, nativism, protectionism and geopolitics destabilized the low inflation world.
President Trump’s immigration policies to appease nativists has cost the U.S. two million jobs, which is driving the current labor shortages and wage pressures. Covid-19 changed labor markets further: early retirements and other changes have exacerbated the labor shortages and increased wage pressures further. President Trump’s hardline approach to China became a bipartisan stance that drove the imposition of protectionist tariffs on China, and what started as a trade war became a technology war: the U.S. went from tariffs on cheap goods, to banning ASML from selling state-of-the-art lithography machines to China to ensure the balance of technological power remains in U.S. hands.
President Xi’s zero-Covid policy continues to frustrate the flow of cheap goods, causing occasional cardiac arrests in global supply chains and backlogs at ports; trade and economic relations between the U.S. and China became inflationary, in contrast to previous decades when U.S.-China relations were deflationary…
President Putin’s efforts to make Europe dependent on cheap Russian gas – in order to tip the balance of economic power in Europe away from the U.S. – were frustrated by the U.S. sanctioning Nord Stream 2 last November, and President Putin’s frustration with the shifting balance of military power in Europe (NATO) then spilled over into a hot war in Ukraine on February 24th, which supercharged the economic war. Both sides went “nuclear” quickly, economically: the U.S. weaponized the U.S. dollar, and then Russia weaponized commodities. Welcome to the war economy where heads of state matter more than heads of central banks.
Think of Russia as a “hub of Commodities” and China as a “hub of Factories” that are the world’s biggest producers of commodities and consumer goods, respectively, providing two pillars of the low inflation world I described above. By extension, Russia and China have been the main “guarantors of macro peace”, providing all the cheap stuff that was the source of deflation fears in the West, which, in turn, gave central banks the license for years of money printing. But now that the pillars of the low inflation world are changing central banks are done with fighting deflation with asset price inflation, and are now fighting inflation with asset price deflation. Central banks are adapting to a world that’s gone from having too much stuff and not enough demand, to a world that has not enough stuff and too much demand. Today’s inflation is more about supply and less about demand, and is more about geopolitics than (domestic) politics.
There are four things that determine the price of a currency; par, interest rates, foreign exchange and inflation. Today’s inflation is impossible to forecast due to Xi’s zero COVID policy and an unrestricted economic war. It’s time to think more about the risk of inflation staying higher for longer due to economic warfare, and less about inflation being driven by a messy re-opening process after lockdowns and stimulus.
My introduction makes the point that what we are living through now is structural, and so we are not dealing with a business cycle, but rather with something straight from the Book of Genesis a “seven fat years, followed by seven lean years”-type of thing.
SocGen sees a peak in the dollar index and expects it to fall to in the coming months.