By Michael Every of Rabobank
“There are decades where nothing happens; and there are weeks where decades happen." – Lenin
The German election so far look like a stalemate, with a long period of wrangling to form a government – all very normal for the EU. However, the majority voted for ‘nothing happens’: multilateralism, rule by phytosanitary standards committees, a mostly balanced budget, and a vast trade surplus. Muddling-through-mercantilism may be welcome in Berlin, but it’s unhealthy for Europe: as one author argues: “…bureaucratic excesses were precisely what Weber theorised and warned against, considering them as corrosive to democracy as fascist tendencies…. Angela Merkel’s legacy is that of a reliable, capable, dutiful ‘civil-servant-in-chief’, not that of an imaginative political leader.” Moreover, Germany is already strategically weaker than pre-Merkel --think Nord Stream 2, US relations, and whatever its China position is-- which will make a continuation of the last 15 years of successful stagnation much harder to sustain going forwards.
Elsewhere, decades are happening. Friday saw the first Quad meeting, where the US, India, Japan, and Australia agreed on an agenda including: donating more than 1.2bn vaccine doses globally; a Quad Infrastructure Coordination Group; a new Green-Shipping Network; a Clean-Hydrogen Partnership; bringing exceptional STEM students to the US; collaboration on critical and emerging technologies via joint technical standards, 5G, technology supply chains and key mineral resources; and cybersecurity and space cooperation. Military cooperation goes without saying. Geostrategist Luttwak argues power is a function of scale (GDP, population, military, and R&D) multiplied by political cohesion. As last week’s ‘Orcs’ snapshot showed, the Quad (and the UK in AUKUS) has all four – and cohesion in key areas. The global architecture is changing, and rapidly shifting away from a Europe lacking both focus and cohesion.
Friday also saw the US allow Huawei CFO Meng Wanzhou to return to China in exchange for an admittance of wrong-doing, which will be used in the ongoing case against the firm; within minutes of that shock, it was announced the two Canadians who have been prisoners in China for three years were also on a plane back home. Notably, Meng arrived to a massive hero’s welcome, with tub-thumping nationalist mass-media coverage. Markets will try to shrug this off as, but as Rory Medcalf, professor and head of National Security College at ANU tweeted: “Is there any corporation or employer in the world that still pretends to itself and its staff that there is not a risk of hostage taking, when China has now proclaimed that reality?” Do you not think that this might just impact FDI, then trade flows, and then financial flows?
On the latter point, Friday also saw China make crypto illegal. Not possession – but any kind of transaction or service. The whisper: decks are being cleared for the entry of the digital CNY, which will be launched against a geopolitical backdrop full of talk of ‘launches’. (As the Evergrande crisis rolls on, Forbes talks of ‘China’s Myth of Infallibility’, and Niall Ferguson writes on ‘China’s Crisis’ via Bloomberg.) Again, the global architecture is changing.
Perhaps, so is the infrastructure. In the US, it appears that this is to be Build Back Better week – or maybe not. House Speaker Pelosi is apparently to try to pass both an increase to the debt ceiling, and a stop-gap spending bill, and the $1.2trn infrastructure bill, and the $3.5trn Build Back Better bill. Are the votes there? The extreme options appear to be either government shut down, or massive government expansion. Watch this space.
In the UK, it is a case of Anyone-Could-Do-Better, as fuel runs out, panic sets in, and supermarket shelves empty. The government is being blamed for not planning for the shortage of fuel caused by a global shift away from US shale that no expert saw the impact of ahead of time. (For more detail on this energy-price shock, see “Gasflation”.) They are also being blamed for not having recruited 100,000 new truck drivers to replace those who have retired due to long hours and a change in the tax system, or returned to Europe post-Brexit. Some also blame UK trucking firms for not increasing wages to fill a huge gap: cynics suspect the firms knew a crisis would occur, and moves then be made to bring in cheaper foreign drivers. Indeed, opposition Labour think new drivers can just be brought back in from the EU to fill gaps as needed, when there is a shortage of drivers there too, and in the US - and even China is seeing major power cuts in industrial areas. In the UK, it seems the army are going to be called in to keep the economy moving. Expect more that kind of thing in many places - as the Quad/AUKUS alludes to.
The supply-chain architecture is buckling globally: imagine what trillions of new US stimulus will do given no goods to supply to it, no free infrastructure to deliver them, and no cheap energy to back the production of such goods. No army would favour our globalised logistics given how vulnerable they have proven to be to a shock; and when even US tech giant Intel says ‘It’s Time to Build a More Geographically Diverse Supply Chain’, you know the zeitgeist is changing. However they, like Elon Musk, still see China as a key link regardless of talk of hostage taking or common prosperity Marxism-Leninism. That doesn’t mean we won’t see lots of different, localized supply chains though, rather than a single log-jammed global one - the message Germans least wanted to think about while voting.
Meanwhile, as the Fed says inflation is transitory because they have no idea how logistics operate, a senior Fed economist slams it for relying on propositions “that ‘everyone knows’ to be true, but that are actually arrant nonsense,” without “any sort of empirical foundation,” including inflation expectations; says it was a source of concern if “dubious but widely held theories” lead to consequential policy decisions; and adds in a footnote: “I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.” Well, yes. But how about pointing out that neoclassical economic models excludes credit, so GDP ‘just happens’ without any money-flows? The whole edifice is “arrant nonsense” if you take a step back and look at it.
Yet against that backdrop, and despite recent experience with Covid’s outright monetary financing, the UK Labour party now agrees with the government that it is time to drop the “Magic Money Tree” (MMT) and “rebuild the public finances” - bang in line with predictions we made early last year that after every major war we get a recession, because politicians reign in spending and ‘lose the peace’; and that wasn’t the most surreal part of Andrew Marr’s interview with the Labour leader yesterday.
That particular lowlight was only matched by Friday’s official UN TikTok video explaining how the General Assembly works. I would love to now see the UN’s “interpretive dance” that explains to ‘the kids’ what is going on with supply-chain shocks, power cuts, food crises in poorer countries, Cold War struggles for new supply chains and tech supremacy, hostage taking, and fears over nuclear proliferation in the Middle East and Indo-Pacific.
“You probe with bayonets: if you find mush, you push. If you find steel, you withdraw” - Lenin