"A Shift Toward Statism: The US Establishment Doesn't Want Domestic Chaos Anymore Because They're In Control"
By Michael Every of Rabobank
A new 'State of Statism'
We can debate the latest numbers. The Philly Fed flashed a recession warning, but US PPI data were hot, and initial jobless claims still show a very firm labor market. In Australia, the jobs report was likely much better than the weak headline suggested. Timiraos at the WSJ, who may be channelling the Fed, notes that January CPI and PPI lead economists to estimate the US core PCE deflator, the Fed’s preferred inflation gauge, from +0.47% m-o-m (+4.4% y-o-y) to +0.55% m-o-m (+4.5% y-o-y) vs. 4.4% y-o-y in December.
The words we hear are unequivocal. The RBA’s Lowe just told Australian lawmakers the ‘lowest sustainable level of unemployment is in the low 4s’, and he didn’t think January jobs data were accurate as most firms still can’t find enough workers. While he stressed the need to be flexible, looking at the risks of not doing enough on rates and doing too much, he underlined: “This is the first test of a new reality that most central banks are going to face.” Prior to that, the FOMC’s Mester and Bullard stressed the best way to pass that test is to push rates higher – both talked about potential 50bps steps again. Before them, the ECB’s Lane said QT of €500bn spread over 12 quarters would only lower inflation by 0.15 percentage points and output by 0.2ppts, although there may be “non-linearities in the exit process.”(!)
What central banks’ deeds will look like remains to be seen, but it’s clear they are going to err on the side of hawkishness. The larger issue is what the collateral damage is, how sticky inflation proves, and what the new economic structure looks like after this unfolds. That involves looking forward via emerging trends. In my view, it also means looking beyond traditional market metrics. After all, if this is a metacrisis/polycrisis, why should we only focus on core PCE or unemployment as harbingers?
Looking forward more broadly, we can already see an *emerged* trend. The top headline in the Financial Times today is ‘Pentagon’s top China official to visit Taiwan amid rising bilateral tensions’, the first visit in 40 years. Yesterday, the same top headline was ‘Ukraine war pushes US to review arms stockpiles’. The Guardian reports ‘UK rehearsing economic fallout scenarios if China invades Taiwan’. The Asia Times says ‘Japan’s remilitarization aiming for more arms exports’. In Europe, the BBC says ‘Lukashenko warns Belarus will join Russia in war if attacked’. The SCMP carries analysis on ‘Prigozhin, Simonyan, Medvedev: the rise of the Russian hawk’ arguing whoever follows Putin is likely to be worse for the West. PBS says ‘Moldova’s new pro-Western government faces ‘crises’ amid Russia’s war in Ukraine’. Euronews notes ‘Serbian nationalists protest against Western plan to normalize ties with breakaway Kosovo’, the latter just marking 15 years of unilateral separation from Serbia, which still doesn’t recognise it. There are other similar headlines around the world.
However, one needs to look at key domestic trends too. In that light, our January 2019 report ‘The Age of Rage’ argued a wave of populism was about to sweep into ostensibly ‘apolitical’ institutions like central banks. Not long after, the Fed was talking about social justice as part of monetary policy. Looking back now, were such concerns part of the reason it lagged so badly in its rates response to inflation, even as radical fiscal policy became joined to radical monetary policy? Looking forward, you can see something different happening in politics and society that may be just as radical, if different.
We are already seeing a pushback against ESG from some. Moreover, we can arguably see a change in overall tone in some benchmark US establishment media. Indeed, my eye was caught by a series of tweets from @balajis that argue The New York Times “is transitioning from wokism to statism. Because the US establishment doesn’t want domestic chaos anymore. They’re in control. So you’ll see less riots calling for abolishing police, more funding for riot police. Less on toxic masculinity, more on troops for foreign wars… The Soviets had a term for this: left-deviationism. That is, it *was* possible to go too far left in the USSR. Revolution was good, then suddenly bad, once power had been consolidated And we too have a term for it: woke. Chaos is less useful now that power is consolidated.”
Mirror image of what happened in China.After CCP consolidated power, they didn’t need zero COVID. After NYT consolidated power, they didn’t need maximum woke. pic.twitter.com/oTRcjt9J2q— Balaji (@balajis) February 16, 2023
This is not just (correct) history and (arguably) correct mapping of political-science theory onto the current US reality, but something that we can quantify – like core PCE or unemployment. Data scientist @DavidRozado, authored of ‘Prevalence of Prejudice-Denoting Words in News Media Discourse’ – it’s results look similar to the path of 2021-2022 US inflation. He now agrees with the NYT tone-shift hypothesis, and says: “Frequency of prejudice signifying words in US news media is decreasing. But there is a catch... I'm working on my updated analysis of this topic to be published shortly.” (A preview chart from that work looks like inflation hopes for 2023.) But what does any shift in words means for numbers and deeds? That’s what markets need to focus on.
Arguably, a shift towards statist order is being driven by chaotic geopolitics as much as chaos at home. Statism has lots of work to do to simultaneously deal with Western military weakness, polarised societies, and debt-soaked and bubble-laden economies.
Politically, statist order means ‘rally round the flag’, or ‘us vs. them’ rather than ‘us vs. us’. Or balloons and aliens all around us. Ironically, that means more geopolitical chaos, and so more need for statism.
Economically, statist order means industrial policy and protectionism. Fiscally, it cannot mean austerity because that doesn’t match expensive geopolitics and rallying round the flag. Monetarily, it means higher rates due to high inflation. Yet that clashes with expensive geopolitics and the flag. However, it cannot mean lower rates because that brings chaotic misallocation of capital and resources away from statist, geopolitical goals towards bubbles.
So, how do we square that circle? I have my own theory: higher rates for longer for the private sector *and* QE for the state, and capital controls as needed to get money where it is needed by the state.
You may disagree, but shifting words may lead shifts in key numbers, and key numbers will usually lead central bank deeds. They have already shown they can be politicized: we will just change how if we enter a more-ordered ‘State of Statism’.
Happy Friday!
