By Michael Every of Rabobank
The Terrible Twenties
I’m not covering yesterday’s bad US data: if you want to count very small beans, go ahead. Bigger than that, First Republic Bank slumped again, which also led to market risk-off. For some, this means a Fed pivot looms; for others, more rate hikes plus acronyms, and the Fed taking more control of banking and shadow-banking. Yet even that is not the real Beanstalk: there, giants are talking about grinding the bones of an Englishman for bread.
On the US debt ceiling, Treasury Secretary Yellen said an “economic catastrophe” will be triggered if a US default occurs. Some external modelling shows unemployment could leap past 2008 highs, GDP drop 10%, and inflation return to over 10%. However, the far, far greater likelihood is that everyone knows that, and after much huffing and puffing, enough Republicans back a Democrat measure to kick the can down the road.
That’s not true in terms of the global picture, however, which should worry you far more as a result. In 2016’s ‘Thin Ice’, I stressed how the neoliberal global order collapsed twice, in 1914 and 1939. That frame remains critical to calling the big market picture today. In short, there are worrying parallels between the last two episodes and 2023.
In 1914, the collapse was led by Britain’s global hegemony being challenged by Germany. Today, Financial Times editor Martin Wolf op-eds that US-China relations “have entered into a frightening new era” which will determine humanity’s 21st century fate and “whether there will be peace, prosperity, and protection of the planetary environment, or the opposites.” He says a proposed ‘managed competition’ is unlikely to work --I concur-- and concludes: “Few leaders in history have borne a heavier moral burden than those of today.” You can try to ignore these drums, but they are being beaten for a reason.
In 1939, the collapse was due to Europe having failed to deal with its post-WW1 debts via either inflation, default, or taxing capital or labor, leading to 1929, the 1930s, and Hitler. Yesterday, with debt soaring and unions on strike, BOE Chief Economist Pill stated Brits “need to accept” they’re poorer because of rising inflation rather than demanding pay-rises. Yet why does conflict over inflation have to be won by capital? Key consumer food firms’ earnings calls just stated they have raised prices by double digits, and/or will do so again, and have suffered no hits to their bottom lines despite rising commodity prices.
When some were looking forward to a ‘Roaring Twenties’ as 2019 ended, even pre-Covid I feared the different roar of a ‘Terrible Twenties’. Read Wolf and listen to Pill, and try not to see the same.
ECB President Lagarde’s speech last week --where she stressed a fragmenting geopolitical world meant central banks must think outside the box to get CPI back to 2%-- clearly hasn’t resonated within her sphere yet.
By contrast, the RBA review seems a coup for economists rather than bringing in heterodox, multi-disciplinary, geopolitical thinking. Fed swap-lines --excluding EMs like Argentina, Bolivia, and Egypt begging for dollars-- are shifting back to a weekly, not daily, schedule because things look ‘more normal’. The BOE shows when push comes to shove, it gives workers one. None of this will reduce the risks of a new global architecture fracture ahead.
In the West, workers will shove back at central banks. We don’t need bubble economies, hence higher rates, but we do need more industrial production, supply-chain resilience, and defence spending – hence businesses and governments are doing it. Good luck telling people they can’t have a pay rise while this high-inflation-now, low-inflation-much-later process happens. Perhaps we can use AI to fire everyone white collar, but then good luck getting people to rally behind your flag in a Cold War or a hot one, rather than saying the other side gets the trains running on time, which business leaders who love to preach sustainability and diversity already do. Globally, EM will look for alternatives, and/or copy what the West is doing.
Yet how many of the “morally-burdened” people working in central banks, or writing about them, have a grasp of geopolitics or strategic studies - and how long can that last if Wolf is correct in his gloomy assessment of US-China relations? Equally, how many in central banks, or writing about them, have ever been truly cold or hungry; struggled to find work; been paid weekly, or on a zero-hours contract; drawn state benefits; or slept on the streets? As such, how many of them understand the risks of a destabilising 1920’s-style internal conflict?
The Twenties are terrible because of our failing institutions, not people who won’t accept they are now poorer. For those who want an idea of poverty without LARPing at being working class, read Orwell’s ‘The Road to Wigan Pier’ or ‘Down and Out in Paris and London’. The brilliance of the writing and the eerie prescience, or current echo, of his analysis is worth it:
On food (prices):
“A human being is primarily a bag for putting food into; the other functions and faculties may be more godlike, but in point of time they come afterwards. A man dies and is buried, and all his words and actions are forgotten, but the food he has eaten lives after him in the sound or rotten bones of his children. I think it could be plausibly argued that changes of diet are more important than changes of dynasty or even of religion.”
On class and the economy:
“The educated man pictures a horde of submen, wanting only a day's liberty to loot his house, burn his books, and set him to work minding a machine or sweeping out a lavatory. 'Anything,' he thinks, 'any injustice, sooner than let that mob loose.' He does not see that since there is no difference between the mass of rich and poor, there is no question of setting the mob loose. The mob is in fact loose now, and --in the shape of rich men-- is using its power to set up enormous treadmills of boredom, such as 'smart' hotels.”
On the international backdrop:
“It was easy to laugh at Fascism when we imagined that it was based on hysterical nationalism, because it seemed obvious that the Fascist states, each regarding itself as the chosen people and patriotic contra mundum, would clash with one another. But nothing of the kind is happening. Fascism is now an international movement, which means not only that the Fascist nations can combine for purposes of loot, but that they are groping, perhaps only half consciously as yet, towards a world-system. For the vision of the totalitarian state there is being substituted the vision of the totalitarian world.”
“We are living in a world in which nobody is free, in which hardly anybody is secure, in which it is almost impossible to be honest and to remain alive.”
Now back to counting very small beans. New Zealand saw another huge increase in its trade deficit as imports leaped far more than exports. This is starting to look positively EM-like to some: then again, DM = EM has been one of my 2023 memes so far. Likewise, Aussie CPI was 1.4% q-o-q vs. 1.3% consensus, and 7.0% vs. 6.9% y-o-y. However, March was 6.3% vs. 6.5% y-o-y and the Q1 trimmed mean 1.2% q-o-q vs. 1.4%, and the weighted median 1.2% q-o-q vs. 1.3%. Yet tradables CPI was 0.3% q-o-q vs. non-tradables at 1.9%, so sticky local problems, not ‘Putin’.
Will the RBA give its workers another shove, or wait for 300,000 new arrivals to stop wage growth for it? The Terrible Twenties loom either way, with a vast country with a small population seeing vast house prices and rent increases.