By Michael Every of Rabobank
"We won, at very little cost."
The past ten days have provided little clarity on the economic and market outlook, as this now increasingly depends on the geopolitical front.
Not that this fact stopped Paul Krugman behaving like the Jewish uncle who keeps talking about the superiority of Marxism at a family gathering, this time claiming on X yet again that, “The war on inflation is over. We won, at very little cost.” That ignores not only current US inflation well above 2%, but that the world is actually at war again, with no way of knowing who gets dragged in, for how long, and with what inflationary consequences.
The war on inflation is over. We won, at very little cost pic.twitter.com/opumf3nEvL— Paul Krugman (@paulkrugman) October 12, 2023
Frantic shuttle diplomacy by US Secretary of State Blinken is trying to avert Middle East escalation. However, the issue is not when Israel goes into Gaza to topple Hamas --which says it holds 200 hostages, with other groups another 50-- but rather who they allow to run it the day after: the US stress Israel needs an exit plan, and the US belatedly knows a thing or two about that. Meanwhile, Iran claims the expansion of the war “is reaching the inevitable stage,” which is what we have been warning since last Monday, and warned of “pre-emptive action” by Iran and its allies in the coming hours. After all, Israel has evacuated 60,000 people from its south, while extending a ceasefire at the Rafah crossing into Egypt to allow Gazans to exit, and now additional thousands more from 28 villages up to 2km away from the Lebanese border, As such, it seems we are building up to something far more substantial than any previous Israel-Hamas fight.
It's already spreading outside the region, first with angry street protests, now with the murder of two Swedes during a football match in Belgium last night by an Islamic extremist. Sadly, the risks are of much more of this to come.
As in Cold War 1.0, both Israel and the Palestinians are now openly backed by Great Powers, raising the stakes. The US is sending two Navy carrier strike groups, 24 fighter jets to Jordan, and maybe President Biden to Jerusalem tomorrow or Thursday: this simply doesn’t happen in minor regional crises. On the other side, Iran’s role is obvious; Russia is behind the Palestinians, without yet having burned all bridges to Israel; and a senior Palestinian Authority figure has publicly stated, ‘China will lead the world and is on our side,’ that Beijing will accept whatever the Palestinians demand, and they “want to make Israel swallow the poison one drop at a time.”
Is the US still in the position to be the arsenal of democracy for Ukraine, and Israel, and Taiwan? That’s the key question whatever asset class you are looking at. If you don’t realise that core fact, you shouldn’t be looking at any asset class at all. On that front, US Treasury Secretary Yellen argues that debt interest is not a problem for the US --having mismanaged this all so incredibly badly by funding via expensive short-term bills rather than locking in long-term cheap debt a few years ago, she would have to say that-- and that the US can easily afford two wars (i.e., Ukraine and Israel).
She’s right in the classic Keynesian respect that he argued in 1942: “Anything We Can Do, We Can Afford” - if there is spare capacity in the economy, the government can absorb it via higher spending. Yet the problem for the US, which Yellen and Krugman can’t get their heads round, is that it is now limited in what it can *do* because, with their past encouragement, it shipped so many of its military industry supply-chains offshore, and left those at home as bloated monopolists. The US may be able to *afford* to fight two wars, or three, but it physically cannot produce the goods to do so on a larger scale over the longer term. Trying to, the US will get more inflation, as we saw in Covid, and while they attempt to rapidly onshore.
Meanwhile, Iran, the Taliban, over a hundred other delegations, and Putin and Xi will all meet at the Belt and Road Forum today and tomorrow, the latter to deepen their “no limits” partnership, and all to discuss ‘A Global Community of Shared Future: China's Proposals and Actions’. Will there be a statement on Israel-Palestine counter to the West’s stance, showing another global split along with Ukraine?
That might play well with some of the Western public, it seems. Boston Globe columnist @Jeff_Jacoby notes that in the guts of a YouGov poll on the current crisis, despite the mountain of evidence of what just occurred, “just 32% of US adults between 18 and 24 believe that Hamas deliberately targets civilians. You have raised a generation of idiots, America.” One starts to understand not just how the Holocaust happened, but how Holocaust denial continues to.
On which, and regardless of the justice of calls for a Palestinian state, @RobertMSterling notes:
“It’s been amazing this week to watch the left invert every rhetorical device they’ve used since 2020, all to avoid having to criticize terrorists dedicated to Jewish genocide. It would be hilarious, if it weren’t so reprehensible.
2020: Silence is violence.
2023: It’s okay to just keep silent, especially while events are still unfolding.
2020: If you’re nit-picking small details instead of focusing on the big picture, you’re doing so to avoid your complicity in atrocities.
2023: 40 babies may have been killed, and some of them may have been beheaded, but that’s not the same as 40 getting beheaded. Details matter.
2020: Universities must proactively take a stand and speak out in opposition to racism. “Academic freedom” is a false concept used to enforce oppression
2023: Universities need to maintain neutrality and ensure that they do not make any statements that jeopardize the principle of academic freedom, which is a paramount virtue.
2020: You must immediately and forcefully condemn an attack, even if investigations are ongoing.
2023: You can’t expect us to release statements opposing an attack within four days, when the facts are still being discovered.
2020: People are responsible for their words, even if they are just working-class teenagers in small towns. Freedom of speech doesn’t mean freedom from consequences.
2023: Graduate students at the most prestigious university in the world are just kids and cannot be held accountable for statements they sign. This is cancel culture.
2020: Believe all women.
2023: Where is the physical evidence of these “alleged rapes”?
2020: It’s not enough to be non-racist. If you are not actively anti-racist, it means that you are, in fact, racist.
2023: How dare you question whether I support terrorists just because I haven’t actively spoken out against Hamas freedom fighters.
2020: We don’t get to tell people in affected communities how to deal with their pain in the aftermath of violence.
2023: It is Israel’s responsibility to ensure that violence doesn’t escalate.
2020: Anything that disproportionately affects one group of people is oppression and must be condemned.
2023: Settlers --a term that includes all Israeli Jews-- are not civilians and are therefore all valid targets for attacks.”
This kind of political hypocrisy is not new. The Right embraced early Hitler and Cold War banana republic thugs, like Saddam Hussein and Pinochet; the Left’s G. B. Shaw and New York Times both covered up Stalin’s crimes, and Chomsky those of the genocidal Khmer Rouge. Do I need to stress that this doesn’t generally end well for the West? It won’t do today for three reasons in particular:
- First, as we head deeper into a new global Cold War, some might ask who in the West is actually on whose side, and if so how the West is going to win at all, let alone at “very little cost” - and if it isn’t going to, which assets should you be holding to retire on?
- Second, ruthlessly shedding intellectual and moral consistency like snakeskin when it’s tactically expedient to do so in order to win at all costs is not in line with core Western values that are the bedrock of the rule of law supporting Western markets – don’t dismiss that long-term threat.
- Third, as writer and historian Paul Johnson noted, wherever anti-Semitism takes hold, social and political decline almost inevitably follows.
In short, for many reasons, inflation may be the winner soon. At very high cost.