By Michael Every of Rabobank
The End/Beginning of a Golden Age
The Fed’s Bostic, an FOMC voter, just said rate cuts “could” reignite inflation, and one Q3 cut is possible, followed by a pause and another in Q4. The pushback, and push out, continues.
However, a broader set of voters should be on market minds today given it’s US Super Tuesday, which will bring the 2024 election into even sharper focus. That’s after the Supreme Court gave a 9-0 thrashing to Colorado’s idea of taking Trump off their state ballot: only Congress can do that, regardless of the ‘expert’ legal punditry which had claimed otherwise.
I repeat I was once told by an economist, “We don’t do politics.” But they all do without realizing it via their assumptions. Yet this is one of the rare occasions when it’s going to be impossible to deny that you do.
Our US strategist, Philip Marey, just took the logical step of basing his forecasts on the polls, which, for now, say a Trump win. This may displease some, and polls can be wrong. However, it’s a transparent basis from which to proceed, and assuming otherwise is also political. As Philip notes, a Trump win then implies a 10% tariff on all goods going into the US, and 60%+ on China. At which point things get even more political.
If the US forcibly narrows its trade deficit, it has huge implications for itself and those running trade surpluses with it. Yet modelling these outcomes via economic tools won’t work as they are static, not dynamic, and have an inherent bias that presumes we always return to equilibrium rather a different state. In reality, if the US abandons its dual role as global goods importer and exporter of the global reserve currency, ‘equilibrium’ is not a word to be using. Bifurcation might be.
Economists who “don’t do politics” should note if your conceptual foundations are wrong, your predictions will be too. Yet they deliberately edit out what Smith and Ricardo warn on how neoliberal systems break down: @BrankoMilan shows Smith was left-wing; Arrighi underlines he argued a strong state is needed to enforce competition to push prices lower; Ricardo said comparative advantage-based free trade won’t work without capital controls. So, how much should we really be shocked about “sellers’ inflation” and rising global protectionism? Even Austrian Schumpeter recanted his belief in free markets towards the end of his life when he admitted that freedom of action needs the invisible hand of morality as its logical underpinning.
There are, however, other ways of seeing. The implications of new, huge US tariffs can also be examined via lenses such as the Godley framework, as here by Michael Pettis, with its intersecting balance sheets and stock/flow approach. 20 years ago, I used it to logically deduce that US households were borrowing heavily to invest in housing, with the rest of the world’s capital neck deep too, with a ticking time of mortgage rate resets looming that would bring down the entire structure. This sounds painfully obvious today, but back then everyone ignored me to sell RMBS and say all was for the best in the best of all possible worlds.
Such optimism is understandably not as prevalent today, even as risk-on trades and AI echo what we saw pre-GFC. Most of us get lots of things are wrong, just not how it plays out. On that front, Trump tariffs vs. market myopia deserves its own “An Un-Godley Mess” report. For now, however, the implication is there will be higher US inflation. Moreover, there are other political forces at play that suggest the same.
China’s National People’s Congress dropped the traditional press conference by the Premier for the first time since 1993, while announcing a 5% GDP target for 2024 – which I can report they already met.
Russian Minister Glazyev continues to talk about a BRICS commodity-based digital FX alongside settlement in national currencies: that’s bifurcation in a nutshell, if so.
Argentina is appealing to the US to overturn a $16bn court ruling against it that undoes its attempts to balance the budget and achieve macro stability: these geopolitics echo far and wide.
The New Zealand Treasury just modelled an oil-price shock, the large-scale adoption of synthetic milk, and a trade shock where an unnamed Asian country, that isn’t Japan or South Korea, places 25% tariffs on Kiwi goods, which are “not realistic predictions of future events.” (All hurt a lot, but the oil shock is actually the largest.)
The EU is today to announce they will “shift to a war economy mode” to supply what Ukraine needs, as well as for their own security, according to an EU Commissioner. How will this be organised? Unclear. How much will this cost? A vast amount, if it is to mean anything. How will this be paid for? That’s the question to markets and economists who are ignoring this ‘politics’ despite funding and fighting war being the largest common thread through all of global economic, financial, and central-banking history.
The UK Budget tomorrow comes after a by-election win for a new left-wing Workers Party, which to show its class has no apostrophe and, yes, Leninist language. Its 10-point policy platform opposes NATO and imperialism, and proposes massive public spending. Is it going to win the next UK election? No. But it shows the British left is as split as the right; an appetite for real populism; and that a much-needed Western military build-up must surely be matched with social spending. In short, the fiscal bill ahead is huge. Which Godley frameworks have something to say about.
Lastly on politics, and related to the UK byelection, The Atlantic claims ‘The Golden Age of the Jews in America is Ending’, as “Anti-Semitism on the right and the left threatens to bring to a close an unprecedented period of safety and prosperity for Jewish Americans - and demolish the liberal order they helped establish.” Of course, The Atlantic is home to many ‘expert’ pundits, and could be wrong. Yet the implications of a demolished liberal order may matter in time to markets; and the correlation between societies turning antisemitic, and then failing economically, is another of the largest common threads through global economic and financial history. Sadly, this headline is also not a shock if you removed false assumptions from your predictions: in 2019, I was warning of an illiberal ‘Age of Rage’ from both the left and right that would sweep institutions and norms before it, concluding, “Markets need to prepare for a far higher risk of truly paradigmatic shifts ahead.” They still do.
Indeed, as one golden age may be ending, the linked political and geopolitical breakdowns are seeing more talk about the revival of a monetary golden age, or a digital one. Make of that what you will.
