“It’s Time To Fasten Our Seat Belts”

By Michael Every of Rabobank

“It’s time for all of us to fasten our seat belts”

It’s hard to disagree with the above sentiment from multiple angles. What else is there to do about the ongoing shift from developed to emerging market norms in the West?

In society, a famous writer is violently attacked… to shrugs rather than hugs from large parts of literary society; and Twitter –always happy to deplatform people at the drop of a hat– allows follow-on gloating and death threats to other authors.
In politics, was the FBI raid on former President Trump’s home an attack against an opponent to prevent him running in 2024, or does it show that nuclear secrets and lists of spies were left out like take-out menus? Or neither? Or both? Whether the information the FBI found was classified or not, the DOJ says it is about whether Trump should have had possession of it at all. Yet Hillary Clinton’s possession (and destruction) of thousands of similar emails was not deemed criminal, despite carelessness, due to a lack of ‘intent’: will the DOJ show Trump (or his family?) intended to share top-secret information? The smell of banana (skins) is strong in this republic from many sources.
In economics, the US may be polarized and hyper-politicised, but can still pass legislation to try to shift industrial supply chains home, and just has. The likely next UK prime minister backs more tax cuts and flag-waving. That said, she also supports the Bank of England (BOE) targeting nominal GDP, not CPI, and pushing Covid debt way down the maturity curve to free up fiscal space. Of course, it is the latter the market objects to. True, the idea won’t work without industrial policy or high tariffs: but even that combo would arguably be rejected by a ‘rational’ Establishment that makes money from the failing status quo: which is very emerging market when you think about it.  

Meanwhile, the leader of the British opposition backs a cap on energy bills at around £2,000 per household rather than allowing them to rise past £5,000, approaching 2.5 months of average UK take-home pay, as one study suggests two thirds of the UK, 18m households, will be in fuel poverty. Obviously, such bills are an economic disaster. Yet so is the government subsidising energy, keeping demand up in the face of low supply, and hoping energy will magically get cheaper.

What would be good is industrial policy, backed by the BOE, to build more diverse sources of energy supply of all kinds. Just like they don’t in inflation-constrained emerging markets, who instead focus on flag-waving, tax cuts, attacking political opponents, or making money from political office.

And don’t think these problems stop in the Anglosphere. Gaze at the wholesale cost of electricity in France and despair. Germany’s falling water levels are not just stopping normal Rhine trade flows, disrupting supply chains, but are exposing “Hungersteine,” or ‘hunger stones’. These messages carved into the rock hundreds of years ago warn, “Wenn du mich seehst, dann weine” – “If you see me, weep.” I know how they feel on many fronts.

Developed market central banks now face the kind of awful choice emerging markets face all the time: keep hiking rates, and cause great pain (but win Western approval); or don’t keep hiking rates, and cause different great pain (and lose Western approval). Friday’s US Michigan consumer sentiment survey saw inflation expectations pick up once again in contrast to the carefully-massaged “transitory!” message recent data have showed: 5-10 year CPI expectations rose to 3.0% from 2.9% vs. an expected 2.8%, while the mean expectation rose from 3.4% to 4.0%. But let’s see what central banks do now they are on the spot: back in 2008 they opted to cut rates and bail out the rich (and abandon the middle-class and poor), in complete contrast to what they always told emerging markets to do in a crisis.

Also fasten your seatbelt over geopolitics. That was the advice of former Australian Prime Minister Rudd in a Wall Street Journal op-ed worrying about US-China relations, and comes from a politician who speaks fluent Putonghua, and has always tried to accentuate the positive on that global front. The Economist front page this week is even blunter, as is Foreign Affairs.

All three media came before a further plane-load of US congressmen and a Senator arrived in Taiwan unannounced to meet the president, just ahead of the US release of plans for deeper trade relations with Taiwan later this week, and as the US navy sails through the Strait of Taiwan again. Is that backdrop really politically conducive to a politically productive Biden-Xi meeting in Asia now apparently set? And what will be said at it if it happens?

Elsewhere, Europe and the US continue to negotiate with Iran over the terms of the nuclear deal, with neither able to join the dots back to the attack on a certain writer. Russia –which is deepening ties with North Korea and Iran (whom the West wants to get closer to again)– warns that if it is designated as a being a state sponsor of terrorism it will mean the complete end of diplomatic relations with the US.

OK, enough for a Monday, and especially an August Monday. But do keep that seatbelt on.