War is usually a sign that a global economy is doing badly and it needs to create chaos. The current situation is global. All the major economies have been doing badly, and each is waiting for the opportunity to take advantage of the situation - which is to reposition itself strategically in the new world order. Eyes on the US, China and Russia.
The current story started with the Russian invasion of Ukraine. Russia wants to reposition itself better strategically by wanting to open a sea access to the world through the Black Sea. This has caused food and oil prices to rise.
The US attacked Iran by taking out its political leadership. The new Iranian authorities now emerging has to show revenge to save face. They respond by attacking the enemies' military bases in its neighbourhood and inflicting economic pain by blockage sea routes for oil of its enemies. This is causing oil prices to rise further.
Rising global prices for food and other essential goods immediately suck up the purchasing power of everybody. This means people buy less things with the same cash. To return the consumption of the people to the previous level or even to help increase the consumption of the people, the government must give extra cash and run a bigger budget deficit.
It is not correct to raise interest rates to lower aggregate demand to stave off inflation. Higher interest payments by debtors will lower further the consumption of the people and make things worse for them. Higher interest rates will also lower loan demand and investment and creates less jobs. In fact, monetary policy should be loosened to maintain a stable financial environment, while the economy tries to cope with the supply chain problems.
Furthermore, war diverts resources from the ordinary people to the war effort. More people will die unnecessarily either from undue poverty or the war itself.
This war comes at a time when both the government and households are facing deficits to their limits. This was will have to break those barriers further and create now debts and deficits and bring them to historic heights.
Because of the diversion of resources to higher prices and the war, markets for financial assets and real estate will soften. Unsupported by slower loan growth and investment and lower purchasing power, we make see the start of a major downward asset price adjustment.
Brace for tough times ahead and keep cash.
2 comments:
The on-off charade on the opening/closing of the Strait of Hormuz is only benefiting energy and military stock traders.
Economies of poor countries dependent on humanitarian aid and oil and fertilizers besides their exports of labour-intensive products are taking a double hit as they have yet to recover from the pandemic aftermath.
If the effects of the Iran crisis continue until the end of the year which is likely because it takes time to repair refineries, renormalize transport insurance and rejuvenate investment sentiments, then jobs and wages will shrink, and starvation may ensue in an ouroboros vicious spiral.
The Gulf region produces urea, ammonia and sulphuric needed to fertilize fields today for harvests six months onwards else yields will fall and prices will rise but barely to cover costs of fertilizers and transport.
The inflative multiplier on price triggered by wars and conflicts is artificial and insidious. Already el-Nino is drying up fields and stressing crops. No point if crop prices rise but less crops are produced what more people can't afford. Economics tagging along, Nature's law of equilibrium trods.
Meanwhile the world stage produces its own Hamlet drama. The theme is the writhing contortions of one order declining but refusing to accept the momentum of decline. Like living through a deep dream of dissolving clingings to dissolute living.
In one corner of the world, that order rebels against what it had served and was served. Globalization which had brought it cheap consumerism was rejected in favour of deglobalization by decoupling using trade walls which then threaten economic integration and guardrail independence.
The result is disorderly fragmentation which leads to lower growth, higher inflation, and greater inequality reverberating across the globe.
Those affected try to salvage the merits of the order but refashion it for themselves in a tacit realization that the West with only 12% of the world cannot continue to write the menu for the 88% which have so far only been served as the menu of the day rather than be seated alongside at the same table.
To stop that change of destinies, war was invoked so that chaos can magnify first-mover advantage of the West whose financial hegemony is being challenged by Japanese bonds, Chinese petrodollars and the palpable collapse of the private credit market.
Thus the seizure of the global oil fulcrum to maintain the exorbitant privilege of the US petrodollar, exercised by the attempted annihilation of Iran on the excuse of nuclear disarmament, which strangely is not served by the IEAE on Israel's 90 nukes, a state resting its existence on a historical faith that it is where the Second Coming will take place, a faith fervently believed by the 20% in the US upon which its narcissistic master tweeter depends for unquestioning voting support if only to avoid his expulsion for misdemeanours past and warmongering present, such as the latest unprovoked premeditated attacks on a sovereign state with an overriding heritage that ended up killing thousands including little schoolgirls.
2/2
Yet in the crucible of change, bets have been placed and hedges embedded that all will renormalize soon enough so suffice it be to continue being alert, agile, resilient and diversifying.
Deregulation and subsidization are proferred to jack up sentiments which will however carry forward costs onto future generations whose parents today are already belabouring that their rat-race wages are being shaved by higher costs of living cancelling any federal reliefs.
It remains to add that into the crucible has bubbled up the double-edged sword of Artificial Intelligence which arose out of the blue and has magnetized all excitement over what could be the final holy grail of Technology.
Which is why AI is the main spearhead of stockmarket sentiments whose disproportionate investments however occlude the grey clouds over other economic indicators and may render all economic theories superfluous given its promise of infinite productivities.
To clear the board, AI is already reengineering headcounts by expelling many job-holders; these include software coders since AI not only can code but also acts as the eponymous e-concierge of the 21st century.
All that comes at other costs: power-and-water hungry data centres have to be constructed, they have high hidden depreciation charges which mandate replacement costs within 3-5 years; their compute speeds are so increasingly fast they may outpace data growth upon which their relevance depends in which case to save itself, AI may invent hallucinatory data and thus degrade its advisory function.
Meanwhile, just as one can google easily for knowhow, AI may make thinking an avoidable chore for humans whose medulla oblongata and corpus callosum may start to plaque from underuse more than by heavy drinking.
At the same time, the more people lose jobs, the less they can afford the fees for agentic bots whose estimations are already over-the-moon but coming only in 2030 by which time cheaper and free substitutes would have swarmed the market which will also be dampened by an avalanche of fakenews, distorted facts and the like.
Today, twisted tweets already presage what is growing. Which is why some technocrats and carpetbaggers array between themselves a pyramidal construct of cross-holdings in advance of what could be another black Monday.
As with waging war based on some misplaced self-defined exceptionalism, unwise over-confidence can come at the price of black-eyes and punctured pride. Mercifully, Nature will exert her equilibrium soon enough to insist resets.
Post a Comment