Hello Swampians, and happy new year! It feels like 2022 has to be better than last year, but given Ed’s note about the atmosphere in Washington, perhaps I’m speaking too soon.
I wanted to kick off my own first note of the new year by sharing the top three issues ahead that I’m watching most closely, and the questions I’m looking to answer. I’d welcome readers, and of course you, Ed, to chime in with your own thoughts or list for 2022 — it will help me focus my thinking and coverage over the next 12 months.
1. What happens when the Fed raises rates?
For years, I’ve been arguing that low rates were benefiting large corporations far more than average individuals. While some quantitative easing was needed post subprime crisis, most of it just jacked up the price of stocks and homes and prevented useful price discovery in markets. The left is as much at fault here as the right politically. Indeed, I’ve pointed out in columns that thanks to buck passing on both sides of the aisle, the Federal Reserve has been stretching out the business cycle artificially for decades, preventing the sort of healthy culling of unproductive loans and businesses that would ordinarily have been happening every few years.
The problem is that when the music stops, there will be pain. About two-thirds of the US economy is consumer spending. But people’s spending patterns are not based on their income alone. Our personal consumption is also linked to our expectation of wealth held in assets such as stocks and bonds. What’s stunning is how utterly dependent American fortunes have become on the inflation of those asset prices.
Financial analyst Luke Gromen has calculated that net capital gains plus taxable distributions from individual retirement accounts are equal to 200 per cent of year-on-year growth in US personal consumption expenditure. As I wrote in 2020: “That does not necessarily mean that people are pulling money out of their retirement accounts to buy hand-sanitiser, bottled water and face masks.” But as Gromen put it, it does mean that gross domestic product “cannot mathematically rise if asset prices are falling”.
2. Do we get a big market correction, and perhaps even a recession, around the midterm elections?
And if so, what does that mean, particularly if it looks like Republicans will win anyway? How should we think about inflation in the middle of a generational economic shift? I’m fascinated by what the Bank for International Settlements calls the “bullwhip economy”, in which inflation dynamics globally are moving in new and surprising ways. Pundits and pollsters tend to look at the effects of inflation in very short-term ways. And I don’t want to downplay those — certainly, higher petrol and food prices make a huge difference in the monthly budgets of working people.
But the entire mandate of the Biden administration has been to reward “work not wealth”. That means shifting to an economy that better balances production and consumption, redistributes some wealth, invests in public works and human capital, and encourages savings and equity over financialised, debt-driven growth. All of that is, in the short term, inflationary. But in the longer term, it would be hugely deflationary to have a greater number of better-trained workers, stronger infrastructure and more resilient supply chains.
How can the administration find a politically quick and easy way to communicate this to the public? How do we help Americans understand that the shift we need to make is to be measured in years, not months or weeks? And how can we buffer the short-term effects of inflation for those most affected by it?
3. Are there upsides to decoupling? What does the post-neoliberal world look like?
We are constantly hearing about the dangers of deglobalisation, and how we’ll end up in the 1930s if we aren’t careful. That’s a risk, but going back to the mid-1990s is neither politically feasible nor economically smart (that’s when we started brewing up the global debt bubble that is now just about ready to pop, again).
I’ve always thought, à la Raghuram Rajan at University of Chicago’s Booth School, that we probably need a bit less globalisation in order to save what is best about our global world. I have just finished my next book, Homecoming: The Path to Prosperity in a Post-Global World, (Crown, October 2022), which will outline what a better world might look like, and provide some examples of businesses that are thriving within it. I’d argue that a more regionalised world makes a lot of sense at a time when energy costs are high (and will probably remain so as we transition to a green economy), complex supply chains are vulnerable, and China has become both a producing and consuming nation with its own economic orbit.
None of this is to say that globalisation is going away. As our colleague Gillian Tett has smartly argued, deglobalisation could well turn into re-globalisation in which countries aside from the US simply orientate themselves towards each other in new ways. But I think that the massive geographic disruption from the pandemic, which has pushed money off the coasts of the US and into the hinterlands, combined with new decentralised technologies such as 3D printing and all sorts of virtual working arrangements, will result in a re-mooring of wealth and place that starts to bridge some of the gap between economic globalisation and national politics. This will be a slow, but welcome process — and a positive note on which to end my first newsletter of 2022.
I found this Peter Hessler feature in The New Yorker about how wealthy Chinese are struggling to adapt to success wonderfully melancholic.
My husband gave me a copy of this book on Wasps (not the insects, but the traditional American aristocracy) over Christmas, part of his continuing effort to help me understand his people. It was fun but sad. High hopes, doused in too much gin.
Edward Luce responds
Rana, I’ll also be fascinated to see whether inflation eases because of supply chain improvements or the Fed has to tighten quicker than it wants. Obviously the first would be infinitely preferable. Given the generally poor recent forecasting record, I’m not sure who to trust on this subject. Paul Krugman this week admitted he had been wrong, which was refreshing.
Since you’ve asked for what I’m watching, here are three things:
1. Will Putin invade Ukraine? This is a far more live geopolitical trip wire than Taiwan given Xi Jinping’s inward focus in a year where he plans to renew his presidency. Should Putin call the west’s bluff, we would face the greatest challenge to our credibility since the end of the Cold War. It would be a very dangerous moment.
2. Will the Department of Justice prosecute Donald Trump? Conventional wisdom says no given Merrick Garland’s innate institutionalism. I am agnostic. The evidence against Trump keeps gaining ballast.
3. Will Covid become endemic? In the answer to this lies the key to the health of the global economic recovery, Democrats’ midterm election fortunes, the recovery of emerging markets and our ability to provide global public goods. As I’ve argued repeatedly, the best thing Biden could do for America’s standing and his own domestic fortunes is step up far more aggressively with global vaccine supply. I remain puzzled and despondent at his lack of urgency on this. Scientists say a new post-Omicron variant is likely unless we take urgent action to vaccinate Africa and other laggards now. Perhaps in 2022 the west will finally grasp this nettle.
And now a word from our Swampians ..
In response to ‘Why Americans are switched off from January 6’:
“I enjoyed reading your article on our democracy. I don’t believe that I have ever responded to an article before but this one got me thinking a bit more than usual, specifically the second paragraph regarding our apathy on the matter. I wonder if the answer is that it feels like the democracy was lost some time ago to special interests and that it does not feel that there is that much more that can be taken away. If by democracy you mean my participation every two, four, six years when I get to choose between a Democrat and Republican candidate, neither of which are ever very palatable, then I’m not sure that’s much of a loss. I realise given some of the living conditions around the world, that is a gross overstatement but I’ve watched things like the Organic food label get corrupted by lobbyists for the agriculture industry, Monsanto sue and win cases against farmers over seeds that migrated unwittingly into their fields, the coal industry sue detractors into silence by outspending them, critical race theory quietly forced into classrooms, pharmaceutical companies that fight legislation against price negotiations that other countries enjoy, PACs that the average citizen can’t possibly hope to compete with, influence by Black Lives Matter, Antifa, Proud Boys, QAnon, George Soros, the Koch brothers, Citizens United, and I wonder, what democracy are you referring to? Feels like that ship has sailed long before January 6. If anything, you could almost argue that January 6 was as much the result brought on by the actions of the aforementioned list of players as it was Donald Trump and his deranged supporters.
I have my own business. Most of my time seems evenly split between running the business or dealing with expensive software issues via IT experts, or hours online, negotiating labyrinthian tech support menus. Then there is the never ending arguments with banks whose algorithms place inexplicable holds on my deposits for no clear reasons other than that they are allowed to do so, by law. None of these issues are ever presented at the ballot box or addressed during the debates but they are problems that I and many of my contemporaries have to contend with daily. So, after dealing with that for 10 to 12 hours a day, I’m supposed to care about what Trump and his insane clown posse did? I see more threats to democracy brought on by elitist ideologues in the EU wanting to throw open their borders to anyone as long as they aren’t of European origin, despite the obvious reservations of their citizens. It’s the same thing here in the US at our border. A few elitist ideologues that will never have to face the consequences of their actions, have way more control over this democracy than I do, in fact, if you voice an opposition to this, you are pilloried by the woke so again, what democracy is left for me to give up?
I think the actions by Trump and his ilk are despicable and I hope they all end up in jail but I see much more to be concerned with that is done within the law than by some idiot with a bison hat or dragging a podium away. I also find it difficult to believe that I am the only one that feels this way . . . . I hope that I provided you with some insight or an alternate view.” — Frank Hyatt