View From The Couch - 07/Aug/2022

Six Problems Over Which To Lose Sleep 

As the war drags on in Ukraine, we're starting to see all kinds of problems poking their heads over the horizon. These problems were latent problems of the world, but thanks to the war, they have become blatant problems of the world. 

No.1 with a bullet for the Europeans is what they're going to do for heating in winter. Too many European countries are dependent on natural gas from Russia. This used to be a vague hypothetical problem, but this northern winter, it's going to be very real, front and centre. There are no easy answers for this because it's not like there are substitute sources, and it's not like there's an alternative fuel to replace it. 

No.2 is the grain export problem. Both Russia and Ukraine were major exporters of grains. Now those exports have been hampered by the war. The last time there were major issues with food in North Africa, it brought about the Arab Spring. That is to say, if you're a dictator in North Africa and your country is dependent on imported grains for food, then this is not a good situation at al. 

No.3 on the list is fertilisers. Russia is the biggest exporter of potash and now that's off the market. Agricultural inputs are pretty unforgiving so growers the world over will make changes to what they plant next year which means globally speaking, we might not have enough food sometime soon. China would be in the shit if that happens because, they are major food importers. And as with the dictators sitting on a hungry population in No.2 above, Xi Jinping's China stands to be in trouble the most over this problem, when it has the problems of its own (more on that below at No.6). 

No.4 is crude oil. We've already seen the oil prices sky rocket and with it inflation. While the immediate peak has passed, oil is going to remain high because Russia was the largest exporter of crude just before the Ukraine invasion. now with sanctions, Russia theoretically can't sell their oil. In practical terms, they're probably keeping their pipelines open to North Korea, but if they stop the oil pipelines, that's it. The pipeline is dead. Meanwhile the world without oil can try and accelerate towards alternative fuel sources but are we geared towards accomplishing that? If we're relying on China to produce the cheap solar panels going into the future, we might be in for a rude shock. 

No.5 is the new model of war that America seems to be trialling in Ukraine. After spending 20 years fighting in Afghanistan, trying to bolster any kind of state there only to see it fall in a week, it is clear the Americans were leery of fighting anywhere to bolster any state. If you add in the chances of a nuclear war, America has had the best reason not to engage in direct fire with the Russians. That said, unlike the Afghans, the Ukrainians have fought hard to keep their state and sovereignty, which has given the world a window to operate. What the Americans have opted to do is give arms to the Ukrainians to fight their war, but have decidedly kept their troops out. This may work well for Ukraine and in the end if they do defeat Russia, it will have worked very well with America. Because success in this model means America will have a new way of managing their wars - they don't send troops and ships, they just send the weapons. It signals a retreat from Pax Americana. 

No.6 is China. China probably deserves an entry all of its own but it can be broken down into three components. The first is political. The concentration of power Xi Jinping has managed to accrue makes China a dictatorship with no checks or balances. China might make the unfortunate call to invade Taiwan and if they do, it would be because one person wanted it, and not necessarily the polity of China. The second is its management of Covid where it is still in the Zero Covid method that was more common before there was the vaccine. China is still doing these because their Sinovax doesn't work. The third component is the property bubble bursting. It's so bad there have been bank runs. China is not going to be the growth engine of the world economy as it has been for the last 30 years. It's probably not even going to stay as the underpants factory of the world. Globalisation is retreating and the combination of the above three component problems mean it is leaving from China the fastest. In this global context, the rise of Xi Jinping, unreformed-Maoist-Totalitarian, is most unfortunate.  

View From The Couch - 11/May/2022

The End of Globalism

Not so long ago - well it doesn't feel that long ago - Globalism seemed set as the way of the future. There would be more coming and going of goods and trade and ideas and education. Like it or lump it, we were all set to compete on a global stage and there was no escaping its tendrils as goods and services put together with global supply chains and global transportation made its way around the world. Globalisation looked like the kind of end point of history that say Francis Fukuyama might approve of; even allowing for these pockets of global players who didn't quite fit into the club of liberal democracies. You could argue Russia was coming along ever slowly towards seeing things the way the west sees them, and even China under the CCP seemed to prioritise making money over ideological purity thanks to Deng Xiao-Ping-ism.

Now in the wake of the Covid-19 pandemic, the bellicosity of Xi Jinping's China, and the Russian invasion of Ukraine, some things have come into very sharp focus. The first thing on the list is that China under Xi - so China since about 2012 - has been a really crappy participant in the global order. The second is that Russia has also been a crappy participant in the global order. And between the two of them, their contributions have lessened to the point of making the first world wonder whether there is any merit in extending the welcome mat to these countries. 

To be sure, China is a big market that seemingly promises future growth except for the gigantic property bubble that has just popped. Russia, for its part is  tremendous exporter of oil, gas, wheat and fertilisers - so much so that the sanctions to remove Russia from the global markets is in a sense flirting with mass starvation scenarios. 

It's kind of amazing things have come to this, but the last decade has been to put it mildly a shit show for globalism. It is no wonder it is in retreat. For a while there, globalism looked so locked in, the people protesting against it in the late 1990s looked like ideological crazies. Now, globalisation is forced to being rolled back by the simple reality that you can't do business with countries with dictators like China and Russia. It may profit you in the short to mid term but in the long run, they're sure to screw you over. In that sense, there's not much daylight between Saddam Hussein and Vladimir Putin or Xi Jinping. 

The End of Deflationary Pressures

For some time we've been in this weird loop since the end of the Global Financial Crisis around March 2009. Governments have spent lots of stimulus money in the hopes of stoking inflation but all these quantitative easing and printing money did not lead to the kind of inflation they taught in schools. Part of the reason is that as the world went global, so did the money, so all the money printed by the US Fed or the RBA seemed to just flow out into the wider world and did not come back as inflation.

It's a complicated area but the bottom line is that even faster than the US was printing money, China had been exporting deflation to the world through its cheap labor. I think I've covered this phenomenon somewhere in the past so I'll skip going into it here. Suffice to say China's labor costs have been going up over the last decade, and so there probably has been less deflationary pressures that China was exporting, leading up to the Covid-19 pandemic. If the last 30 years of gentle economic growth for the first world was founded on Chinese manufacturing being so cheap and easy, that context is coming to a rapid end. 

Worse still China is the most indebted nation in history both in absolute terms as well as per capita, and for political reasons of the CCP needing to stay in power - or perhaps it's just Xi who needs to stay in power - they have blown up their property bubble. We have no idea how this is going to play out in global markets. Judging from the ructions of April and May, global markets do not like what is going down in China. Markets might approve and accept the US Federal Reserve raising interest rates, but it does not like the figures coming out of China. The supply chain issue that we have come to understand isn't just about the fact that China is in lockdown across its most productive cities. It's the fact that China itself has become this gigantic counter-party risk in the last few months. 

Some of the manufacturing the Chinese had been handed by foreign corporations is now being on-shored back to those very foreign shores. The reason we're seeing such stubborn inflation in the first world is simply because the deflationary pressure China brought to the world economy has been cut out of the loop. This means we can expect inflation to keep rising, and for interest rates to keep rising until those inflationary pressures are tamed. In turn this means we will be having that recession we had to have back in 2008-2009 that we didn't quite get because China took on the greatest debt in history to keep the punch bowl swirling. All of that, on top is about to get unwound out of China. 

Brace yourselves. This ride is going to be a bit rough.

Can Global Capitalism Even Be Fixed?

I'm sure people will make every effort to revive it, but right now, the forces are arrayed against it.