When we posted on Mr. Pozsar's piece on August 2 we only linked to the Bloomberg story rather than to the original source which is our usual style. Someone (ahem) screwed up. This was our Aug. 2 post:
Zoltan Pozsar Says L-Shaped Recession Is Needed to Conquer Inflation
So 2 1/2% rates and no movement on the Fed balance sheet isn't going to be enough to cut 9.1% inflation?
But for those folks (like ourselves) who prefer to get things without any filters, here is Credit Suisse, August 1, 2022:
War is inflationary.
Wars come in many different shapes and forms. There are hot wars, cold wars, and what Pippa Malmgren calls hot wars in cold places – cyberspace, space, and deep underwater (see here). We would also add to the list of cold places “corridors of power” in Washington, Beijing, and Moscow, where great powers are waging hot wars involving the flow of technologies, goods, and commodities – hot economic wars – which have been major contributors to inflation recently. Inflation did not start with the hot war in Ukraine...
...but the war did fan the inflationary currents that had been under way already: understanding today’s inflation as the result of an escalating economic war and a lingering pandemic is important, for if war and zero-Covid policies stay, the view that inflation is mostly cyclical, driven by excessive stimulus, is wrong.
After visiting over 150 clients in eight European capitals over six weeks, my impression is that the expected path of Western policy rates rests on two hopes: first, that inflation is about to peak; second, that we are near peak hawkishness.
Obviously, if the first view is right, the second view is right too. But the risk with the first view is that it assumes a stable world with no geopolitical risk premia where demand management is more powerful than issues related to supply, when in fact we live in an unstable world where geopolitical risk premia are rising and where supply-side issues are more powerful than demand management.
It follows that if the first view is wrong (inflation is driven by the economic war, not stimulus), the second view is wrong too (we are not at peak hawkishness). The aim of today’s dispatch is to highlight risks to the peak hawkishness view. We won’t be forecasting. We’ll be observing. And you’ll draw your conclusions.
Thus, with slight exaggeration, the low inflation world stood on three pillars: first, cheap immigrant labor keeping service sector wages stagnant in the U.S.; second, cheap goods from China raising living standards amid stagnant wages; third, cheap Russian gas powering German industry and the EU more broadly.
U.S. consumers were soaking up all the cheap stuff the world had to offer: the asset rich, benefiting from decades of QE, bought high-end stuff from Europe produced using cheap Russian gas, and lower-income households bought all the cheap stuff coming from China. All this has worked for decades, until nativism, protectionism, and geopolitics destabilized the low inflation world..
President Trump’s immigration policies to appease nativists has cost the U.S. two million jobs, which is driving the current labor shortages and wage pressures. Covid-19 changed labor markets further: early retirements and other changes have exacerbated the labor shortages and increased wage pressures further.
President Trump’s hardline approach to China became a bipartisan stance that drove the imposition of protectionist tariffs on China, and what started as a trade war became a technology war: the U.S. went from tariffs on cheap goods, to banning ASML from selling state-of-the-art lithography machines to China to ensure the balance of technological power remains in U.S. hands (see here).
President Xi’s zero-Covid policy continues to frustrate the flow of cheap goods, causing occasional cardiac arrests in global supply chains and backlogs at ports; trade and economic relations between the U.S. and China became inflationary, in contrast to previous decades when U.S.-China relations were deflationary...
President Putin’s efforts to make Europe dependent on cheap Russian gas – in order to tip the balance of economic power in Europe away from the U.S. – were frustrated by the U.S. sanctioning Nord Stream 2 last November, and President Putin’s frustration with the shifting balance of military power in Europe (NATO) then spilled over into a hot war in Ukraine on February 24th, which supercharged the economic war. Both sides went “nuclear” quickly, economically: the U.S. weaponized the U.S. dollar, and then Russia weaponized commodities. Welcome to the war economy...
...where heads of state matter more than heads of central banks....
....MUCH MORE
If compared with his August 24 piece which we re-read yesterday there is a distinct change in tone, he is not nearly as 'blamey' in the latter and actually seems as though he would agree with President Trump on not sending the most advanced chip making equipment to China.
On the immigration issue, in the first eighteen months of President Biden's first term more than 4.8 million immigrants have crossed the U.S. - Mexican border with no appreciable effect on labor bottlenecks.
There is a huge skills mismatch between what those 4.8 million people can do upon their crossing onto U.S. soil and what the U.S. economy requires that neither Zoltan nor the Business Insider piece he links to even mentions.
For the rest, the overriding point is the one that got me Re-reading Zoltan Pozsar's August 24th Missive, "War and Industrial Policy", wars are paid for one way or another, through debt, through taxes but most often, throughout history, through inflation.
