A very insightful article that deserves a wider audience. Originally posted Thursday January 5.
From NZZ's TheMarket.ch, December 20:
A series of negative supply shocks could mean that inflation rates will settle at a higher plateau. Stronger inflationary tendencies in turn could lead to interest rates remaining «higher for longer» than markets currently seem to expect.
Is inflation decelerating? Is it going to decelerate enough? Will central banks in advanced market economies, above all the Federal Reserve, soon be able to moderate further tightening and eventually «pivot» towards easing?
These questions are being asked all around the world, with divergent answers generally reflecting opposing views about how quickly recent supply shocks will dissipate (reducing inflation) and fears of a wage-price spiral (raising inflation).
Sadly, this debate has largely ignored the growing likelihood of a number of future, negative supply shocks that will mark a global transition from an «Era of Plenty» to an «Era of Shortages». These shocks will raise prices, reinforce the need for tighter monetary policy, and put greater strains on already strained finances, both private and sovereign.
Negative supply shocks keep upward pressure on inflation
First, the covid related recession in most countries was severe, albeit short lived. Severe downturns always leave scars, and this setback seems particularly likely to do so. Companies must restructure supply lines, reducing «efficiency» while improving «resilience», with China’s zero-covid policy posing an additional challenge. In most countries, the supply of workers has been hit by deaths, long covid and other pandemic-linked problems.
Second, secular forces were increasing commodity prices already before Russia's invasion of Ukraine – and these forces will persist. A still rising global population is putting food security at risk. The production of fossil fuels and metals will suffer from recently low investment levels and the previous exploitation of promising production sites. In addition, higher prices for fossil fuels seem unlikely to lead to more investment, while a newly discovered mine site can precede production by a decade.
Third, climate change will push up costs in at least three ways. Mitigation implies «stranding» existing reserves of fossil fuels. If the supply of renewable energy is inadequate to meet still rising demand, then energy prices must rise. Adaptation will involve stricter building standards and many other costs. Finally, climate change will reduce the future supply of food and other reproducible commodities, could render significant parts of the world unsuitable for production, and is already causing heavy damage from extreme weather.
Fourth, the global supply of workers is in sharp decline, pushing up wage costs everywhere. While some countries can partially offset this through immigration, this will initially put still more pressure on overstretched infrastructure, the housing stock and health care systems.
Fifth, the full costs of misallocated capital, generated by years of easy monetary policies, remain unseen. Zombie companies, whose interest payments exceed profits, and companies who subsidize prices to gain market share, have proliferated in recent years. Should financing conditions tighten and these companies disappear, prices will rise directly. Further, recent trends to greater corporate concentration in some countries will make it easier for surviving companies to maintain or even increase profit margins.
Sixth, geopolitical tensions affecting global supply chains are rising sharply. This threatens higher prices in the short term and will slow the pace of future technological progress.
Interest rates: higher for longer?....
....MUCH MORE
On June 26, 2007 (i.e. pre-"Quant-quake", pre-Bear Stearns, pre-ought-eight-near-catastrohe) we posted a short little piece:
"(Off-topic) Banks' banker warns of downturn":
THE risk of a 1930s-style economic slump has been heightened by "euphoric" markets tapping cheap global credit, one of the world's pre-eminent financial institutions has said.In its annual report, the Bank for International Settlements noted that the conditions that led to the Great Depression of the 1930s and the Asian crises in the 1990s reflected the current environment.From The Age ....
And June 2008
BIS: Don't Worry, Inflation Not a Problem Because Global Economy Will Crash
We were thus mentally primed for Albert Ewards:
On September 5, 2008 we posted "Meltdown"-Société Générale" which linked to Albert's research note of a couple days earlier:
A good call.
On September 7, 2008 Fannie Mae and Freddie Mac were placed into conservatorship.
On September 14, 2008 Merrill Lynch agreed to be acquired by Bank of America to avoid a Reg. T shut-down when markets re-opened.
On September 15 Lehman filed their bankruptcy petition.
On September 16 AIG became a 79.9% subsidiary of the U.S. Treasury.
Within 10 more days the Nation's largest thrift, WaMu was seized and five days later Wachovia gobbled up.
Good times, good times.
