10 Dec Unpredictable

“Recent trends have no precedent. The world’s economies, governments and societies are in uncharted territory.” – The Lonely Realist

A recurring TLR theme has been that “These Times are Different” …, but not all that different. Although the world has been experiencing an historical cycle that finds no parallel in past cycles (that is, history most definitely is not repeating itself), there have been clear echoes from the past – recurrent economic, political and social themes that have “rhymed” with prior eras (borrowing from Mark Twain that “History never repeats itself, but it does often rhyme”). The 2008-09 subprime debt crisis indeed was a mild version of the 1929 Crash – the former triggered The Great Depression while the latter resulted in The Great Recession. The Great Political Divide of the past number of years has been a rerun of 1930s political and economic populism (which TLR first highlighted years ago in “1937,” “Are We Experiencing a 1937 Redux?” and “This Time is Different?”). Similarly, COVID-19 has drawn comparisons with the 1918 Spanish Flu pandemic and its aftermath. Although any number of additional “rhymes” between recent events and historical ones could be listed, the era of “rhyming” unfortunately has come to an end. The world has entered an entirely new, unpredictable, risk-filled period for which there are no precedents and with growing problems for which there are no ready solutions. Growth is slowing in America and throughout the world, inflation remains high everywhere, stock, bond and real estate markets are in flux, international trade is shrinking, globalization is unwinding, hot wars are mutating, geopolitical tensions are rising, there is a continuing clash of religions and civilizations, and the surging Dollar has added economic uncertainty to countries and currencies the world-over. With this never-before-experienced combination, volatility is on the rise … and, with it, instability.

Anyone pretending to be a predicter of future events therefore is either guessing or conning, more so today than ever before.

As a consequence, attempting to sort out the complexities and determine future direction is beyond challenging. How will the Ukraine War end? What will be the consequences? When will China invade Taiwan? (There can be no dispute that China indeed will invade Taiwan.) What will be America’s (and Europe’s and Japan’s) response? How will the rivalry for global supremacy, reserve currency control, trade and wealth between America and members of the Axis of the Sanctioned – China, Russia, North Korea, Iran, etc. – sort itself out? What is clear is that these struggles will include armed proxy conflicts (punctuated by the use of disruptive military technologies), cyberattacks, intellectual property theft, the risky deployment of artificial intelligence, and disinformation campaigns. Although there can be no clear winner(s) in today’s nuclear world, who will be the losers and how serious will be the losses? What effect will the rise of autocracies and the weakening of democracies have? Today, 70% of the world’s population lives in non-democratic countries. Over the past 2 years, 33 countries have veered towards authoritarianism and only 5 have moved towards democracy. How much will America’s influence continue to shrink? Will accelerating populism at home and abroad create further weakness and result in increasing violence? And what of the world’s already weak and weakening nations and their economies?

The economic foundations of the post-WWII American-led world order began to erode even before Russia’s 1998 debt default and Long Term Capital Management’s collapse. Challenges multiplied with the puncturing of the dot.com bubble in 2000, followed by 9/11 and the consequent political and economic fallout, the Iraq and Afghanistan Wars, the 2008-09 subprime mortgage crisis and resulting slow-growth decade, the widening gap between rich and poor, and the COVID pandemic, each of which led governments and central bankers to spend too much, distribute oodles of cash to taxpayers, accrue massive fiscal deficits, wantonly print money, and progressively lower interest rates in a new and unorthodox approach to economic mismanagement. Their goal was to artificially stimulate growth and goose weak demand. They succeeded …, in cooking the goose! The result today is excess demand, insufficient supply, ongoing supply shocks, persistent inflation, high interest rates, and slower growth. At the same time, worker supply is insufficient to meet labor demand, with America’s baby boomers retiring, legal immigration at multi-decade lows, and COVID continuing to take a toll on labor force participation that alone fuels weakening growth. With increasing labor costs and inflation and geopolitical tensions at their highest levels in decades, rising interest rates threaten to plunge the global economy into recession. This is not part of a normal business cycle. In fact, it is without historical precedent and explains why the Federal Reserve has been bumbling in its response. It is guessing on the path forward. It is not faced with simply fulfilling its dual mandate of controlling inflation and maximizing employment. Instead, the Fed must balance how to reduce persistent inflation without harming economic growth, destabilizing the economy or allowing unemployment to rise too far, an impossible task. Raising interest rates, which the Fed now must continue doing, will starve the economy of the cheap capital that has been the fuel of growth for the past 13 years – even if it was only mediocre growth. This at a time when the Federal government is running $2 trillion deficits!

The era of global peace, commonly-held social norms and weak demand is over. An era of supply shortages, instability and increasing social stress has dawned. Low-cost goods and services produced in low-cost regions and driven by globalization and tight-knit supply networks are a thing of the past. In its place are rising geopolitical tensions, a rising tide of social disruptions, uncertainly and unpredictability.

[Despite the difficulties, Cassandra, the seer of seers and prognosticator of prognosticators, has indicated that she soon will be providing TLR with her 2023 predictions.]

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Finally (from a good friend)