When the Covid crisis hit the market fell like a rock. The big daddy Federal Reserve stepped in and flooded the economy with money. Congress and two successive presidents helped out with “stimulus” money. Supply of virtually everything fell as the world locked down. Demand took two paths. People with jobs online and money in the bank kept spending on what they could buy and have delivered. People who lost their jobs and received government help bought as well but mostly that was food and other essentials. Excess money drove the market higher as Facebook, Amazon, Alphabet, and Microsoft soared. Today supply issues and markets are taking a different course and the Fed is backing off and raising interest rates. And the market is falling. What is the solution? How will this work out as the Russian invasion continues and China keeps locking down its cities?
Supply Side Inflation and Slower Growth
Speaking on Bloomberg TV, David Malpass, the president of the World Bank said that the primary force behind worldwide inflation is supply-related. US car makers are not able to keep production lines running at full tilt despite demand for cars because of shortage of computer chips. Malpass focused on oil, natural gas, food, and fertilizers. The World Bank website says that the risk of stagflation is considerable. They have reduced their forecast for global growth from 4.1% which was their January prediction to 2.9%. They believe that growth will be slowed for several years rather than a year or two as previously believed. In the immediate term they believe that dealing with the war in Ukraine and its fallout is paramount. These side effects are largely what are driving up prices and threatening unrest throughout Africa, the Middle East, and South Asia.
The USA and EU were already worried about excessive reliance on China and Russia for strategic minerals and things necessary to modern society like lithium batteries. As such there already were the first steps toward reshoring critical industries. Then Covid lockdowns virtually everywhere showed the folly in depending on unstable and unfriendly societies on the other side of the earth for critical supplies, especially when related to national defense. Then Russia invaded its smaller neighbor with intentions of reestablishing USSR-era hegemony. Sanctions are hurting Russia but everyone else as well. Countries across the world have put curbs on exports of food, fertilizer, and anything that they see as critical. This protectionism may well outlast the Ukraine war and Chinese lockdowns.
Relationship of Efficient Markets, Security and Prosperity
In an ideal world markets are totally efficient. Goods are produced where it is most cost-effective and efficient and where the best products can be made. Then one adds in expansionist aims of countries like China and Russia. Although cheap labor has made manufacturing in China desirable for many companies like Apple, the result is money pouring into China for development and expansion of their military and less investment in the USA and Europe. Over decades the US and EU have lost the sort of skill sets that made them industrial powers. These skills are at the level of the factory floor and allow for cost-efficient production of the best products. Now to a large degree the US and EU are relying on skills first taught by US and EU companies to Chinese workers and then honed by Japanese management and enhanced by equipment from Germany. In the name of national security and prosperity we can expect to see a decline in global markets and increased protectionism. The global GDP will likely fall and markets will follow.
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