Economies off the rails

In spring 2020, as the covid pandemic began to ravage the world, country after country, consumers were the ones panic-buying but now a year later, it is companies furiously trying to stock up, which is materializing in all kinds of scarcity. Numerous basic industrial materials are under severe overdemand like aluminum, copper, iron ore, steel, semiconductors, lumber, plastics and cardboard as well as corn, coffee, wheat and soybeans.

Supply – demand imbalances

The panic is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will speed up inflation. The dearth of semiconductors has already spread from the automotive sector to Asia’s highly complex supply chains for smartphones. During the pandemic, consumers rushed to online purchases (e-commerce), raising demand for e-Pack boxes and other shipping materials by hundreds of percent.

Crude oil is also on the rise, as are the prices of industrial materials from plastics to rubber and chemicals. Some of the increases are already making their ways to the store shelf. Food costs are climbing, too. A United Nations gauge of world food costs climbed for an 11th month in April, extending its gain to the highest in seven years. Prices are in their longest advance in more than a decade amid weather worries and a crop-buying spree in China that’s tightening supplies, threatening faster inflation. Earlier this month, the Bloomberg Commodity Spot Index touched the highest level since 2011.

Meanwhile, transportation – ships, trucks and trains – that move parts along a global production process and finished goods to market is also in high demand peak. Container vessels are running at full capacity, pushing ocean cargo rates to record highs and clogging up ports. Rail and trucking rates are elevated, too. Spot prices for truckload service are on track to rise 70% in the second quarter from a year earlier and supply-demand imbalances should keep rates high in the near future. This is stressing networks, creating bottlenecks in the supply chains and capacity constraints.

Many experts are describing the situation as a “Deepening Supply Chain Nightmare”. The difference between this crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight. Big or small, few businesses are spared.

Making things even worse, is an unusually long and growing list of calamities that have rocked commodities in recent months:

  • freak accident in the Suez Canal backed up global shipping in March
  • drought has wreaked havoc upon agricultural crops in many parts of the world, no less in the US
  • deep freeze and mass blackout wiped out energy and petrochemicals operations across the central US in February.
  • hackers brought down the largest fuel pipeline in the US driving retail gasoline prices peaking since 2014
  • India’s massive Covid-19 outbreak is threatening its biggest ports, similar situation in Brazil

Prices up – inflation

For anyone who thinks it is all going to end in a few months, it is worth to consider several US indicators and indexes (like Logistics Managers’ Index, US consumer index, price index of American producers and others), which indicates “all times highs” or exceptionally sharp monthly increases etc. A growing chorus of experts are warning that inflation is bound to quicken. The threat has been enough to send tremors through world capitals, central banks, factories and supermarkets. The US Federal Reserve is facing new questions about when it will hike rates to stave off inflation and the perceived political risk already threatens to upset President Joe Biden’s spending plans (numerous packages of trillion dollars spending).

Bringing all of these factors in, it seems an environment that is ripe for significant inflation, even hyperinflation. Policy makers, however, have laid out a number of reasons why they do not expect inflationary pressures to get out of hand. Fed Governor Lael Brainard said recently that officials should be “patient through the transitory surge.” One reason for the price rally is a US economy that is recovering unevenly and faster than many others. Most goods are flooding in from China, where government figures last week showed producer prices climbed by the most since 2017 in April, adding to evidence that cost pressures for that nation’s factories pose another risk if those are passed on to retailers and other customers abroad. Across the world’s manufacturing hub of East Asia, the blockages are especially acute.

The Federal Reserve’s primary concern is no more employment or inflation but rather keeping the market for Treasury securities functioning. The Fed (and US Treasury as well) has lost control on the American economy and there are left only two alternative ways “Inflation or depression” … or in the case of “Total Hell” combined inflation & depression (= stagflation).

“Demise” of money printers

What would happen to the financial system of the US, if the Fed stopped printing massive amounts of money for stimulus and debt service?  By preventing liquidity being put into the system, a financial implosion can be seen. The system needs new liquidity to function. Without that liquidity, you would see more of an economic implosion and stagnation.

The Fed has been creating money at a pace that has never been seen before (up 75% year over year, normally up 1% or 2% year over year).  The exploding money supply will lead to inflation sooner or later with certainty. While the official US inflation figure is about 4% at the moment, taking into account all the hidden and latent factors, prominent US economists have estimated the real US inflation to amount up to 11-12% and the trajectory is getting up, not down.

Moving the scope from the US to Europe, wide-range “aping” is going here, as usual. Europe’s boasted “Miracle Recovery” Narrative is illusory fluff and based on similar means than in the US: “We will just print our way to prosperity”.  Just like the Fed (and US Treasury) is printing massive amounts of new money, ECB (and EU Commission) is making the same mistake with adopted naïve trust that massive money printing without inflation could be possible. It is not.

As I have many times stated in relevant blogs, news and articles on this website, China and Russia have proceeded in different ways and have now come out of the pandemic in better condition than their Western competitors. China’s economic growth has returned to pre-covid growth level and Russia is also making clear growth without any extra sovereign debt.

Given the massive amount of federal debt (over $ 28 trillions), which is still skyrocketing, the US is estimated to face soon a hyperinflationary economic collapse, which event is scheduled to take place in early 2022. This event brings along worldwide economic consequences… and major ramifications in great power relations.

Some ideological repercussions

Since the end of the Cold War, the general Western hype of “free world final victory”, “end of history” and “the ascendancy of free market” have slowly faded and some “new” realities have emerged, especially after China’s entry onto the world scene. While the development of free market system and global free trade could be regarded as a sound intellectual victory for Western system, such trend has paradoxically weakened several countries in Europe and America.

The first side effect of economic globalism in the West has been the retreat of manufacturing industry from several developed economies like the US and UK, with durable unemployment issues as a result. Beyond social impacts, a manufacturing decline is structurally problematic as it affects the resilience and ability of a country to establish robust industrial clusters which are nationally capable to innovate relevant business branches in the long run.

The second side effect is the multiplication of structural imbalances in the global economy, with unsustainable surpluses and deficits everywhere. An economy displaying a growing trade deficit is getting poorer with respect to foreign economies, leading to a financial and/or social crisis in the end. Of course, current account deficits can be offset by financial inflows but as there is no free lunch in economics, that should not be seen as a long-term solution.

Last but not least, the rise of global trade and countries specialization has led to a global system full of frictions and vulnerabilities. Long supply chains and production chains, which may cover hundreds of parts, tens of companies and worldwide transportation, are obviously highly vulnerable to shocks (whatever their size). In other words, the more specialized countries are in terms of economic production, the more dependent on foreign production they become and the more vulnerable to distant events they will be.

The naïve trust on the omnipotence of “free global trade” and underrating the honest patriotism, which both have been propagated widely in the Western market economies, especially in Europe, in last twenty years, are now backfiring worldwide. The history of Europe is full of convincing examples how to proceed / not to proceed in avoiding the falls of empires. Just as an example, study the reasons in the demise of West Rome. You will find staggering confluences with the present time.