By Michael Every of Rabobank
Markets started 2024 as wildly optimistic –and wildly wrong– about rates as they did 2023: is there something structurally wrong with economics, or just them? After all, yesterday’s US retail sales were much stronger than expected, industrial production better than consensus, and while the Fed’s Beige Book said the labor market was cooling, with increased consumer “price sensitivity”, businesses expectations were positive and/or improved. In other words, doing nothing is a realistic option for the Fed. Moreover, UK inflation was stronger than expected, as Canadian core CPI had been earlier this week, and Australia’s Melbourne Institute survey today was an unchanged 4.5% y-o-y. On top, we got more central-bank speech saying “We aren’t cutting rates anytime soon.” And they aren’t. That said, Australia’s jobs data today collapsed -65.1K, having been +72.6K last month, with full-time jobs -106.6K, yet unemployment staying at 3.9% due to a plunging participation rate. The AUD didn’t like that much, and neither will the RBA. However, both this and last month’s job figures are mad in a population of 25m.
On economics, markets, and being structurally wrong, Davos just saw “anarcho-capitalist” Argentinian President Milei lambast its attendees for abandoning the “values of the West” – to warm applause. Moreover, JP Morgan CEO Dimon said, “I think this negative talk about MAGA is going to hurt Biden’s electoral campaign,” adding Trump, “was kinda right about NATO. Kinda right about immigration. He grew the economy quite well. Tax reform worked. … I don’t like how he said things about Mexico, but he wasn’t wrong about some of these critical issues, and that’s why they’re voting for him.” Both comments are worth noting regardless of whether one agrees or not.
Best way to listen to the Milei speech in English, rendered using HeyGen, in his own voice. pic.twitter.com/eYsSPLeukc
— David Sacks (@DavidSacks) January 18, 2024
Davos, and ECB President Lagarde, also mentioned Red Sea inflation risks. There, the US has redesignated the Houthis as global terrorists – with a 30-day notice period(!) and massive sanctions carve-outs. The Houthis, apparently as deft at comedy as at disrupting the global economy, released a statement saying the US move “would not affect their operations.” Indeed, they have since hit another ship, and may be shifting their mobile missile launchers to avoid airstrikes and target the Gulf of Aden as well as the Bab El-Mandeb. That makes the maritime area vulnerable to attack even further beyond the protective capabilities of Operation Prosperity Guardian. So what is to be done as the ‘US Empire’ crumbles and the global maritime trading system goes back to a 19th century world of piracy, national navies having to protect trade, and no Suez or Panama Canals? Davos is short of answers.
While doing my own thinking earlier, I came across an EconTalk interview with Bloomberg opinion writer Noah Smith titled ‘Can a Nation Plunder Its Way to Wealth?’ That this is a topic of debate again now says something about the ‘geopolitical’ times we live in! Smith’s simple answer is zero-sum empires and plunder don’t make you rich; innovation and higher productivity do. Yet the reality is sadly far more complicated.
Most of history with metallic money showed if you plundered foes of their metal, you got richer, and they got poorer: Rome did that; so did Spain in the Americas. In more recent history, with a gold standard, a favorable balance of trade supported by gunships helped the UK become global #1. True, evidence also says empires cost so much to run that they can hollow out the economy at the center. Yet, sadly, that is to say empire can be mismanaged, not that it can’t make you rich if operated alongside innovation and higher productivity. Panglossian ‘economics over guns’ theory is wrong in its internal logic – and so we retreat back to guns over economics.
Smith’s counterview that small countries like Singapore prove one can became rich without empire also overlooks that, the brilliance of Lee Kwan Yew aside, its foundation as an entrêpot trading centre was laid, by force, by the British as part of their empire. Likewise, his view that within that empire India never industrialised ‘because they relied on cheap labor, not capital’ obscures that the British *deindustrialised* it at gunpoint, making them buy textiles produced in England’s mill towns.
Let’s think about the Suez Canal for a moment in that light. Who built it? Why was it built? Who fought wars to control it? Also note the 1956 Suez Crisis showed the UK and France were no longer Great Powers with freedom to act geopolitically, only the US and USSR were. And recall Egypt shut the Canal from 5 June 1967 until 5 June 1975, following the Six Day War: correlation is not causation, but what happened to global inflation at that time, even when Asia wasn’t the world’s factory floor?
In some eyes, this relationship is still echoed today under a veneer of neoliberal global capitalism. Indeed, ‘Imperialist appropriation in the world economy: Drain from the global South through unequal exchange, 1990–2015’ argues: “Rich countries and monopolistic corporations leverage their geopolitical and commercial dominance in the world economy to depress or cheapen the prices of resources and labor in the Global South, both at the level of whole national economies as well as within global commodity chains.”
It’s hard to argue with that when the West insists that it must control the highest value-added and best-paid jobs in new green supply chains. That must imply those digging the lithium, nickel, cobalt, etc., are going to add little value and have few well-paid jobs – as is the case now in many other industry value-chains. This is by definition a zero-sum process, regardless of how we dress it up about in neoliberal economic theory. Worse, as we see around us, it can require the use of weapons, or Western-run institutions, to enforce. The above paper uses input-output tables to argue that structural under-pricing, as of 2015, already equated to a net appropriation of resources from the Global South by the North worth trillions of dollars a year. In short, it’s not just bad governance and corruption that holds the Global South back, but a North that leans on the scales while calling it neoliberal economics. (The only thing one could perhaps add is that the West tries to lean on its own workforce too, which makes things even worse!)
You’re wrong if you think that this is all an obscure debate with no link to Milei, Trump, conflict with China copying the past Western playbook back at it, or strains with the BRICS. If so, you aren’t seeing the bigger picture. We need to take a step back and see that what we are doing isn’t working. Things do need to change. Just not how some are proposing.
Indeed, in an age in which Harvard and other Western university literature, history, sociology, language, and even science curricula are being ‘decolonised’, economics is ironically immune; that’s despite the fact that if there is any discipline full of biased, illogical, western-centric, oppressor vs. oppressed, Cantillon elite self-enrichment, it’s not English Lit, but Econ 101. So, is there something structurally wrong with economics? Yes! There are the alternative Marxist, Austrian, or Post-Keynesian schools, yet none have platforms at universities: instead you will find the Marxists in every department but economics, and to the detriment of them all.
In case it isn’t clear, this isn’t to bash the West: I am describing a zero-sum truth to the global system that would be just as badly and unfairly run by anyone else, if not more so – as we may find out at some point in the future. Neither is to cheer Marx: he has no solutions, just good critiques of parts of capitalism. We need fresh ideas badly, not bad ideas dressed up freshly.
I get that markets focused myopically on large near-term rate cuts won’t want to get the above, and won’t be able to do much with it if they do: so, is there something wrong with markets? Yes! Yet, in short, rates may stay higher for longer; and we are heading for a wild ride in which the likes of Milei and Trump may just be our warm-up acts.