War And Inflation

There’s been a bit of a buzz around Zoltan Pozsar’s latest long analytical piece, War and Inflation. Pozsar is global head of short-term interest rate strategy at Credit Suisse, so financial types tend to take his missives seriously. The preferred narrative is that we’re at about peak inflation and will be getting back to the good times of low inflation soon. Pozsar suggests that may not be the case. I’m interested in this piece—it’s very long, so I’m excerpting it—for what it tells us about our rulers and about their view of the world. And us, their subjects.

Pozsar’s basic perspective seems to be that the low inflation regime and the financialized economy—which, I suppose, can be traced to its origin in the Reagan policies—were good times. He regrets their passing and points his finger at the people he thinks are to blame. I’ll paste in the excerpts and offer a few comments. I’m partly interested, as well, for what light it can shed on Tom Luongo’s narrative.

Here we go.

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War is inflationary.

Wars come in many different shapes and forms. There are hot wars, cold wars, and what Pippa Malmgren calls hot wars in cold places – cyberspace, space, and deep underwater. We would also add to the list of cold places “corridors of power” in Washington, Beijing, and Moscow, where great powers are waging hot wars involving the flow of technologies, goods, and commodities – hot economic wars – which have been major contributors to inflation recently.

Note that Pozsar locates the directing source of the warfare in the political capitals of the world. None of them are located in Europe, which is curious in some ways.

Inflation did not start with the hot war in Ukraine but the war did fan the inflationary currents that had been under way already: understanding today’s inflation as the result of an escalating economic war and a lingering pandemic is important, for if war and zero-Covid policies stay, the view that inflation is mostly cyclical, driven by excessive stimulus, is wrong.

After visiting over 150 clients in eight European capitals over six weeks, my impression is that the expected path of Western policy rates rests on two hopes:

• first, that inflation is about to peak;

• second, that we are near peak hawkishness.

Obviously, if the first view is right, the second view is right too. But the risk with the first view is that it assumes a stable world with no geopolitical risk premia where demand management is more powerful than issues related to supply, when in fact we live in an unstable world where geopolitical risk premia are rising and where supply-side issues are more powerful than demand management.

It follows that if the first view is wrong (inflation is driven by the economic war, not stimulus), the second view is wrong too (we are not at peak hawkishness).

The aim of today’s dispatch is to highlight risks to the peak hawkishness view.

With that introduction, Pozsar shifts to a description of the low inflation we’ve been living in since, say, the end of the Cold War.

Thus, with slight exaggeration, the low inflation world stood on three pillars:

• first, cheap immigrant labor keeping service sector wages stagnant in the U.S.;

• second, cheap goods from China raising living standards amid stagnant wages;

• third, cheap Russian gas powering German industry and the EU more broadly.

U.S. consumers were soaking up all the cheap stuff the world had to offer:

• the asset rich, benefiting from decades of QE, bought high-end stuff from Europe produced using cheap Russian gas, and

• [—>The Middle Is Missing!]

• lower-income households bought all the cheap stuff coming from China.

All this has worked for decades, until nativism, protectionism, and geopolitics destabilized the low inflation world.

OK, the rich got richer, the lower income got cheap stuff from China. What happened to the Middle? They were pushed into the lower income category, in effect. Those who were more or less established mostly felt they were doing “allright”, but the Middle has been squeezed as the good middle class jobs were progressively exported. That’s what Pozsar calls the system “working”. He and his clients were doing well and the lower classes weren’t restive. The Middle was more or less oblivious—vague unrest for the future of the few children they had, but not sure of the cause or what to do. Saving didn’t seem worth it in the low interest rate environment, yet the periodic bursting bubbles brought on by the financialization of the economy made investing somewhat precarious.

So let’s look at what killed the goose laying those golden eggs—for the rich:

NATIVISM:

President Trump’s immigration policies to appease nativists has cost the U.S. two million jobs, which is driving the current labor shortages and wage pressures. Covid-19 changed labor markets further: early retirements and other changes have exacerbated the labor shortages and increased wage pressures further.

Orange Man Bad. He appeased “nativists” and the low income types got the idea that their salaries could go up. Solution? Open the borders again.

Note the use of the pejorative “nativism.” Pozsar doesn’t seem to think that the masses should love their cultures and the countries they inhabit. That’s not the value of his class.

PROTECTIONISM:

President Trump’s hardline approach to China became a bipartisan stance that drove the imposition of protectionist tariffs on China, and what started as a trade war became a technology war: the U.S.went from tariffs on cheap goods, to banning ASML from selling state-of-the-art lithography machines to China to ensure the balance of technological power remains in U.S. hands.

Not a word here about the hollowing out of the US economy and the loss of Middle Class employment. That isn’t a concern to the ruling class—only to nativists who also gravitate toward protectionism. Protecting their jobs but also protecting their culture and way of life, such as it remains after the ravages of secularism over the last century or two.

Then again, why would we expect the Chinese to be content to remain the sweat shop to the world? That would never be a stable situation, and Trump was correct to see that our own future as a nation was being undercut for the benefit of the people getting rich off that arrangement—and that wasn’t you and me.

GEOPOLITICS:

President Putin’s efforts to make Europe dependent on cheap Russian gas–in order to tip the balance of economic power in Europe away from the U.S.–were frustrated by the U.S. sanctioning Nord Stream 2 last November, and President Putin’s frustration with the shifting balance of military power in Europe (NATO) then spilled over into a hot war in Ukraine on February 24th, which supercharged the economic war. Both sides went “nuclear” quickly, economically: the U.S. weaponized the U.S.dollar, and then Russia weaponized commodities.

What am I missing? I thought that Europe’s dependency on Russian energy was a result of Europe lacking alternatives. Putin didn’t need to do a thing, and Europe was pretty happy with cheap energy from Russia. The notion that Russia was selling energy via pipelines as opposed to the wildly more expensive alternatives was nothing but a power play seems tendentious. Russians and Russia need to make a living, too, don’t they? Are they supposed to accept a subjugated status as a mere supplier of resources to the West, and not attempt to develop their own economy? It’s not as if the US needs to ship LNG to Europe to keep our economy afloat. It’s to keep Europe under our thumb.

To Pozsar’s credit he recognizes that the shifting balance of military power wasn’t Russia’s doing. On the other hand, the notion that Western sanctions designed to bring Russia to its knees by denying Russia a market for its commodity exports equates to Russia weaponizing commodities is … puzzling.

Welcome to the war economy, where heads of state matter more than heads of central banks.

Wait a minute. Heads of state? I’ll accept that Putin and Xi matter. Certainly Trump mattered—that’s why he had to go. But Zhou, or Obama? No, I don’t think they were or are running the show—not in the big scheme of things. Soros’ role in funding the Left in the US tells you something about who rules America. Who was the last British PM who was really in charge? Thatcher? The whole Brexit charade tells you that the PMs weren’t really the people in charge. On the continent (and in Canada) it’s the WEF that seems to install governments, for the most part. And that suggests that the economic war Pozsar speaks of is a war of the financial elites. Listen to his lament:

Our jobs used to be simple. Central banks became the epitome of transparency, and with slight exaggeration, the only skill we needed to get by in markets was the ability to read and comprehend English: central bankers have been saying for over a decade that their aim was to fight deflation by inflating asset-prices, and all we had to do was borrow at low rates and buy assets irrespective of quality.

Now our jobs are becoming more difficult.

Yeah, that’s a perfect description of the financialized economy. The rentier class getting richer, not because they’re smart but because they’re the insiders. Those are the people who control our politicians, who buy and sell them.

Next Pozsar explains why he thinks inflation—and interest rates—will remain high. And in doing so he also explains that the globalized economy was, in fact, a type of Neo-colonialism. The war against Russia—and China, and any other country that isn’t on our side, that doesn’t follow the rules we set—is a war to force the rest of the world to remain economically subjugated to the West. Meaning, the US and the WEF. That’s colonialism.

Central banks’ policy objectives are changing …

Central banks went from waging a war against deflationary impulses coming from the globalization of cheap resources (labor, goods, and commodities), to “cleaning up” the inflationary impulses coming from a complex economic war.

Think of the economic war between the U.S., China, and Russia as something that will weaken the pillars of the globalized, low inflation world described above – the process will be slow, not sudden, but it will be certain, where ongoing economic “tits” for “tats” will have the potential to drive more and more inflation.

Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West until East-West relations soured, and supply snapped back.

And whose fault was that? The Russians and the Chinese (and the Indians, and the …) aren’t stupid. They were never going to accept subjugation indefinitely. Again, Pozsar states it bluntly, even brutally:

By extension, Russia and China have been the main “guarantors of macro peace”, providing all the cheap stuff that was the source of deflation fears in the West, which, in turn, gave central banks the license for years of money printing (QE).

Russia and China “kept the peace” by accepting subjugation to the West—providing us with cheap stuff. That masked inflationary QE, which went to making the rich—the rentier class—richer. The war on Russia is a war to keep the rich rich.

…central banks are done with fighting deflation with asset price inflation, and are now fighting inflation with asset price deflation. Central banks are adapting to a world that’s gone from having too much stuff and not enough demand, to a world that has not enough stuff and too much demand.

Today’s inflation… …is more about supply and less about demand, and… …is more about geopolitics than (domestic) politics.

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... East and West are engaged in unrestricted economic warfare to tip and to maintain, respectively, the global balance of power in three domains: the military domain; the technology domain; and, lastly, the production domain, which links commodity producers, production facilities, and shipping companies in the East to consumers in the West through a complex web of supply chains.

If we’re right that the economic war is the right context to understand inflation, then Western central banks will not have any good options to slay inflation. ...

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Getting right where inflation goes from here is basically a matter of perspective: do you see inflation as cyclical (a messy re-opening after Covid, exacerbated by excessive stimulus) or structural (a messy transition to a multipolar world order, where two great powers are challenging the might and hegemony of the U.S.).

If the former, inflation has peaked. If the latter, inflation has barely started, and could actually be understood as an outright instrument of war, for as Lenin said, “the best way to destabilize the capitalist system [is] to debauch the currency”.

Luongo’s angle, as I understand it, is that the big New York commercial banks see this economic war as ultimately inimical to their interests, because if “Davos” wins that will mean that Davos will take over those banks. So, the West is not united. We hope. Luongo offered an interesting anecdote the other day. He said that JPMorgan and one other NY bank were the only US banks with reserves of rubles and yuan, and that JPMorgan had used that to, in some way that I can’t explain, put the screws to another major bank (NYMellon?).