EconVue Spotlight: Skating, On Thin Ice

January 2022

Jan 10, 2022

Dear Readers,

In just a few weeks, the Winter Olympics will be held in Beijing. Both Japan and China were unlucky in their timing; these Games without an audience must be bittersweet for participants as well. For me personally, they bring back memories.

In 1988, I attended the Calgary Olympics as a guest member of the China Central Television crew. Although it was the first time that CCTV had covered the Winter Games, ice skating dates back to the Song Dynasty, a Manchu custom. My mother was a competitive figure skater, and I was a teacher, so seeing the performances up close at the Olympics was thrilling.

The center of power: the Jiaqing emperor watches the ice skating performance by bannermen. Yingtai 瀛臺 Island in Zhongnanhai. 1802, Collection of the Palace Museum h/t Jaymin Kim

Thirty-four years later China will be the host, but skating around in circles might not be a bad metaphor for our times. This winter we find ourselves lacing up our skates, but falling often as we come to terms with Covid’s slow and uneven resolution. This is in spite of novel US economic policies to combat its effects for individuals and small businesses, enacted quickly and deployed liberally, in contrast to the Great Financial Crisis which focused on supporting big banks.

If things continue as they are now, additional targeted fiscal stimulus can be expected. Schools here in Chicago are closed once again. If food inflation and energy costs are the problem, is it more effective to raise interest rates, or offer direct assistance to lower income families? Just announced: heating subsidies. It is an election year, possibly the most consequential mid-term election in our history.

What will happen in 2022? January is the time for EconVue experts to share their forecasts, which you will find below. More will be posted soon on website. Some are optimistic and others not. One thing is certain: as the recovery takes hold and these experimental policies unwind, things could easily spin out of control.

Four specific issues concern me:

The most obvious, monetary policy which is linked to
Debt, which is linked to
China & supply chain realignment all of which is linked to
Emerging markets’ lagging recovery

If US interest rates rise too rapidly in response to inflation, the global economy might not be able to keep its balance. The taper tantrum of 2013 took place when global debt was far, far below what it is today. According to a paper by the World Bank, we can expect a fourth wave of an emerging market debt crisis. We simply do not have a good international mechanism for forging repayment agreements. Sooner or later, we need to consider a debt jubilee.

My forecast for 2022 is that we won’t get policy right and will see a very uneven recovery. We will overshoot, not just monetary policy, but geopolitically as well. Of special interest below given this week’s meetings in Geneva: Vladimir Putin himself on the historical unity of Russia and Ukraine. I hope you enjoy these other perspectives, and invite your comments.

Forecasts from Our Experts

Michael Lewis (U.S. macro economy)

2022 will be the beginning of the ends. The end of COVID-19 as a serious concern. The end of federal fiscal stimulus -- even if Biden gets (or Manchin allows) some "Build Back Better" programs, the near-term benefits will be relatively small accompanied by considerable higher taxes.

The end of the state largess as governors and mayors blow through their federal windfalls and end up in deeper holes. The end of monetary accommodation, though it will take years for this Fed to climb out of the deep negative real rates hole it has dug. This all leads to the beginning of sluggish real growth, likely below potential for years as inflation remains stubbornly high. Risks will be to the downside...

Evan Ellis (Latin America- political and economic environment)

In Latin America and the Caribbean, the biggest risk playing out in 2022 and beyond is the interaction between the economic and fiscal problems created by the Covid-19 pandemic, their impacts on sociopolitical instability, the associated unprecedented advance of the left across the region, and reinforcing effect of the ability of left and populist regimes to turn to China.

The region’s unprecedented turn to the left not only creates an environment unfriendly to investors, but raises the prospect of multiple loan defaults, and the possibility that political transitions and crises will become economic ones as well. Adjacent to the US, anti-business policies of the Andres Manuel Lopez Obrador regime, particularly in the petroleum and electricity sectors, combined with cartel violence and corruption and an increasingly radical foreign policy are complicating Mexico’s ability to realize the benefits of nearshoring and integration with the US and Canadian markets through USMCA. The leftist Peronist regime in Argentina is moving toward an IMF loan default.

The February 2022 elections in Costa Rica will determine how that otherwise well-governed country handles the implementation of difficult IMF commitments. The battle between the inexperienced leftist Castillo administration in Peru and a fractured Congress will likely deepen political instability there. The likely victory of millennial leftist Gabriel Boric in Chile could precipitate capital flight from the country once the anchor of political and economic stability in South America. Elections in Colombia in May, and Brazil in October are likely to similarly bring governments with strong left agendas to power in an area representing more than half the GDP of South America.

The expansion of PRC economic presence and influence will continue to play out at the expense of US, European and Western investors, not only in these governments, but also through diplomatic flips from Taiwan to the PRC. Nicaragua’s recent change will likely be followed by Honduras before the end of 2022, with Haiti, St. Lucia and others possibly at risk, leading to the rapid signing of multiple non-transparent MOUs which open up the economies to Chinese companies in port, transport, electricity, and other sectors.

Meanwhile, the Omnicron Covid-19 variant illustrates that mutations of the virus will continue to oblige the suppression of economic activity in the region, and elevated expenditures for vaccines, other medical, and socioeconomic needs that the region’s governments are ill prepared to meet.

Marsha Vande Berg (Transpacific linkages and governance)

Don’t Look Up is the name of a dystopian comedy now playing in movie theatres and streaming on Netflix. Except it’s not funny.

The thematic - featuring a star studded cast directs its pointed barbs at the heart of our government, our politics and society with a twin warning. To take democracy for granted and ignore the warnings of informed scientists on the subject of climate change is to take a path toward destruction of biblical proportion.

Comic relief brings the movie to its close when Meryl Streep’s President Orlean, an opportunistic politician with literally no redeeming quality, loses her pretty head. I was grateful it was over, but the plot has stayed with me.

So when Lyric Hughes Hale, the editor-in-chief of this venerable on-line publication for which I write, asked me to offer a few words about what worries me in 2022, I decided Don’t Look Up sums up a lot of what’s on my mind as I head into the New Year. Trumpism’s Big Lie is testing the institutions of our government and the values that are at the heart of our democracy. It is further exacerbating our deep social divisions. Demagoguery undercuts democracy.

And the thinly-veiled indifference to climate change on the part of many of our politicians and in the darker corners of big business continues to favor power and profits over the public good.

The solution? Insist on transparency and truth in government. Understand there will be power plays but insist those wielding the power understand why they are elected – as representatives of the people. – and act accordingly.

Expect leadership in the White House that is willing and able to exercise the levers of authority to make wise, compassionate and difficult choices – including about the environment. And push investors to tie their investments to sustainability with a long view that expects business, government and society to look up for real and realize what’s going on.

Richard Katz (Japan economy)

Most viruses evolve to become more contagious but less lethal. That enables them to reproduce themselves more than previous strains. Viruses that kill their victims—or send them into isolation—too quickly find it harder to spread. Hopefully, omicron will represent that tendency for COVID, assuming that past is prologue. But, if not, the odds are that eventually some other strain is likely to do so.

Links

Skating

First Edition: 1772

A Treatise on Skating; founded on certain principles deduced from many years experience: by which that noble exercise is now reduced to an art.

The first known book about figure skating, by R. Jones.

Global

July 12, 2021/President of Russia

On the Historical Unity of Russians and Ukrainians“
Vladimir Putin

If you want to know what is going to happen in Ukraine, read what Putin says.

December 2021/Asia Society

Supply Chains: A Shifting Indo-Pacific

An important shift is underway in the global economy: the relocation, diversification, and reshoring of supply chains to various destinations. Nowhere is this more visible than the Indo-Pacific region.

December 27, 2021/Tridge

2021 End of Year Report - Changes in Markets and Climate
The agricultural industry in 2021: notable exports, demand, and price trends, outperformance of Norwegian seafood, increasing demand for Vietnamese durians, and high Malaysian palm oil prices, trade issues including the effects of the US-EU import tariff suspension, and adverse weather that affected the industry such as the frost in Brazil.

U.S.

January 1, 2022/Substack

Why price controls are a bad tool for fighting inflation
Noah Smith

They have their uses, but this isn't one of them.

July 23. 2021/Project Syndicate

Dismal Economics
James K. Galbraith

December 21, 2021/Axios

U.S. population growth falls to record low
Oriana Gonzalez

October 5, 2021/Nature

The effects of remote work on collaboration among information workers

Our results show that firm-wide remote work caused the collaboration network of workers to become more static and siloed, with fewer bridges between disparate parts.

December 4, 2021/Smithsonian Magazine

The Horse Flu Epidemic That Brought 19th-Century America to a Stop

An equine influenza in 1872 laid bare how essential horses were to the economy.

December 21, 2021/the Hill

Life expectancy fell almost 2 years in 2020: CDC

Life expectancy in the U.S. dropped by almost two years last year amid the COVID-19 pandemic, representing the biggest single-year decline in more than 75 years, according to finalized statistics from the Centers for Disease Control and Prevention.

China

February 1, 2021/Manufacturing Leadership Council

Leaving China? It’s Not That Easy

Trade tensions and the global pandemic’s effect on supply chains have compelled manufacturers to rethink their strategies in China. But pulling up stakes in China is far from simple and may not be in a manufacturer’s long-term interest.