Sat. Jan 22nd, 2022


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Hello Swampians, and happy new year! It feels like 2022 should be better than last year, but given Ed’s note about the atmosphere in Washington, maybe I’m talking too soon.

I wanted to kick off my own first note of the new year by sharing the top three issues ahead that I am watching closely, and the questions I am looking to answer. I want to welcome readers, and of course you, Ed, to engage with your own thoughts or list for 2022 – it will help me focus my thinking and coverage over the next 12 months.

1. What happens when the Fed raises rates?

I have argued for years that low rates were benefit large corporations much more than average individuals. While some quantitative easing was needed after the subprime crisis, most of it was just drove up the price of stocks and houses and hinders useful price discovery in markets. The left is just as guilty here as the right-wing politicians. Indeed, I have pointed out in columns that the Federal Reserve has been artificially extending the business cycle for decades, thanks to goats that have crossed both sides of the aisle, kind of healthy thinning of unproductive loans and businesses that would normally have happened every few years.

The problem is that when the music stops, there will be pain. About two-thirds of the U.S. economy is consumer spending. But people’s spending patterns are not just based on their income. Our personal consumption is also linked to our expectation of wealth held in assets such as stocks and bonds. What is astonishing is how completely dependent U.S. fortunes have become on the inflation of those asset prices.

Financial analyst Luke Gromen has calculated that net capital gains plus taxable distributions from individual retirement accounts equate to 200 percent year-on-year growth in U.S. personal spending. As I wrote in 2020: “It does not necessarily mean that people withdraw money from their retirement accounts to buy hand sanitizer, bottled water and face masks.” But as Gromen put it, it does mean that the gross domestic product “cannot rise mathematically if asset prices fall”.

2. Are we getting a major market correction, and maybe even a recession, around the midterm elections?

And if so, what does it mean, especially if it looks like Republicans will win anyway? How should we think about inflation in the midst of a generation of economic shifts? I am fascinated by what the Bank for International Settlements calls the “bullwhip economy”, in which inflation dynamics moving worldwide in new and surprising ways. Judges and opinion pollsters tend to look at the effects of inflation in very short-term ways. And I do not want to put it off – surely higher petrol and food prices make a big difference in the monthly budgets of working people.

But the whole mandate of the Biden administration was to reward “work not wealth”. This means moving to an economy that better balances production and consumption, redistributes some prosperity, invests in public works and human capital, and encourages savings and equity above financed, debt-driven growth. All of this is inflationary in the short term. But in the longer term, it will be extremely deflationary to have a greater number of better trained workers, stronger infrastructure and more resilient supply chains.

How can the administration find a politically quick and easy way to communicate this to the public? How do we help Americans understand that the shift we need to make should be measured in years, not months or weeks? And how can we buffer the short-term effects of inflation for those most affected by it?

3. Are there benefits to disconnection? What does the post-neoliberal world look like?

We are constantly hearing about the dangers of globalization, and how we will end up in the 1930s if we are not careful. It’s a risk, but going back to the mid-1990s is not politically feasible or economically smart (it was then that we started expanding the global debt bubble that is now almost ready to reappear).

I’ve always thought, à la Raghuram Rajan at the University of Chicago’s Booth School, that we probably need a little less globalization to save what’s the best of our global world. I just finished my next book, Homecoming: The Road to Prosperity in a Post-Global World, (Crown, October 2022), which will outline what a better world might look like, and provide some examples of businesses thriving in it. I would argue that a more regionalized world makes a lot of sense at a time when energy costs are high (and likely will remain so if we move to a green economy), complex supply chains are vulnerable, and China has both a producing and consuming nation with its own economic orbit.

None of this is to say that globalization is disappearing. As our colleague Gillian Tett has smart reasoning, deglobalization could very well turn into re-globalization in which countries apart from the US simply orient themselves towards each other in new ways. But I think the massive geographical disruption of the pandemic, which has pushed money off the coast of the US and inland, combined with new decentralized technologies such as 3D printing and all sorts of virtual work arrangements, will lead to a re-mooring of wealth and place beginning to bridge the gap between economic globalization and national politics. It will be a slow but welcome process – and a positive note to conclude my first 2022 newsletter.

  • In my column, I look at what is real, and what is being lifted, about Web3. In this piece, Tim O’Reilly, who helped make the term Web 2.0 popular, does the same.

  • I found this Peter Hessler feature in The New Yorker on how rich Chinese struggle to adapt to success wonderfully melancholy.

  • My husband gave me a copy of this book on Wasps (not the insects, but the traditional American aristocracy) over Christmas, part of his ongoing effort to help me understand his people. It was fun but sad. High hope, immersed in too much gin.

Edward Luce responds

Rana, I would also be fascinated to see if inflation eases due to supply chain improvements or the Fed needs to sharpen faster than it wants to. Obviously, the first will be infinitely preferable. Given the generally poor recent forecast record, I’m not sure who to trust on this topic. Paul Krugman admitted this week he was wrong, which was refreshing.

Since you asked what I’m looking for, here are three things:

Will Putin invade Ukraine? It’s a much more vibrant geopolitical travel thread than Taiwan given Xi Jinping’s inner focus in a year where he plans to renew his presidency. Should Putin call the west’s bluff, we will face the greatest challenge to our credibility since the end of the Cold War. That would be a very dangerous moment.

2. Will the Department of Justice prosecute Donald Trump? Conventional wisdom says no given Merrick Garland’s innate institutionalism. I’m agnostic. The evidence against Trump is still getting ballast.

Will Covid become endemic? In answer to this lies the key to the health of the global economic recovery, Democrats’ mid-term election happiness, the recovery of emerging markets and our ability to supply global public goods. As I have repeatedly argued, the best thing Biden can do for America’s status and its own domestic fortune is to increase much more aggressively with the global vaccine supply. I remain amazed and discouraged at his lack of urgency about this. Scientists say a new post-Omicron variant is likely, unless we act urgently to vaccinate Africa and other laggards now. Maybe in 2022 the west will finally grab this nettle.

Your feedback

And now a word from our Swampians ..

In response to ‘Why Americans were turned off from January 6‘:

“I enjoyed reading your article on our democracy. I do not believe I have ever responded to an article, but this one made me think a little more than usual, specifically the second paragraph about our apathy on the matter. I wonder if the answer is that it feels as if democracy was lost some time ago for special interests and that it does not feel like there is so much more that can be taken away. If you mean by democracy my participation every two, four, six years when I can choose between a Democratic and Republican candidate, which is neither of those ever very palatable, then I’m not sure it’s a big loss not. I realize, given some of the living conditions around the world, it’s a gross overemphasis, but I’ve seen things like the organic food label being damaged by agribusiness lobbyists suing Monsanto and winning lawsuits against farmers over seeds unknowingly going to their fields, the coal industry suing opponents for silence by expending them, critical racial theory being quietly forced into classrooms, pharmaceutical companies fighting legislation against price negotiations enjoyed by other countries, PACs with which the average citizen could not possibly compete, influenced by Black Lives Matter, Antifa, Proud Boys, QAnon, George Soros, the Koch brothers, Citizens United, and I wonder, to what democracy are you referring? Feel like that ship sailed long before January 6th. If anything, you can almost argue that January 6 was as much the result caused by the actions of the above list of players as it was Donald Trump and his disturbed supporters.

I have my own business. Most of my time seems to be evenly divided between running the business or dealing with expensive software issues via IT experts, or hours online, negotiating labyrinthine technical support menus. Then there are the never-ending arguments with banks whose algorithms place inexplicable hold on my deposits for no apparent reason other than that they are allowed by law to do so. None of these issues are ever presented at the ballot box or addressed during the debates, but these are issues that I and many of my contemporaries face on a daily basis. So, after dealing with it for 10 to 12 hours a day, am I supposed to care about what Trump and his insane clown ownership did? I see more threats to democracy posed by elitist ideologues in the EU who want to open their borders to anyone as long as they are not of European descent, despite the obvious reservations of their citizens. It’s the same thing here in the US at our border. A few elitist ideologues who will never have to face the consequences of their actions have much more control over this democracy than I do, in fact, if you express an opposition to this, you will be woken up again by the wake, which has democracy been left for me to give up?

I think the actions by Trump and his peers are despicable and I hope they all end up in jail, but I see a lot more to worry about being done within the law than by some idiot with a bison hat or around ‘ to drag away a podium. I also find it hard to believe that I am the only one who feels that way. . . . I hope I have given you some insight or an alternative view. ” – Frank Hyatt

Your feedback

We look forward to hearing from you. You can email the team to swampnotes@ft.com, contact Ed by edward.luce@ft.com and Rana on rana.foroohar@ft.com, and follow them on Twitter at @RanaForoohar and @EdwardGLuce. We may include an excerpt of your answer in the next newsletter

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