The Widening Gyre
The Credit Strategist - March 2022
We are living at a key tipping point in history when the forces that maintained economic and geopolitical stability after the Second World War are under severe pressure. The global monetary policy regime that relied on American military and economic hegemony to protect free markets and economic stability is straining at the seams. Geopolitical arrangements that managed the fall of the Soviet Union and the rise of China are under coming apart. A global system built on growing financial and moral debts cannot fulfill its promises because its foundation lacks sufficient financial and moral equities. The West is learning that it is working off a different economic and moral ledger than the other major world powers. Democracies consumed by narcissistic grievances and short-term obsessions can no longer impose their will across the globe. Yeats said it best: “The best lack all conviction, while the worst/Are full of passionate intensity.” We need the best to live with passionate intensity and conviction to save us from the dark angels stalking the landscape.
The economic consequences of this changing regime are earth-shaking. The deflationary wave of the last forty years that lifted financial asset prices to the sky is ending due to a combination of several long-term trends that are culminating simultaneously:
(1) Higher energy prices resulting from geopolitical eructations and green energy policies.
(2) Higher labor prices resulting from demographic changes in China and elsewhere.
(3) Massive global indebtedness resulting from years of profligate central bank policies.
Enormous industry concentration (especially in America) after years of lax antitrust enforcement resulting in enormous pricing power in the hands of large companies in key industries.
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