The week of May 23, 2022: Globalization’s supply-chain issue, the Fed, baby formula, inflation, and much, much more.
Back in early March, shortly after some of the disruptions being caused (or likely to be caused) by the Russian invasion of Ukraine were becoming clear, I wrote that “while the specialization that comes with being part of a globalized market comes with enhanced efficiency and productivity, it can also increase vulnerability at difficult times.”
There is probably no area where vulnerability of supply is more feared than food, something always likely to encourage both hoarding (China has led the way here) and export restrictions. To quote from a Bloomberg report from that time:
Many countries have positioned agricultural production toward exporting a few key products, rather than for food sufficiency. So nations like Ghana and Cameroon can be big global players in the cocoa market, but are still hugely dependent on shipments for wheat.
Meanwhile, grain-exporting nations can see what’s happening in Russia and Ukraine and decide that the world won’t have enough wheat or barley, so instead of shipping, they move to keep supplies at home. That can lead to a dangerous domino effect of increasing protectionism that hurts the world’s poorest and the countries most-dependent on imports.
This should come as no surprise. It represents the intersection of two core human instincts, to keep fed and, at times of trouble, to (metaphorically, anyway) fortify the citadel. Indeed, since then, we have seen a series of export bans.
I included that passage from Bloomberg in the second note I had written around then (the first is here) on the danger of major trouble in the global food markets (Russia and Ukraine are major exporters of grain, and, in Ukraine’s case, other food products), a danger compounded by the effect that the war might have on the fertilizer sector (Russia and its puppet, Belarus, are major exporters of fertilizer and related raw materials) and compounded again by the startling increase in the price of natural gas. Large amounts of natural gas are needed to produce ammonia, the key ingredient in nitrogen fertilizer.
Making matters worse, food prices were already dangerously high. I also quoted this passage from the same Bloomberg report:
Grains are the staples that keep the world fed, with wheat, corn and rice accounting for more than 40% of all calories consumed. But grain stockpiles are poised for a fifth straight annual decline. A combination of higher shipping costs, energy inflation, extreme weather and labor shortages have made it harder to produce food.
As a result, global food prices are already at record highs, with the benchmark U.N. index increasing more than 40% over the past two years.
Since then, one of those factors (extreme weather) has gotten worse, specifically in India, which (after five consecutive years of record wheat harvests), had been expected to fill at least some of the gap left by Ukraine and, to a lesser extent, Russia.
While what lies ahead is, to say the least, unpredictable (most Ukrainian wheat is winter wheat, sown in the fall, and harvested in June), there is still plenty of wheat in the country. That’s the good news. The bad news is that much of that wheat is stuck there. In a must-read column (well, as his all are), our Jim Geraghty wrote this in early May:
Keep in mind, even if the Russian invasion ended tomorrow — and it won’t — there’s still the issue of the hundreds of anti-ship mines now floating around in the Black Sea, a few of which have ended up drifting into the territorial waters of Turkey, Bulgaria, and Romania. It’s not going to be safe to send cargo ships through those waters for a long time.
That problem has not gone away, and nor is it only a matter of mines.
The Wall Street Journal (May 19):
Russia dismissed calls from top United Nations and Western officials to halt a Black Sea blockade that has prevented Ukraine from exporting much of its grain to world markets, causing price hikes and exacerbating food shortages.
Moscow’s ambassador to the U.N., Vasily Nebenzya, told a meeting of the U.N. Security Council on Thursday that rising food prices had been caused by Western sanctions against Russia and other factors, rather than the nearly three-month old war in Ukraine. He didn’t acknowledge calls to negotiate the shipment of grain from Odessa and other Ukrainian ports.
Bloomberg (my emphasis added):
Resuming Ukrainian grain shipments will be time consuming given challenges that include mine-clearing in Black Sea ports and the need for cooperation from the very country that kicked off the war, Lithuanian President Gitanas Nauseda said.
Nauseda is among a small group of European leaders pushing for naval escorts for vessels shipping Ukrainian grain through the Black Sea. Russia has effectively blockaded Ukrainian ports with its invasion, including a three-month siege of the largely-destroyed city of Mariupol, leaving the government in Kyiv struggling to export grain and sending prices to near-record highs….
“It could take weeks, not months, but if there will be no will of the Russians to open this window, it will be impossible,” Nauseda said in an interview Wednesday on the sidelines of the World Economic Forum in Davos, Switzerland. “The Russians could use this instrument as yet another leverage to destabilize the situation in the world. They are highly interested to do as much harm as possible.”
… Another option, Nauseda said, is to reroute Ukrainian grain through other ports in the region by rail, though that channel would be daunting. An “experimental train” sent from Ukraine via Poland to the Lithuanian port of Klaipeda took three weeks, he said. Polish railroads are already overloaded…
Focus for a moment on those naval escorts, which (incidentally, also could give rise to issues with Turkey, the country given the right under the terms of the Montreux Convention to ‘police’ transit to and from the Black Sea). It probably doesn’t help that Turkey is already giving NATO a major headache by (so far) rejecting the idea that Sweden and Finland should joining the alliance.
[Estonian president] Alar Karis said he had been pushing for some time for naval escorts for grain freighters, but “not everybody was convinced that this was a good idea.” The concern, he said, was it “might escalate the war in the Black Sea. But it seems like it will work.”
The Balts are (rightly) renowned for their, at times, uncomfortably clear-eyed view of Russia (I have recently returned from a trip to Estonia and Latvia and can confirm that nothing has changed in that respect), but in this instance, Karis may be a bit too optimistic.
Bloomberg:
Ukrainian Foreign Minister Dmytro Kuleba said he saw no desire from NATO now to help secure safe passage of grains.
“If NATO did not close the Ukrainian skies in the most tragic moments of the war, why should they dare to close the Ukrainian sea to allow the free passage of vessels with Ukrainian agricultural products… I would wholeheartedly welcome the decision, but I just don’t see the stamina and the bravery to take all the risks associated with this operation.”
This is somewhat different to the debate over closing the skies, but I don’t think that Kuleba is wrong.
Bloomberg:
The interruption of Ukraine’s agricultural cycle risks a multi-year global food crisis, Kuleba said, “but in the end the problem is that you cannot trust Russia even if they sign papers guaranteeing safe passage.”
The historically-minded may recall that one of the many causes — other than sheer stupidity — of the outbreak of the First World War in 1914 (a year that is coming up too often for comfort recently) were Russian concerns that its exports of wheat via the Black Sea to the West might be blocked.
But, even if fears of another 1914 are indeed overdone, Kuleba’s concern about “a multi-year global food crisis” are not. Please read Jim’s piece for more on what that may mean both in humanitarian terms and for political stability (and note more talk of a possible new migration wave as well). Whatever the outcome of the current disaster, after this experience, countries, rich and poor, are going to be putting much more of a priority on food security, and much less on the efficiency of globalization.
Shortly before Britain’s catastrophic decision to become embroiled in what became the First World War, Britain’s foreign secretary famously remarked, “The lamps are going out all over Europe, and we shall not see them lit again in our lifetime.” As mentioned above, fears of 1914 redux are overstated, but I do think that the lamps of globalization are, to stretch both metaphor and historical analogy, at least going to be dimmed.
Before giving a few examples of that, I’d just like to turn to something else Jim mentioned:
The world probably could have done without the comments from U.S. Agency for International Development administrator Samantha Power on ABC News this weekend:
“Fertilizer shortages are real now because Russia is a big exporter of fertilizer. And even though fertilizer is not sanctioned, less fertilizer is coming out of Russia. As a result, we’re working with countries to think about natural solutions like manure and compost. And this may hasten transitions that would have been in the interest of farmers to make eventually anyway. So never let a crisis go to waste.”
Please stop telling us what a great opportunity there is in an oncoming famine. I would love to take the slogan, “Never let a crisis go to waste,” put it onto a rocket, and blast it into the sun.
Well, yes, and about those “natural solutions,” here’s Sri Lanka’s experience (via Modern Farmer from March):
Last spring, Sri Lanka’s President Gotabaya Rajapaksa put a ban on agrochemicals. His goal was an ambitious one: to transform Sri Lanka into the first nation with 100-percent organic agriculture. Less than a year later, the country is left in an economic and supply shortage crisis as a result…
Within six months of the ban, rice production in the country—a once very sufficient industry—dropped 20 percent, forcing Sri Lanka to import $450 million of rice to meet supply needs and surging rice prices rose nearly 50 percent…
The ripple effect of the ban impacted the entire country. According to Foreign Policy, after the ban and the pandemic, nearly half a million Sri Lankans have sunken below the poverty line.
Poor planning (as it is so often with central planning) was partly to blame, but only partly. Organic farming is what it is: inefficient, environmentally destructive and hopelessly ill-suited to the needs of the modern world.
But back to deglobalization.
Just a few recent stories:
India will restrict sugar exports as a precautionary measure to safeguard its own food supplies, another act of protectionism after banning wheat sales just over a week ago.
Europe’s leaders are increasingly worried that the EU will jump from the frying pan into the fire as it breaks dependence on Russian fossil fuels, becoming equally dependent on supplies of strategic minerals controlled by China.
[German Chancellor] Olaf Scholz has warned that the era of globalisation that powered the German economic miracle is “coming to an inevitable end” after Vladimir Putin’s “thunderbolt”.
While the CHIPS (Creating Helpful Incentives to Produce Semiconductors) for America Act was passed in January 2021, Congress has yet to agree on a bill that would appropriate resources for its various programs, despite bipartisan support for expanding domestic chip manufacturing capacity.
“It is a huge national security issue and we need to move to making chips in America, not friend-shoring,” Raimondo told CNBC exclusively at the World Economic Forum in Davos, Switzerland, on Wednesday.
And so on and so on . . .
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 68th episode David is joined by Louis Gave of Gavekal Research, and the only things they talk about this week are the bond market, the stock market, global wars, foreign currency, crypto, and pets.
The Capital Matters week that was . . .
Antitrust
Joshua Wright and Derek Moore:
Suddenly, the FTC’s rankings are at or near the bottom. From our perspective, the most concerning results reflect a sharp disconnect between FTC staff (mostly apolitical federal employees) and management (presidential appointees and their hand-picked senior staff). In 2020, prior to the change in administrations, 87 percent of FTC staff answered favorably when asked whether senior leaders “maintain high standards of honesty and integrity.” In 2021, after Khan and her team took over, that number dropped to 53 percent. Similarly, the number of staff who answered favorably to the question of whether “senior leaders inspire motivation and commitment” moved from 80 percent to 42 percent. These declines are substantial and concerning, and they reflect a sharp break from consistent and positive results over a long period . . .
Housing
One of the iron rules of investing in inflationary times is to invest in real assets, because they tend to keep up with inflation. A prime example of a real asset is, of course, real estate. So far, as inflation has skyrocketed, real-estate prices have done what they have always done in the past, kept up. But if inflationary spirals tend to end in recessions, then they also end in collapsing housing markets. If — or when — that comes to pass, how bad will it get?
Labor
The notion of the exploitative employer has been a standard critique of capitalism, and not always without reason (curiously, the way that communist states treated workers in their factories has been subject to a rather less sustained critique, in the West anyway), but the degree of intrusiveness of some contemporary employers, who appear to be engaged either in changing the way that their employees think or, at least, pretend to think, goes beyond anything that could have been dreamt up by the robber barons of old . . .
The Biden administration has made clear that it does not want to see any work stoppage during these negotiations. But it’s also no secret how the administration feels about organized labor. Biden has called himself “the most pro-union president leading the most pro-union administration in American history.” Ports envoy John Porcari has heaped praise on the ILWU in past public remarks. Secretary of Labor Marty Walsh was a union president before he was a pro-union mayor of Boston . . .
Regulation
The National Labor Relations Board’s (NLRB’s) humiliating loss in the Third Circuit was not the past week’s only high-profile defeat for the administrative state. Last Wednesday, the New Orleans–based United States Court of Appeals for the Fifth Circuit ruled, in Jarkesy v. SEC, that certain cases in which the Securities and Exchange Commission seeks civil monetary penalties cannot be heard by the SEC’s own administrative-law judges (ALJs), and must instead be filed in federal court and tried by a jury. Jarkesy does not justify some of the sky-is-falling rhetoric of defenders of the administrative state, but it does strike a real blow for due process of the law and the right to a jury . . .
Energy
Essentially, Finland’s Greens appear to be recognizing that the strain of 1970s environmentalism which was centered on opposition to nuclear power is not compatible with belief in a climate “crisis” (and dealing with it). Whatever one may think about the reality of a climate crisis (something different from an acceptance of climate change), at least Finland’s Greens are recognizing that attempting to manage it will involve trade-offs of the type that many climate fundamentalists refuse to recognize, either through stupidity, or because at some level they regard net zero as a form of punishment for a sinful mankind: It is supposed to hurt . . .
Last week, the average price of diesel hit a new record high at $5.55 per gallon after being priced at just $3.11 last May — an increase of 78 percent in a single year. The cost of other middle distillates that power trucks, trains, tankers and agricultural equipment are on the rise as well. These high costs will be passed along to consumers in the form of higher prices.
That’s tough, given that consumers are enduring a 41-year-high bout of inflation and are still trying to navigate shortages of crucial supplies due to supply-chain bottlenecks that became clogged during the pandemic. Yet the Biden administration’s actions fail to address record-low distillate levels . . .
The reality of the “incredible” (in more senses of that word than one) transition, is that, if it is pursued as currently contemplated, energy — whatever the price of oil may do in the short term — is going to be becoming more expensive (and probably more unreliable, too, but that’s a different story), and for the foreseeable future. To climate warriors (and there are quite a few of those in the Biden administration) that’s a feature, not a bug. But the smarter among them also appreciate the political dangers (which are not confined to the midterms) that come with this. Ideally, they would prefer transition-related increases in the cost of energy to be relatively slow, and relatively steady. Frogs in a pot — that was the model.
Well, if we’re the frogs, the unexpected disaster at the gas pumps has just given us a preview of what, on our present course, will be coming our way . . .
Education
For decades, homeschooling has been closely associated with devoutly religious white conservatives. But today — especially after the disruptions of the pandemic — that stereotype no longer holds. The homeschooling population has become more diverse over the past decade across a variety of metrics. In the first year of the pandemic, the number of black families who were homeschooling grew fivefold. Parents from a wider range of backgrounds have also found that there are many affordable and effective homeschooling resources.
Regardless of income level or the type of education that parents choose — public, private, charter, or homeschool — parental engagement plays a key role in determining a child’s academic success. Let’s hope, then, that the surge in homeschooling holds. Among other things, it would doubtless reflect that parents are becoming more engaged in their children’s education for the long haul.
Baby Formula
Abbott appears to be another victim of the disproportionate targeting by the FDA of the few remaining domestic manufacturers of FDA-regulated products. Since Covid-19, the FDA still hasn’t fully resumed inspections of drug-manufacturing plants in China and India. Instead, the many inspectors otherwise sitting idle have focused their ire on the few remaining domestic FDA-regulated manufacturing plants. Shutting down FDA-regulated facilities always seems to happen a lot faster than reopening them, even if FDA accusations are unfounded — as Abbott has abundantly made clear . . .
The unfolding infant-formula-shortage fiasco is best described by three words: Made in Washington. Government-made barriers to entry into the formula market and actions that were too little or too late precipitated and prolonged the crisis . . .
The Fed
Last year, the inexcusable mistake that the Powell Fed made was to keep its pedal fully to the monetary-policy metal for far too long. It did so even though the economy was recovering strongly, inflation was picking up, and the economy was receiving its largest peacetime budget stimulus on record. It also did so despite the fact that the U.S. equity and housing markets were going through the roof.
Seemingly oblivious to the economy’s changed circumstances, and seemingly forgetting that monetary policy operates with long and variable lags, the Fed kept interest rates unchanged at their zero-lower bound. Until the year’s end, it also continued to buy $120 billion in Treasury bonds and mortgage-backed securities. This bond-buying contributed to a 40 percent increase in the broad money supply over the past two years . . .
All U.S. recessions in the post-war era have been the result of either Fed interest-rate hikes, financial-asset bubbles bursting (think the early 2000s tech bubble and late 2000s housing bubble) or a pandemic (as in 2020). Recessions caused by the Fed correcting its past mistakes are the most common type of recession in the post-war time series, although we haven’t seen such a recession since the early 1990s.
Perhaps what we’re now witnessing is the end of a period of relative macroeconomic stability that began in the 1990s. If it is indeed over, it may have ended thanks in part to policy-makers buying into folk narratives about “transitory” inflation that have put the Fed in a place where for over a year it failed to act in response to rising inflation. Let’s hope this is not the case as much as history might say otherwise . . .
Taxation
As the Internal Revenue Service struggled to dig out of the backlog of millions of unprocessed tax documents and incoming correspondence last year, it stumbled on a potential solution to the problem. Why not just destroy the returns that can’t be processed? As crazy as that sounds, it’s exactly what the agency did . . .
The Economy
Trucking could follow the same pattern that led to the last freight recession in 2019: softening demand for trucking rendering an oversupply of trucks and a crashing freight price that sends trucking companies into bankruptcy. One of the largest trucking companies in the country, Celadon, went out of business in 2019, along with about 800 others.
Trucking recessions can be leading indicators for the rest of the economy, but trucking is much more prone to booms and busts than the economy at large. While trucking recessions don’t always cause economy-wide recessions, four of the six most recent economy-wide recessions (before the pandemic recession) were preceded by trucking recessions . . .
Climate
The real kicker is that by subjecting itself to California’s political whims, New Mexico (and other states adopting these standards) could be forced to adopt even more aggressive “Clean Car” standards soon. California governor Gavin Newsom has issued an executive order that, if adopted by California’s Air Board, would end the sale of gasoline-powered cars in California by 2035. The board’s decision on final adoption of that rule could come in California as early as this August.
Under California’s proposed rule, 35 percent of new cars, SUVs, and small pickups sold in California (and thus other states following their policies) must be zero-emission starting with 2026 models. That number will increase yearly, reaching 51 percent of all new car sales in 2028, 68 percent in 2030, and 100 percent in 2035 . . .
Stakeholder Capitalism
National Review’s Capital Matters has been a leader in critiquing the so-called “stakeholder capitalism” movement. I have lectured on the topic extensively myself. My agenda here is less to reaffirm the self-defeating folly of this movement and more to demonstrate how the failures of these companies illustrate the fact that everyone agrees the movement has failed. There are varying degrees of self-awareness and consistency, but the societal response to each of these three debacles indicates the same thing: Stakeholder capitalism is a fraud. And a significant part of current market challenges comes down to the need to relearn the lessons that basically were forgotten in the insanity that these three drama series capture . . .
Price Controls
In 1971, more than two years before the Arab oil embargo, President Richard Nixon executed a political gambit that would help him secure the 1972 presidential election but that would also precipitate a decade of economic crisis. On August 15, Tricky Dick went live on national television and, via the powers granted to him by the Economic Stabilization Act of 1970, announced a freeze on all prices and wages in the United States and a suspension of the dollar’s convertibility into gold. Nixon scheduled the comprehensive, economy-wide price-and-wage edict to last for 90 days.
According to the Cato Institute’s Gene Healy, Nixon’s maneuver — ostensibly to curb what we would now consider modest inflation — was popular, drawing 75 percent approval. A 1972 Harris poll reported that respondents thought the price controls were doing “more good than harm” by a 30-point margin. Economists, on the other hand, were less than enthused. Milton Friedman opined in Newsweek, “I regret exceedingly that he decided to impose a 90-day freeze on prices and wages. That is one of those ‘very plausible schemes,’ to quote what Edmund Burke said in a different connection, ‘with very pleasing commencements, [that] have often shameful and lamentable conclusions.’” Disturbingly, the president apparently agreed. According to Friedman, Nixon described the policy as a “monstrosity” in a private meeting with the economist and promised to do away with it as soon as possible . . .
The Budget
Surging inflation is hitting American families hard and is quickly becoming a top concern for voters ahead of the November midterms. So, it’s no surprise that President Biden is on the defensive — but his latest attempt at political spin is so absurd that even CNN had to call him out.
When asked at a recent press conference if he takes any responsibility for inflation, Biden said no, explaining that his spending policies are blameless.
“I think our policies have helped, not hurt,” Biden replied. “We brought down the deficit. The bottom line is, how much does America owe?”
There are several problems with this answer, but let’s begin with Biden’s claim that he “brought down the deficit,” a claim he has repeated on social media . . .
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