The Global Economy is more complex than I could ever explain in a single blog post. But one of the simplest ideas to understand is that trade and commerce are the foundation for the Global Economy.
Trade between states, nations, and continents is how you end up with innovation, global increases in prosperity, and resistance to the consequences of famine, natural disasters, and even pandemics.
But, the wants and power dynamics of these different entities can get complicated. There are many intergovernmental trade barriers.
That's where trade blocs come in ... Two you likely recognize would be NAFTA (now USMCA) and the EU.
Trade blocs are meant to reduce trade barriers between participating entities but are sometimes controversial for their potential consequences. For example, they can result in rival groups, overly benefit certain countries, and potentially place undue pressure on certain exports.
In late 2020, the Regional Comprehensive Economic Partnership (RCEP) was signed and creates the largest trade bloc in history - accounting for over 30% of global GDP and population. Visual Capitalist put together an infographic about RCEP's formation and likely implications.
via visualcapitalist
The agreement isn't fully ratified (it is set to be fully launched by early 2022). Regardless, it will impact the global stage and create approximately $209B of income increase per year.
Despite all the rules and benefits that RCEP will have for its 15 nations, it doesn't contain any provisions for labor unions, environmental protection, or government subsidies.
As China continues to race against America to be the largest global superpower, the RCEP is a powerful tool in its arsenal.
Inflation and Other Economic Effects: Will They Last?
I've recently posted about the rise in global & national debt and the increasing dissonance between markets and the economy. This post is about inflation and the long-term economic effects of 2020.
We're currently operating on $6 trillion of stimulus. The Trump administration approved the first 4 trillion dollars, and Biden's administration added another $1.9 trillion. Around $3.5 trillion of that went to purchasing government securities. Meanwhile, the U.S. Treasury also printed another $2B in dollars (more than they produce in a normal year).
Here is an infographic showing the programs enacted to counteract the pandemic's economic impact.
These strategies make credit easier to get by growing the money supply and lowering interest rates with banks having more reserves. Without these and the Fed's other emergency measures, the economy likely would have crashed ... but was it a "fix" ... or did it just delay the inevitable?
In the short term, the stimuli did a pretty good job of creating liquidity, preventing a substantial market crash, and increasing faith in the system.
Markets became more erratic and harder to predict. And other ripples are starting to show in the economy.
Inflation: Temporary?
It's not hard to tell that prices have risen recently. But, while consumer prices have risen 2%, on average, investors continue to invest in treasuries and push the price of 10-year yields down to where they were in February of last year. That seems to imply that despite inflation and stimulus, investors still have faith in the Fed.
The hope would then be that the inflation is transitory and not a long-term effect of the stimulus.
It's possible that this inflation is the result of a post-Covid demand surge (and not the beginning of a larger trend). You can also assume that the surge in prices of airfares, hotels, and sports games will drop once they become "normal" again. And, even if they don't, if wages don't rise with that new demand, it's easy to picture demand returning to normal.
The last time the Fed created money on a similar scale (the Great Recession), high long-term inflation didn't materialize, so it might not happen again.
Conclusion
I think it's unlikely that we see another 1970s style surge – and I think it's equally unlikely we see major deflation. With that said, I still don't think we've seen the end of the effects of the pandemic and the pandemic stimulus either.
One of the practical results of the Fed's bond purchases is that it creates money to finance the gigantic debt run up by Congress. With the national debt at almost $25 Trillion, it gets harder to pick a measuring rod of financial health that isn't woefully inefficient. The idea of "sound money" or a sustainable fiscal path seems increasingly questionable. But, if you believe in Modern Monetary Theory and in the United States' amazing ability to borrow, it's possible that there truly is no worry. Japan is a potential example of that - with a debt-to-GDP ratio of double the U.S.
So, even if inflation continues, it's hard to judge how bad a sign it is.
Whether or not there's a crash tomorrow (or 7 years from now), at some point, we know there will be a "correction."
Predicting the future is hard!
Curious to hear what you think.
Posted at 08:37 PM in Business, Current Affairs, Food and Drink, Ideas, Market Commentary, Trading, Trading Tools | Permalink | Comments (0)
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