A.M. Look 6/27/22


translated article by Felix Zulauf in publicly available The Market Internet online publication

A self-inflicted mess

Western policy has failed on security issues. At the same time, fiscal and monetary policies have long deviated from the responsible course, which is accelerating inflation. Without a recession, we will not find our way back to a more stable world, which means turbulent times for investors.

Felix W. Zulauf24.06.2022, 03.45 a.m

The prices of consumer goods and services have risen more in the last 12 months than at any time in the last 40 years: by more than 8% in the US and the euro zone. In the eurozone, producer prices rose by 37%. Interest rates are beginning to rise accordingly, with yields on ten-year government bonds in the industrialized countries at their highest level in eight years. War is raging in Eastern Europe – a situation that many people in the West could no longer imagine.

Energy and staple food prices have exploded, hitting lower income groups particularly hard. Supply chains outbound from China are disrupted. Our national economies are increasingly conforming to a classic “scarcity economy” as we knew it from the planned economies of the former Eastern bloc or from times of war.

Here and there, Western politicians have begun to blame Vladimir Putin for this misery. But that doesn’t go far enough, because the problems were already there beforehand. The war just washed them to the surface.

It is a self-inflicted mess that Western policymakers have naively brought about for many years. Their unrealistic decisions, driven by false ideology, have led to this chaos and painful consequences for the citizens.

In view of this mess, no one should be surprised that interest rates are rising and share prices are trending downwards; The roller coaster ride I predicted in earlier articles only started at the beginning of the year. It will take years.

Presumption of knowledge about climate

Three themes dominate. First, the zeitgeist derailed with the climate apocalypse, when politicians, from red-green to centrists and some conservatives, began to speak of an impending catastrophe. The one-sided media, private and state, have taken the ball with the result that today almost all citizens believe the claim that humans are responsible for global warming.

I am skeptical of such presumption of knowledge. The scientific evidence is not given. Climate is cyclical and goes through warm and cold phases. In the last 10,000 years, for example, there were twice no glaciers in Switzerland, and in the last three million years the earth went through 44 warm and cold phases.

In my opinion, it is presumptuous to force people with gross interventions and bans to adopt a lifestyle that is supposed to allow a further warming of just 1 degree. The state investment programs against climate change that have been approved for the next few years alone now amount to more than 4 trillion. $, which is about twice as much as all previous government investment programs – from the Great Wall of China, the Suez and Panama canals, the NASA space programs, the highways, railroad networks, etc. – combined.

In my view, today’s climate policy is a millennium madness of mankind. Of course, I support every new technology that makes economic sense, is sustainable and protects our planet. But it must not be a planned economy, but must be used in a market economy.

Anyone who has been demonizing fossil fuels for years should not be surprised that companies in these sectors are investing less and less and production capacities are shrinking instead of growing. Anyone who simultaneously demonizes nuclear power and believes that we can supply our electricity-hungry economies with solar and wind power alone is leading us into the bottleneck that has only just begun.

This bottleneck will last for years because it will take years to build up enough energy capacity. In addition, investments in the extraction of fossil fuels will only be increased if politicians credibly give them a long-term future. With the EU ban on internal combustion engines from 2035, this is not the case.

Policy makers guided by ideology are sending the wrong signals. These decision-makers have forgotten that all forms of energy will become much more expensive in the coming years, which in turn will flow into practically every consumer good and every service and fuel inflation.

Dangerous geopolitical development

Secondly, the war in Ukraine is a tragedy and could have been prevented by far-sighted policies. He mercilessly exposed the security gaps in Europe.

The bravely fighting Ukrainians have our sympathies. But Russia has repeatedly, over the past 15 years, clearly drawn the red line of its security needs – the West has ignored them and refused a mutually acceptable compromise. Of course, it bothers freedom-loving people that a state cannot live fully according to its own will. But Ukraine’s geostrategic position with neighboring Russia is a fact, and accordingly the West should have backed it for a modus vivendi rather than fueling the conflict.

After the fall of the Berlin Wall, the West promised Russia not to station any NATO troops east of the Oder/Neisse line – and it didn’t keep that promise. The 2014 Maidan revolution in Ukraine was pulled by the Obama administration. And after Trump, the Biden government has been militarily training Ukrainian troops in Ukraine, the forecourt of Russia. That was the last straw for Putin.

Plato said: If you want peace, prepare for war. Europe did exactly the opposite. To this day, Western Europe has failed to build a credible security architecture and instead sought protection from the United States.

First, it was cheaper and second, it was morally superior – but third, it was completely wrong. If a third of the aircraft in the German Bundeswehr are not flying, all submarines are not diving and the number of operational tanks is smaller than that of little Switzerland (and this is already underfunded), then this shows a blatant lack of understanding of security. Germany even had to borrow the 5,000 helmets given to the Ukraine from the Poles!

The left-wing ideologies of pacifism have clouded the far-sightedness of European politicians in recent decades. The consequence is that the USA, under whose protection Europe has fled, asserts its geopolitical interests in Europe. Europe has degraded itself to a geopolitical extra and surrendered itself to a foreign great power whose interests in Europe are not congruent with ours.

That is wrong, even if this power is called the USA.

Putin will regret his aggressive war move as it will set Russia back economically and geopolitically in the long run. But he will still do various harms to the West if the West doesn’t relax sanctions. Far-sighted politicians and diplomats would not have made these mistakes in the West – we just haven’t had them for a generation.

This conflict exposed mistakes and omissions of the past, particularly in the areas of defense security, energy and food supplies, and supply chains. Russia and Ukraine together are major exporters of energy and staple foods, which the West is now lacking. The US laughs up its sleeve because it has enough of both.

Weaknesses of globalization are exposed

Third, international division of labor makes sense in theory because everyone does what they do best and at the cheapest price. However, globalization has also been exaggerated because dangerous dependencies have emerged. If, for example, 80% of the active ingredients used in the manufacture of pharmaceutical products in the West come from China, then, to put it bluntly, the West can hardly manufacture a headache pill without China.

In a world with increasing conflicts between different systems, oversized dependencies for strategically important products make it vulnerable to blackmail. China’s zero-Covid policy shows the West that sanctions against China would have much more serious consequences than those against Russia.

The “Thucydides conflict” between the hegemon (USA) and the rising star (China) is obviously in full swing. It will last for years and is expected to get worse. Accordingly, a certain degree of economic unbundling will occur to a reasonable extent. Global economic efficiency will suffer and numerous products and services will become more expensive from this point of view as well; our prosperity will decrease accordingly.

More realism, freedom and the market are needed

Basically, there are three major challenges: defense security, security of energy supply and security of supply. All three need to be restored. There needs to be a greater sense of reality when it comes to climate issues. Politicians must move away from statist ideologies and orientate themselves towards freedom and the market economy. If we don’t change course politically to a liberal-conservative line, then our prosperity will melt like snow in the March sun.

At the same time, our authorities must fight the unacceptably high inflation, otherwise we will end up in a price-wage spiral that can no longer be stopped.

But neither a restrictive monetary policy nor a tightening of fiscal policy can increase the supply of energy and food. In today’s situation of structurally tight supply, economic policy can only use its instruments to dampen demand so that supply and demand settle down again at a lower level.

But that inevitably means a recession. Do the central banks have the foresight and strength to carry out such a maneuver consistently?

A recession reveals further structural problems that have built up as a result of years of misguided fiscal and monetary policy. The mountains of debt have grown rapidly in relation to economic output in all industrialized countries, the government quotas are enormously high, in the EU it is just under 60%!

Debt and demographics hamper growth potential

Debts can no longer be repaid, and the mountains of debt, combined with negative demographics, will continue to depress the growth potential of our national economies to an insufficiently low level. But our system needs growth, otherwise it will no longer function and hurl itself from one chill to the next. Let’s just think of old-age provision, where the state models in particular have not been secure for a long time.

Also: What is happening to the global real estate market, which is currently worth around 350 trillion. $ and is overpriced by 40 to 50% in terms of rental income? Rising interest rates – just returning to normal levels – would trigger a global real estate crisis.

With the central banks’ braking policy, interest rates will be raised for the time being. On the free market, government bond yields have been rising for two years from a level kept artificially low by the central banks. Negative interest rates, an invention of the ECB, will also find an entry in the history book of the “stupidities of the millennium”. With inflation at over 8%, the ECB is now increasing its key interest rates by a small 0.25 percentage points and then possibly again in September by 0.5 percentage points, i.e. slightly above zero.

That’s ridiculous. Dominated by the Franco-Italian philosophy, the ECB is the antithesis of the old German Bundesbank, which once guaranteed stable monetary values. Perhaps it is finally dawning on the Germans what a catastrophic nonsense the euro is for their economy.

Interest rates – the price of money – are still far too low everywhere to bring about the necessary braking of the economy to reduce the rate of inflation. However, the development of the quantity of money, especially in the USA, indicates that the braking maneuver could be more severe than the low interest rates imply. Since the US central bank focuses primarily on interest rates and not on the money supply, it could override and trigger a recession.

Pressure on equity markets will remain high

I am assuming that in view of the high inflation rates – even if they may drop slightly towards the end of the year – the central banks in the industrialized countries will continue the braking maneuvers they have initiated for the time being. In particular, the reduction in the US Federal Reserve’s balance sheet will drain the credit system of almost $50 billion of liquidity per month from June and double this from September, which should add to the downward pressure on stock markets in the second half of the year.

Only when the economic data become weak and the most important stock indices have fallen about 30% from their high point will the Fed begin to abandon this braking manoeuvre. Until then, however, there is still room to go down in share prices, even if the investment industry sings its optimistic songs with every setback.

In my opinion, it is still too early for a sustained boom on the markets. For the time being, the roller coaster course is trending downwards, even if there are temporary countermovements from time to time

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