Global inflation shock

Ian Bremmer's Quick Take: Going to talk about inflation. Why inflation? Well, because I posted something on Twitter that sort of exploded over the course of the last couple of days, which means people are clearly interested. And I'll tell you what the tweet was, I'll show you a little post here. It said, "US: left government, high inflation. UK: right government, high inflation. Germany: centrist government, high inflation. Italy: everyone in government, high inflation. Wild guess, it's not the government." Now of course, it is government in part, but it's not the government, which is the point. In other words, no matter who you decide to elect, if it was Trump, or Biden, or Merkel, or Scholz, or Johnson, or Starmer, or Bolsonaro, or Lula, you are getting high inflation, you're getting high inflation globally. I'll talk about why that is.

Now, a lot of people went nuts and said, "How can you call the US government left?" And certainly, from a global perspective, the entire US political spectrum is kind of on the right. And from the European perspective, you wouldn't call Biden a leftist, you'd call him a centrist. You might even call him center-right? Of course, Fox News on Primetime calls Biden and the Democrats a bunch of socialists. And if I said that the US was a left government, I mean a right government, then everybody in the US explodes, so it just shows how divided and screwed up everybody generally is anyway. But leaving that all aside, the point is the point. And it's an important point, which is that we are so divided in the United States and globally that when something that really upsets us happens that we haven't seen in over a generation, which is persistent levels of very high inflation, we get really angry, and we want to blame the government and blame the government hard.

And the reality is that no matter what your government looks like, you're dealing with very high inflation. Let's be clear, this is a global inflation shock. The economic disruption hit everybody. First with the pandemic because COVID destroyed global supply chains seized up the global economy. And then after that, you've got China's zero-COVID, just as you think you're coming out, the United States, the Europeans vaxxed, and relaxed, unmasked and going out, and going about our business and the Chinese locking down Shanghai and Beijing and some of their most important ports. And we still get so many of our goods, especially the low-cost ones from China. So, that hits you with greater supply chain risk. And then on top of that, the war, the Russians invading Ukraine, leading to massive disruptions in energy, massive disruptions in food and fertilizer, all of that is increasing prices.

Now, in response to those shocks, and those are shocks that are frankly of unprecedented scope in the context of the last couple of decades, so you would expect massive inflation just on the basis of that. But on top of that, governments met the shocks with a flood of money, and of fiscal spending, and it worked. And as a consequence, you ended up with massive demand that fell on shrinkings and disrupted supply. Now this shock is being felt very differently in different regions around the world.

So for example, in Europe, you're seeing it particularly in high energy prices because of their dependence on Russia for oil and gas, vastly more so than the United States or, really anybody else. And that's really hitting the Europeans harder, it's one of the reasons why French inflation, while high, is not as high as Germany, and Italy, and the UK, because the French actually are much more reliant on domestic nuclear energy as an energy source. Didn't stop Macron from getting hit really badly though in elections over this weekend, being blamed for how badly their economy is performing. In the United Kingdom, it's also a weak currency that's helping driving inflation up even higher than it is in the United States. In the United States, supply chains are a very big piece though also the size of fiscal expansion under Trump and under Biden is a big piece of it. In emerging markets, the food crisis is the bigger piece, as well as protectionist response in a lot of those countries. But everyone is facing their variant and all of these pieces are coming together.

Now, it's very easy to criticize the United States now for doing too much fiscal spending, particularly in 2020. And we heard that from Larry Summers, and that the Fed started too late to tighten. But we should, first of all, remember that fiscal expansion is one of the very few things that Democrats and Republicans, over the last two administrations, have strongly agreed on. I mean, massive deficits being run, massive expansions in spending in the Trump White House and in the Biden White House. This was not a country that was concerned about trying to keep debt levels down. Also, you want to talk about monetary policy, the one person that Trump and Biden agree on was Powell, the Fed Chair. And so, obviously you're getting consistency in terms of policy from the Fed. The monetary response in countries, advanced industrial economies around the world, central banks are pretty independent from governments, in some cases a little less so, but nonetheless much more so than other members of cabinet, you experienced that in the United States, and this is the nature of the response.

But we should also not forget the uncertainty, the fear, the massive swings that have been occurring in supply and demand. And that we all really were feeling our way when the pandemic hit, in a dark room, and trying not to break too much furniture, trying to make sure this wasn't just a bailout for elites and big business, this was a bailout for everybody, for average citizens that were, would be hit by unemployment really, really badly. And so, yes, you erred on the side of more stimulus, and more expansion that created more of a V-shaped economic recovery, which I think at the time, everybody was breathing a collective sigh of relief.

Now inflation is going to come down as a consequence of this because these shocks are not going to be permanent. Yes, they'll be sanctions on Russia for the long-term, but the Europeans will diversify their energy supply, they will get more efficient. Yes, they'll keep coal going, but they'll also move faster on renewables over a couple of years, that's going to play out. Supply chains will get more normalized. China's zero-COVID policy will ebb away over the coming year as more Chinese get vaccinated as they have more therapeutics. Those things really do matter, they're structural.

But of course, inflation is at least as much a political phenomenon as it is economic. It creates an enormous amount of economic insecurity and leaders get blamed because they're in charge irrespective of what the causes are. So I understand it, even though there's not necessarily a lot that anyone right now can do in the nearest term to really affect it. I mean, I think that there's a good chance that Biden announces some kind of tariff relief vis-à-vis China. He's been dragging his feet on it because he doesn't want to be seen as soft on China, but he knows that would actually reduce levels of inflation in the United States, which are making him very unpopular. Some kind of gas tax holiday for the summer seems reasonably likely, maybe some green energy subsidies paid for by the government, but nonetheless would make life a little easier for the average American. But these are really at the margins, it's kind of like a Saudi energy deal is at the margins. There's nothing that's going to suddenly pre-midterm elections make this better or easier either for Biden, or for Bolsonaro, or as Macron just experienced this weekend.

My bigger concern, by the way, is that what all of this means is that governments may not have a lot of fiscal firepower left if we're now entering into a global recession. That's going to be a lot worse for developing countries that are highly indebted, and are dealing with high interest rates and aren't able to service their debt than the United States. But even the United States, it's going to have a harder time navigating the next global recession if it comes soon.

So anyway, that's where we are in inflation. It's a little bit less dramatic and hair on fire than what you see on cable, or on social media, but that's why you're here. I hope everyone's well, and I'll talk to y'all real soon.

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