Celeb Shot
Reggae & the World Economy: The “Why” to What’s Happening
As geopolitics and the global economy become ever more intertwined, it’s critical to understand the reasons behind the chaos. Andrew Busch explains why inflation, energy, and interest rates all need context to understand where we’ve been, where we are, and where we’re going.
I love music. From opera to rap to rock to jazz, just name it. One of my favorites is reggae music. I enjoy listening to it especially when I’m doing case studies for my clients. Bob Marley, Jimmy Cliff, and Peter Tosh were some of the artists I listened to in college. Ziggy Marley, Bob’s son, wrote one of my more recent favorites, “Tomorrow People.” The lyrics that help drive my research are this:
Tomorrow people where is your past
ziggy marley
Tomorrow people how long will you last
These lyrics represent the best way to understand the world today. Over my 40-year career studying economics, politics, and the markets, I’ve found myself always searching for context. I want to know where we’ve been in the past so that I can understand where we are today to give me insights into where we are going in the future. It drives answering the “Why” question.
Why do we have inflation? Why are interest rates going up so fast? Why does the Ukraine war matter? Why does climate change create problems for the environment and business? Why did COVID radically change labor supply and location?
Not surprisingly, these “Why” questions are all interconnected, and all influence each other.
Globally, the COVID pandemic and the subsequent economic shutdowns created a shift in consumer spending away from services towards goods. Global central banks and governments rapidly stimulating their economies generated a strong wave of economic growth and consumer spending. This consumer spending lift and shift in demand led to supply chain pressure which was already under duress from a US-China trade war. A ship getting stuck in the Suez Canal, Snowmageddon in Texas, China opening and closing ports due to COVID outbreaks, and the Ukraine war all contributed to massive disruption in goods and food flowing around the world.
COVID also caused a shift in labor availability and location. In the US, there were approximately 2 million more people who retired than normally would have been expected given current demographics. Many workers in the service sector left to avoid the human-to-human contact risk of the virus. This exodus of workers also occurred in the low-paying jobs in the leisure and hospitality sector. The US also closed its border with Mexico, further inhibiting labor supply. All of these have led to a shortage of labor. The number of jobs available is now about double the number of workers available.
Furthermore, the COVID shutdowns forced companies to allow employees to work from home (WFH) which in turn, morphed into work-from-anywhere. A recent Federal Reserve of New York paper states this trend is not changing anytime soon. This has led to a dramatic increase in demand for both single-family homes and in rents as workers need more space for home offices and no longer need to commute to a specific office.
Then we have the Ukraine war. This conflict stopped the flow of Ukrainian wheat, fertilizer, and steel to the rest of the world. Also, we had Russia cutting off natural gas supplies to the European Union, and the European Union putting sanctions on Russian oil. The extreme heat in Europe, the US, and China has placed more demand on energy and caused further supply chain disruption as European and Chinese factories shut down.
All of these led to a dramatic rise in global prices for energy, labor, housing, and food, with some countries experiencing inflation levels not seen since the 1970s.
To address inflation, the Federal Reserve has begun an aggressive policy of turning off easy money spigots. To achieve this, the Fed is simultaneously raising interest rates and reducing its $8.5 trillion balance sheet. The Fed raised interest rates quickly, twice by 75 basis points in June and July. They anticipate an increase of another 100 basis points by the end of 2022. They’ve also been reducing their balance sheet by reducing the proceeds they reinvest in maturing securities. This could lead to a monthly balance sheet roll-off of $95 billion.
These actions caused mortgage rates to almost double, mortgage applications to shrink, and the S&P 500 to fall 25%.
Now, the world is shifting fast on inflation. Since the peak in March, the US WTI oil price has fallen over $30 and is contributing to a rapid decline in the cost of gasoline and diesel prices. Unsurprisingly, the EU sanctions are having little impact on Russian oil production and the production is now higher than it was prior to the Ukraine invasion. In turn, the drop in diesel prices will likely cause a drop in both food and airfares in the coming months as it takes time for the price changes to feed through. The US CPI was flat in July and could be negative in August due to this decline. The stock markets reacted positively to the easing of inflation and began to anticipate the Fed not following through with all their anticipated rate hikes. Then at the Jackson Hole economic conference, Fed Chairman Jay Powell reinforced their desire to combat inflation by continuing to raise interest rates and keep rates higher for longer. And the stock market fell again. If this feels like one big snake eating its tail, well, that’s because all of these are connected and self-reinforcing. Yes, a negative economic feedback loop.
Now, you have the current snapshot of the “Why” for what is happening in the world. The “where do we go from here” is an entirely different story and a big component of the case study I do for clients in my keynotes. Suffice to say, the world is changing faster than ever. But to understand the future, as Ziggy Marley wrote, you have to ask, “where is your past?”
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