ENERGY, CURRENCY AND DEGLOBALIZATION WARNING SIGNS
This is the first of a two-part series on the changing world order, its effects on the global economy, and the future of central bank monetary policy.
This is the first article in a two-part series on the evolving world order, its effects on the global economy, and the future of central bank monetary policy. In conclusion, we will discuss how bitcoin may relate to the world towards which we are transitioning.
THE FIRST PART:
The world is at war. This statement may initially sound exaggerated, but it has become increasingly apparent that the world is in the midst of an economic conflict that is at risk of becoming “hot.”
Before delving into the intricate elements of global geopolitics, let’s assess why it’s even worth our time as market participants to analyse. As an investor (and, more generally, as a global citizen), it is of utmost importance to comprehend that the previous three decades were a complete anomaly in the context of global history.
Following the dissolution of the Soviet Union, unprecedented global trade mobilisation ensued, with the United States playing the role of peacemaker by patrolling trade routes with its navy. This contributed to what is now commonly called The Great Moderation.
The Great Moderation can be thought of as a synonym for globalisation on an unprecedented scale. Particularly, the disinflationary environment of the previous three decades enabled real growth to persist and U.S. financial assets to skyrocket after the Great Financial Crisis on the backs of low interest rate policy and seemingly endless quantitative easing programmes.
Treasury securities, which are nothing more than claims on future dollars with an attached interest rate, allowed nations to store their economic surplus. This system benefited sovereign stakeholders so long as dollars and, by extension; treasuries maintained their real purchasing power.
In February, in response to the invasion of Ukraine, G 7 nations announced the freezing of Russian Central Bank assets. Remember that sovereign debt is nothing more than a promise of future payment from another nation; your counter party’s liability.
With this action, a precedent was established. In our monthly report for February, we stated the following.
The move implied to all sovereign nations, especially China that their foreign exchange reserves could be taken away if they make a mistake.
While speculating on the likelihood of a hot war breaking out is not an exciting task, it is clear that geopolitical tensions are continuing to rise, and history tells us that wars are almost always inflationary. Not only because of nations’ protectionist trade policies, but also because of the supply-and-demand imbalance that massive industrialization toward war necessitates.
The next section, which will serve as part two of this introduction, will examine the knock-on effects of the energy crisis in Europe, rising geopolitical tensions worldwide, tumultuous global debt markets, and bitcoin’s potential future role in a de-globalizing world.
The release will occur after Jerome Powell’s speech at Jackson Hole,
“Where central bankers from around the world, academics, and prominent economic thinkers will discuss and address “Reassessing Constraints on the Economy and Policy.”