In the current edition of this commentary, we would like to focus on three evolving headwinds that sustain our skepticism about economic and market trajectories, namely: Trade flows, developing countries’ potential defaults, and Russia’s intentional moves to destabilize the world order. Having said that, let’s reiterate that even in the midst of these headwinds, opportunities arise and can be found.
Let’s start with the trade flows: Trade is the locomotive of growth. When the locomotive faces headwinds, the whole train slows down. Rising energy, food, fertilizer, and metals prices, dislocations because of Russia’s invasion into Ukraine, and Chinese lockdowns have all contributed to a slowdown in trade flows. Forthcoming reduced credit liquidity will slow down trade flows even more. Such development darkens the economic outlook and will negatively impact supply and capital investments which, in turn, will feed further into the slowdown as caution prevails.
Our next headline deals with forthcoming defaults: The rising prices, the limited supplies, and the constrained credit facilities are placing major pressures on developing nations. The scenes that we have witnessed in Sri Lanka in the past few days may simply serve as the prelude to a series of defaults and unrest. Sri Lanka is probably the first of many forthcoming defaults, including Russia. The dependence of emerging economies such as Egypt’s on imported commodities (especially grains) is undermining economic, social, and political stability in poor and middle-income countries. As inflation spirals out of control, capital flights will follow, which, in turn, will undermine local currencies. Balance of payments and currency crises will be inevitable.
We are already witnessing unrest in Pakistan, Egypt, and Tunisia. Argentinian interest rates are over 55%. Turkish inflation is already 60%. Monetary tightening will make things worse for these countries. When we add to those problems the Great Wall of Chinese steroids, especially in their real estate sector – which is already in major turmoil – then the cocktail becomes toxic. Finally, when we consider the possible default of a belligerent Russia, we can understand that in a world of scarcity, geopolitical tensions create the background of commodities cycles that could be long-lasting and are the fertilizer of global instability.
Finally, as the prospect of a longer than anticipated war in Ukraine is getting stronger, we express our concern that Russia’s efforts to create a new world order, as we have been writing for about two years now (which we consider the cause of its invasion into Ukraine), when combined with its incompetent handling of the Ukrainian invasion (result of its deep authoritarian and kleptocratic structure), may lead to some catastrophic decisions that cannot leave the US and NATO indifferent…
The rapprochement between Russia and China and their portrayal of the conflict as a binary confrontation between an emerging new world order and the West requires a disproportional Machiavellian response by the West. We are afraid that the absence of such a response will encourage the apathy and the indifference demonstrated by countries like India and the rest of 57 countries that abstained from the vote at the UN on the suspension of Russia from the UN Human Rights Council (let alone those who voted against the suspension). In our humble opinion, the West needs to use its soft power and statecraft tools with developing economies in order to uplift their positions and also avoid any tremors/fragility in the balance of power dynamics. Such fragility undermines peace, growth, and stability. Emerging economies, which suffer the most during a commodities crisis, refuse to take sides despite the evidence of the horrendous atrocities that Russian forces have been committing, and this is because they are dependable upon China and Russia. While the West cannot allow this to continue and should consistently and not sporadically use its economic statecraft tools in order to advance the well-being of developing nations, it should also never allow again vested interests to undermine the international rule of law or injustices of the apartheid nature to prevail whether that is Africa, the Middle East, Latin America, or Asia.
And because we cannot live on bread alone:
“Prosperity, however, is not an end but a means: it is the sine qua non, which guarantees nothing. We should not value education as a means to prosperity, but prosperity as a means to education. Only then will our priorities be right. For education, unlike prosperity, is an end in itself…Education is like friendship: it brings help, comfort, strength, privilege, success…To treat friendship as a means is to lose the capacity for friendship.”
From the book Against the Tide: The best of Roger Scruton’s columns, commentaries and criticism
Canceling the Noise; Not by Bread Alone Part VII
Author : John E. Charalambakis
Date : April 18, 2022
In the current edition of this commentary, we would like to focus on three evolving headwinds that sustain our skepticism about economic and market trajectories, namely: Trade flows, developing countries’ potential defaults, and Russia’s intentional moves to destabilize the world order. Having said that, let’s reiterate that even in the midst of these headwinds, opportunities arise and can be found.
Let’s start with the trade flows: Trade is the locomotive of growth. When the locomotive faces headwinds, the whole train slows down. Rising energy, food, fertilizer, and metals prices, dislocations because of Russia’s invasion into Ukraine, and Chinese lockdowns have all contributed to a slowdown in trade flows. Forthcoming reduced credit liquidity will slow down trade flows even more. Such development darkens the economic outlook and will negatively impact supply and capital investments which, in turn, will feed further into the slowdown as caution prevails.
Our next headline deals with forthcoming defaults: The rising prices, the limited supplies, and the constrained credit facilities are placing major pressures on developing nations. The scenes that we have witnessed in Sri Lanka in the past few days may simply serve as the prelude to a series of defaults and unrest. Sri Lanka is probably the first of many forthcoming defaults, including Russia. The dependence of emerging economies such as Egypt’s on imported commodities (especially grains) is undermining economic, social, and political stability in poor and middle-income countries. As inflation spirals out of control, capital flights will follow, which, in turn, will undermine local currencies. Balance of payments and currency crises will be inevitable.
We are already witnessing unrest in Pakistan, Egypt, and Tunisia. Argentinian interest rates are over 55%. Turkish inflation is already 60%. Monetary tightening will make things worse for these countries. When we add to those problems the Great Wall of Chinese steroids, especially in their real estate sector – which is already in major turmoil – then the cocktail becomes toxic. Finally, when we consider the possible default of a belligerent Russia, we can understand that in a world of scarcity, geopolitical tensions create the background of commodities cycles that could be long-lasting and are the fertilizer of global instability.
Finally, as the prospect of a longer than anticipated war in Ukraine is getting stronger, we express our concern that Russia’s efforts to create a new world order, as we have been writing for about two years now (which we consider the cause of its invasion into Ukraine), when combined with its incompetent handling of the Ukrainian invasion (result of its deep authoritarian and kleptocratic structure), may lead to some catastrophic decisions that cannot leave the US and NATO indifferent…
The rapprochement between Russia and China and their portrayal of the conflict as a binary confrontation between an emerging new world order and the West requires a disproportional Machiavellian response by the West. We are afraid that the absence of such a response will encourage the apathy and the indifference demonstrated by countries like India and the rest of 57 countries that abstained from the vote at the UN on the suspension of Russia from the UN Human Rights Council (let alone those who voted against the suspension). In our humble opinion, the West needs to use its soft power and statecraft tools with developing economies in order to uplift their positions and also avoid any tremors/fragility in the balance of power dynamics. Such fragility undermines peace, growth, and stability. Emerging economies, which suffer the most during a commodities crisis, refuse to take sides despite the evidence of the horrendous atrocities that Russian forces have been committing, and this is because they are dependable upon China and Russia. While the West cannot allow this to continue and should consistently and not sporadically use its economic statecraft tools in order to advance the well-being of developing nations, it should also never allow again vested interests to undermine the international rule of law or injustices of the apartheid nature to prevail whether that is Africa, the Middle East, Latin America, or Asia.
And because we cannot live on bread alone:
“Prosperity, however, is not an end but a means: it is the sine qua non, which guarantees nothing. We should not value education as a means to prosperity, but prosperity as a means to education. Only then will our priorities be right. For education, unlike prosperity, is an end in itself…Education is like friendship: it brings help, comfort, strength, privilege, success…To treat friendship as a means is to lose the capacity for friendship.”
From the book Against the Tide: The best of Roger Scruton’s columns, commentaries and criticism