Introduction: For today’s look at the Day After, we examine four areas where stability is threatened by world events. The first of these is energy markets, where the Russian invasion of Ukraine has brought to light the need to balance the competing interests of decarbonization and energy security. Our second article deals with global supply chains, where incentive structures have shifted away from a cost reduction approach to a risk-management mentality. For our third article, we examine how global debt has squeezed emerging countries, risking a global recession. Finally, we conclude with an examination of the turmoil in crypto markets. Even as these events destabilize old systems, the process of “creative destruction” is at work behind the scenes to build the Day After. The issue at hand is to identify which systems need a cleansing fire, and which should be protected against damage.

The New Energy Order

Jason Bordoff and Meghan L. O’Sullivan, Foreign Affairs

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“In matters of industry, human enterprise ought, doubtless, to be left free in the main; not fettered by too much regulation; but practical politicians know that it may be beneficially stimulated by prudent aids and encouragements on the part of the government.” – Alexander Hamilton
Energy security and decarbonization have become oppositional priorities for policy makers in the months following Putin’s invasion of Ukraine. While the private sector is effective in balancing supply and demand to reach optimal pricing, when the cost of certain actions is borne by the public (e.g. the climate damage caused by fossil fuel emissions), public markets are less effective at addressing the shortcoming. Today’s situation reveals two weaknesses in energy markets: a lack of sufficient incentives to build the infrastructure necessary for energy security and the energy transition, and a failure to incentivize decarbonization. In these situations, governments must step in to restore equilibrium – but this can often lead to overreach, as was the case in the 1970’s oil crisis under Nixon, when supply shortages were exacerbated by poor price controls and allocation efforts. Reorienting corporate incentive structures to address market failures requires careful tuning and precisely tailored policy to avoid destroying the positive outcomes produced by the private sector, such as efficiency and low prices. Democracies must resist the urge to wield the sword of state to politicize energy markets, jeopardizing global supply chains and exacerbating internal conflicts. In order to meet the dual needs of energy security and decarbonization, governments must carefully intervene in energy markets with surgical policies to address inefficiencies.

The Structure of the World’s Supply Chains is Changing

The Economist

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Even before the Covid-19 pandemic, deglobalization trends began undercutting global supply chains. First came US tariffs on Chinese exports, then the pandemic which boosted demand for manufactured goods but constrained production and transport, and, most recently, the war in Ukraine has sent commodity prices skyrocketing. These recent shocks have companies rethinking and reorganizing their supply chains; “The decade to 2030 is likely to prove a period of transformation for global value chains.” Executives of multinational corporations have become increasingly concerned with how robust their supply chains are, and not just how efficient they can be. More and more, countries are experimenting with industrial policies aimed at self-reliance or international pre-eminence in at least some “strategic” technologies and businesses. While there is little evidence of rich countries “reshoring” production from abroad, some companies are signing new contracts with more than one supplier and building up inventories in preparation for future shocks. In some sectors, like the American computer sector, vertical integration – building the capacity to be your own supplier or buying companies that already have that capacity – is a growing trend, as is “greenfield” foreign direct investment (FDI) which is capital investment in new offices or factories. While there will be benefits from this transformation of global supply chains, the costs of prioritizing more than just efficiency will be felt by taxpayers, consumers, and companies. The world economy may become less vulnerable to shocks, but “improving resilience could be a case of running to stand still.”

World Bank Warns of Debt Crisis Risk as Outlook Worsens

Jonathan Wheatley, Financial Times

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The World Bank is warning that the war in Ukraine will hinder global growth and push tens of millions more people into extreme poverty this year. In the organization’s latest economic outlook, global growth will fall from 5.7% last year to 2.9% this year and 3% in 2023, under the best case scenario. However, higher than expected interest rates, additional pressures from a continuation of the Covid-19 pandemic, and escalating energy prices could diminish global growth to 2.1% this year and just 1.5% in 2023. In the World Bank’s report, it also forewarned that global financial conditions today are similar to those of the 1970s when the rapid rise in interest rates sparked a global recession and debt crises in many developing economies. According to World Bank data, foreign debt in low-income countries rose by $15.5 billion in 2020 and foreign debt in middle-income countries rose by $423 billion, leaving these economies exposed to sharper than expected interest rate rises and putting them at higher risk of default. Ayhan Kose, head of the World Bank’s economic forecasting unit, said “​​The faster-than-expected tightening of financial conditions worldwide could push countries into the kind of debt crisis we saw in the 1980s. That is a real threat and something we are worried about.”

‘The Music Has Stopped’: Crypto Firms Quake as Prices Fall

David Yaffe-Bellany and Erin Griffith, The New York Times

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High-profile cryptocurrency firms are facing a daunting challenge as crypto prices plummet, with several firms announcing mass layoffs – Coinbase, Gemini, and BlockFi, to name three. The total value of cryptocurrency markets has fallen by approximately 65% since last fall, demonstrating the fragility of the unregulated structures built on the new asset class. Despite soaring valuations and many unicorn-status companies, the collapse of most cryptocurrencies has threatened even the most established of these companies’ business models. Analysts have drawn comparisons to the proliferation of online companies in the dot-com era – when that bubble burst, only the largest of these companies were left standing. Despite the turmoil, many analysts remain bullish for the long-term potential of cryptocurrencies, seeing the present crisis as an opportunity to “buy the dip.” Though the industry has a long history of boom-and-bust cycles, the future of cryptocurrencies will be shaped by how today’s endangered crypto companies weather the storm.