My plan to post a short reflection every week failed almost immediately. The dual demands of a full-time job and part-time academia meant little time for part-time writing. Nevertheless, I’ll try again.
Inflation, Elon Musk buying Twitter, and the leaked first draft opinion for Dobbs v. Jackson Women’s Health Organization eclipsed the Russo-Ukraine War in commentariat America these past several weeks. I’d like to write long (or longish) essays about all of these, but I will probably not have the time. So…
It seems the world is realizing inflation may be the story of the next two or three years. Or, rather, stagflation. Increased media coverage only tells part of the story; more ominous is equity markets losing their hot air. I manage my own investments and I work in financial planning and M&A, but I’m certainly no macroeconomist, so take the following as personal impressions. The stock market is a leading indicator for the economy. While there was no rhyme nor reason for the astronomical price/earnings ratios of many stocks, there’s no escaping the fundamental concept that equity prices reflect present values of future cash flows. Interest rates are still near historical lows and there’s no shortage of cash in the world, and up to this year low rates, abundant credit (thanks to monetary easing), and growing money supply only impacted asset valuations and not price levels. There’s little question that governments’ overreactions to Covid–the fiscal equivalents of helicopter drops of cash–started this inflation run. The following graph shows US inflation rates spiking at the start of the first quarter of 2020.
The same was true in the EU.
So now it is clear there’s too much demand chasing too little supply. However, up to now the rapid rise in the prices of goods and services just flowed through to stock prices. So why are equity prices now depreciating alongside inflation? Asset devaluations mean that a critical mass of investors anticipate lower cash flows in real terms (inflation adjusted). But the equity sell-off isn’t just a reaction to inflation; it’s a reaction to the series of events that come with central banks fighting inflation. The Federal Reserve finally responded (just a year or so late) and started to tighten the money supply more aggressively. A lower money supply means lower aggregate demand, but it’s unknown how consumers and businesses will react. It may be that demand falls so much that it impacts employment levels, investments, imports and exports, etc., so that supply greatly exceeds demand. That means the economy retracts (i.e., experiences negative GDP rates, otherwise known as a recession). Stagflation in the economic situation where there’s both a wage-price inflationary spiral and depressed demand, and I think the developed economies are going to face it again.
“Stagflation” stands a good chance of being the biggest issue in the 2024 presidential race. Why? Inflation is only one of many big economic problems. Consider all of the other issues at play: spiking energy prices from the Western break from Russia, decoupling from China, supply chains still disrupted by Covid, historically low interest rates finally coming to an end, huge levels of sovereign debt, record fiscal deficits in the US, and asset price bubbles in equities and residential real estate. Whether stagflation happens or not isn’t the question now; the question is how long it lasts.
Typically, in media, business, and government the word “recession” means “big economic problem” that has to be solved. However, it’s more logical to think of recessions as cures for myriad economic maladies. A recession rids an economy of bad capital investments and over-leveraged companies–maybe even an unsustainable industry. A recession allows entrepreneurs to bring better ideas of market. A recession forces labor to re-train for new skills and relocate to growing markets. Unfortunately, recessions also bring unemployment and bankruptcy for many; however, most of the world isn’t lacking for social safety nets.
The coverage of Elon Musk buying Twitter has been so ideological it’s almost intolerable. This story may now be much ado about nothing. Assuming it still happens, I tend to agree with other libertarians who welcomed the news. Still, I think the current focus on algorithms, user accounts, and ‘The Twitter Rules’ will prove to miss the real story. A $44 billion price tag has to have a business case proving return on investment. I wonder if the real story ends of being innovations that bring more users and more activity (and therefore more revenue) to Twitter. It seems Facebook is vulnerable to going to the way of Myspace; Meta will survive, but the Facebook platform is tainted by vanishing Boomers and seems antiquated now–stuck in the dark days of the Bush administration. Meanwhile, Google’s horrible management of YouTube created all manner of incentives for content creators to go elsewhere. Finally, Substack’s takeoff proves there’s a subscription model for high-quality journalism and media. I’m not an Elon fanboy, but I would never underestimate his business acumen.
Regarding Dobbs, obviously the Democrats are mobilizing to turn this into an issue for the mid-terms, but my gut is most Americans don’t care and will may even welcome the abortion issue being de-federalized. At this point we have no idea what the final opinion will hold. However, I think the five conservative judges could get Chief Justice Roberts to join the majority in the final decision. Obviously a 6-3 opinion would be far more powerful. Why would Roberts vote to strike down Roe v. Wade? We all know the common wisdom about Roberts: he’s an institutionalist, more judicially pragmatic than anything else. In this sense, he’s really a conservative, if only in temperament. I tend to think the long-term health of the Supreme Court–the weakest branch–is best ensured by it staying out of hot ideological conflicts like abortion. Putting the issue back to the states is where it always belonged. Going forward, judicial nominations will be less heated. It also lowers the risk of another constitutional crisis around court packing. Finally, there’s also the possibility the issue is further delegated to localities. Instead of waging disruptive, back-and-forth contests on abortion in state legislatures and governorships, states could opt to allow for “home rule” on abortion, meaning abortion regulations would vary by municipality. Ultimately, I think the outcome will be a vast majority of America following the Roe-Casey framework of only imposing restrictions after viability, with exceptions for health risks to mothers.
My views on this are complicated. At the end of the day, I’m with most Americans who subscribe to President Clinton’s stance on abortion: it should be safe, legal, and rare. Abortion on demand is insane, but so is an absolute prohibition. Legally, Roe was a mess and one of the biggest mistakes ever made by the Supreme Court–a horrible example of legislating from the bench and usurping a political issue best resolved by democratic processes. I have believed this since I first read Justice Harry Blackmun’s opinion in law school back in 1992. Furthermore, the Constitution has an amendment process. A Constitutional amendment promulgating abortion rights supersedes any Supreme Court ruling. If a plurality of American citizens wanted to make abortion a fundamental right, the governance framework makes this possible. Philosophically, I think abortion should be a woman’s choice; however, I agree with the moral arguments that abortion is killing a human being and, if asked, my advice to a woman would be not to have an abortion (unless her life was at risk, or her child would face extreme health issues and practically no quality of life). Furthermore, so long as no force or coercion was involved, I have no problem with the collective action of people who believe abortion is wrong and should be shunned in society.
Finally, the Russo-Ukraine War looks to drag on. Despite all of the establishment media rah-rah, military and IR experts doubt Ukraine will achieve anything resembling conditions for victory. The Russian Army can just park itself in Donbas and the Black Sea coast. I don’t think anyone knows how this will end, but it is clear this invasion is a historical milestone. Personally, I’d like the focus of American politics to return to foreign policy. I’m thinking about writing a thought piece on the end of “Pax Americana” which would argue the Syrian Civil War and the Russo-Ukraine War were the first steps in the end of American hegemony and a reason for a new grand strategy (as I’ve written in the past).