May 26, 2022

Three Strikes On The Global Economy.

There are three major factors currently that are affecting the Global Economy. And unfortunately, all are aligned to produce a negative impact.

First is the Ukraine war. War is always a dismal event. With violence and loss of life reprehensible. Much has been written about this war, from those of us who look on from the West. With ringing condemnations from NATO, and America.

But little has been said about the full impact of this particular war. From an economic perspective, the war will hit in two phases.

Phase one had already begun. Together Russia and Ukraine supply much of the world's commercial fertilizers. The principal commercial types of fertilizers that farmers use are Nitrogen, Potassium, and Potash.

Russia and Ukraine are the chief suppliers of these types of fertilizer. The need for them is now. But the impact may not be felt until next fall's harvest season.

The US is a major importer of these Ukrainian and Russian fertilizers, and we will not be immune from their loss. Look for major price hikes and possible food shortages in the fall.

The Second major factor facing the global economy is the Chinese Zero Covid Policy. This is the policy that has locked down the world's number one port Shanghai. The originator of much of the products and components that the west needs to have a fully functioning economy.

If you've seen empty store shelves at your local department stores, it is likely due to the closing of Shanghai. And this zero Covid Policy.

Just yesterday China's Premier Li Keqiang (in the attached photo Premier Li in meeting Indian Prime Minister Modi) indicated that China is experiencing the worst quarter since the dreadful second quarter of 2020.

Premier Li, went on to indicate that they would do everything possible to keep the Chinese economy moving forward. But there were no guarantees. All a result of the current Chinese Lockdown. 

Finally, the third Macro Factor affecting the global economy is the reaction of the US Federal Reserve to America's inflation.

The two latest readings on the Consumer Price Index, have both been above 8%. A level of inflation that has not been seen in this country in over forty years.

The reaction by the Fed has been to put on the monetary breaks. Taking away their monthly bond purchases, and hiking interest rates. All in an effort to slow this runaway inflation.

From my point of view, the principal cause of the rise in inflation is the battle that Joe Biden is waging against oil. With gasoline and other fuel prices being the number one cause of inflation by far.

But we will leave that discussion for another day.

The point right now is that the Fed has gone on a money tightening spree. And based on the FOMC Minutes released yesterday, it looks like this restrictive monetary policy is here to stay. At least for a while.

And when the number one Central bank in the world, tightens, the effects are felt around the world.

So there are the three principal Macro Factors that I see as impacting the international economy.

1. The War in Ukraine, with its reduction in fertilizers now. And lower grain supplies in the fall.

2. China, with its zero Covid policy. And it's lockdown of the world's number one port.

3. And finally, the Federal Reserve's tight money policy. With its impact both in this country and in international trade.

Now the good news here is that we may be just weeks away from seeing some of these conditions improve.

Rumor has it that as soon as June first, less than just a week from now, China may re-open Shanghai. This would go a long way in easing shipping and supply chain issues.

As for harvest season, it is a long way off right now, and perhaps by then, we may even have some resolution in Ukraine.

Finally, as to the Federal Reserve. This current wave of selling in the stock market is a mighty powerful inducement for the Fed to reverse course, and once again ease money tightening.

It's an interesting time right now. But these are the three strikes on our Global Economic, as I see them.

Now for the good news: we're not playing baseball!

There is still time to put in place the policies needed to overcome these shortages and limitations. We don't have to sink into a Global Recession.