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It’s Official: Nomura Is First Bank To Call For 2022 Recession

It’s Official: Nomura Is First Bank To Call For 2022 Recession

A little over two months ago – in early April – Deutsche Bank shocked Wall…



It's Official: Nomura Is First Bank To Call For 2022 Recession

A little over two months ago - in early April - Deutsche Bank shocked Wall Street when it became the first bank to break with the mold of "cautious optimists" when it made a US recession its base case  (agreeing with our dire assessment from late 2021 that a recession was inevitable, if disagreeing with our timeline which put the recession smack in the middle of the second half of 2022, followed by more QE). Well,, since then things have only gone from bad to worse for the US economy, with the Citi US Eco surprise index plunging to pre-covid levels and multi-year lows...

... while the Atlanta Fed GDPNow tracker for Q2 has collapsed to precisely 0.0%, implying that a technical recession is now virtually certain absent a dramatic improvement in the US economy in the remaining ten days of June, and Q2, which is very much unlikely since the slowdown in the US economy is only accelerating to the downside.

Amid this continued deterioration in US economic data, we said that the market's jarring repricing lower was evidence that a recession had become the baseline, and we predicted that "every Wall Street bank would revise their GDP forecasts to contraction in the coming days."

Sure enough, we were right once again because late on Sunday, Nomura became only the second bank to join DB in calling for a recession as its base case, and also became the first bank expecting this outcome to hit some time in the second half (unlike DB's generously delayed forecast of a "late 2023" recession).

And once again echoing what we said back in December 2021, when we predicted that "the Fed is hiking rates into a recession"...

... Nomura warns that the "Fed’s commitment to restoring price stability will likely push the economy into a downturn." I.e., Powell will hike the US right into a recession.

While there is a lot of useful data in the full note (available to premium ZH users in the usual place), we will excerpt some of the key highlights below:

  • With rapidly slowing growth momentum and a Fed committed to restoring price stability, Nomura believes a mild recession starting in Q4 2022 is now more likely than not (ZH: expect the mood to deteriorate further as "mild" eventually becomes "jarring").
  • Financial conditions are likely to tighten further, consumers are experiencing a significant negative sentiment shock, energy and food supply disruptions have worsened and the outlook for foreign growth has deteriorated. All these factors will likely contribute to the expected downturn.
  • Relative to previous downturns, Nomura believes that the significant strength of consumer balance sheets and excess savings should mitigate the speed of the initial contraction. However, policymakers’ hands are tied by persistently high inflation, limiting any initial support from monetary or fiscal stimulus.
  • The bank lowered its real GDP growth forecast in 2022 to 1.8% y-o-y (-0.3% Q4/Q4), down from 2.5% (1.4% Q4/Q4). In 2023, it expects real GDP to  decline 1.0% y-o-y (-1.2% Q4/Q4), down from +1.3% (+0.6% Q4/Q4).
  • The bank also expects the unemployment rate to rise to 5.2% by end-2023 and 5.9% by end- 2024, above previous expectation of a rise to 4.3% over that period.
  • For inflation, the near-term impact of the bank's economic outlook revision is more muted considering the persistent nature of rent inflation and rising inflation expectations. Nomura only lowered its Q4/Q4 2022 core PCE inflation forecast 0.1% to 4.4%, largely reflecting core goods prices. However, the Q4/Q4 2023 core PCE inflation forecast now stands at 2.4%, down from 2.8% previously.
  • With monthly inflation through 2022 likely to remain elevated, Nomura economists believe the Fed response to the downturn will initially be muted, and expect ongoing rate hikes to continue into 2023, but with a slightly lower terminal rate of 3.50-3.75% reached in February (down from our previous forecast of 3.75-4.00% in March). However, it now expects rate cuts in H2 2023, lowering the funds rate to 2.875% by end-2023 and 0.875% by end-2024.

Nomura then goes into a detailed review of all the various factor that have made a late-2022 recession inevitable. We excerpt from these below:

  • The persistence of inflation and a single-mandate Fed - From a very high level, the ongoing persistence of elevated inflation and growing evidence of unanchored inflation expectations are the two key drivers of our expected growth downturn. Despite the Fed’s significant hawkish pivot since November 2021, inflationary pressures have not eased meaningfully and may have arguably worsened (Fig. 2 ). Inflation expectations are showing growing signs of being unanchored (Fig. 3 ). Against that backdrop, we believe the Fed’s efforts to realign demand with depressed supply to rein in price pressures will ultimately drive the economy into a mild recession.

  • Recent financial conditions developments and their implications for growth - Financial conditions have tightened considerably in 2022, but not yet to levels that would suggest a significant drag on growth. Broad measures of equity prices have declined between 20-30% and BBB option-adjusted corporate credit spreads have widened over 60bp. While NFIB’s latest data suggest small businesses are not yet experiencing a material deterioration in credit conditions, that could soon change. Altogether, our financial conditions index has moved lower – implying a roughly neutral impulse to growth after hovering around 3pp in late 2021 – but has not yet entered negative territory (Fig. 4 ).

  • Interest-rate sensitive GDP components - Within the real economy, interest-rate sensitive GDP components are likely to accelerate the downturn. Already, housing demand has shown signs of pronounced weakness as both existing and new home sales move lower and starts and permits lose steam. The sensitivity of US GDP growth to higher interest rates could be larger in this cycle, considering interest rate-sensitive components comprise a historically elevated share of real GDP (fig 5).
  • Durable goods consumption jumped sharply above its recent trend during the pandemic, due to constrained service activity and significant policy support. With rapidly rising interest rates, and deteriorating economic conditions, the pullback in durable goods spending in 2022 and 2023 will likely result in a larger-than-usual negative impulse to growth. In particular, to some degree, durable goods consumption and home sales are interconnected and the recent deterioration in home affordability could weigh on durable goods consumption significantly (Fig. 6 ).

  • Rapid home price growth during the pandemic has pushed up the home price-to-rent ratio to levels not seen since the early 2000s (Fig. 7 ). Despite the lag with which home prices will likely respond to the downturn, we see elevated risk of price corrections, which could prolong the downturn. Moreover, if workers lose bargaining power for remote work opportunities as the unemployment rate rises, COVID-related migration could reverse, which may exert downward pressure on home prices in areas that benefitted from the shift in work conditions

  • Consumers are experiencing a sentiment shock - For much of 2022, we have expected strong service consumption – due to re-opening, pent-up demand and excess savings – to support overall consumer spending despite headwinds for goods consumption. However, in recent months, meaningful signs of a negative consumer sentiment shock have emerged. Google search activity for “recession” has increased above levels that prevailed during the Global Financial Crisis (GFC) and the University of Michigan’s consumer sentiment index dropped to its lowest level on record in June (Fig. 8 and Fig. 9 ).

  • In May, real core retail sales declined notably, but real food services spending also faltered, suggesting a growing risk the expected rotation to services to offset weakness in goods may already be unraveling. The Fed intends to materially slow demand to rein in inflation, and continued elevated employment growth in that context seems increasingly unlikely. Indeed, as evidenced by the June Summary of Economic Projections (SEP), the Fed’s efforts are increasingly designed to push up the unemployment rate over the forecast horizon to lower inflation by reducing labor market tightness.
  • Commodity price shocks risk becoming the new normal - In addition to tighter financial conditions, the exposure of interest-rate sensitive sectors and a consumer sentiment shock, the outlook for supply shocks – particularly for energy and food – has continued to deteriorate this year. The ongoing Russia-Ukraine war and its impact on global commodity markets and supply chains has shown few signs of improvement, and may have started to become more entrenched. After commencing 2022 around $75/barrel and spiking to as high as $123/barrel at the onset of the war, WTI crude oil prices have remained persistently high, averaging close to $120/barrel during June. Retail gasoline prices in the US have risen sharply and persistently from around $3.30/gallon at end-2021 to over $5.00/gallon in June. Increased demand from the ongoing reopening of China after Omicron-linked lockdowns suggests further upside risk to energy prices.

A challenge to bears is that while a recession is now assured, the Fed's intervention to contain it will be delayed: here we agree with Nomura that "one of the most significant differences between our expectation for this recession and prior episodes involves the response from policymakers. In the current high-inflation environment, both monetary and fiscal policy are likely to be much more restrained in their response relative to previous recessions." That is until everything comes crashing down in a global, synchronized recession. Here are some more details from Nomura:

The Fed’s hands are likely to be tied through 2022 by elevated inflation - Fed officials have been clear they will prioritize restoring price stability above all else. Unfortunately, we believe monthly core inflation is likely to remain quite elevated and above levels with which the Fed would be comfortable, at least through 2022, and likely into early 2023. As shown in Fig. 2 , the main driver of elevated trend inflation pressures continues to be owners’ equivalent rent (OER) inflation – one of the largest, and “stickiest,” inflation components. Due to BLS methodological differences and the lead-lag relationship with shelter prices and the economic cycle, Nomura does not expect OER inflation to meaningfully improve until early 2023. As a result, the Fed is likely to downshift to a 50bp rate hike in September, and 25bp per meeting thereafter before holding rates at an elevated rate. However, we do not expect any signs of potential easing from the FOMC, i.e., rate cuts or QE, in the near term.

Over the past decade and a half, the proximity of the Fed’s policy rate to the effective lower bound (ELB) has helped establish a standard “playbook” for responding to recessions, exemplified during the COVID crisis: cut rates swiftly and sharply to the ELB and prepare for large scale asset purchases (LSAPs, or QE), in order to provide additional accommodation.

However, Nomura believes that this playbook is likely to be of little use to policymakers in the current environment, due to persistently elevated inflation. We disagree: while Nomura expects rate cuts to start in H2 2023, they will likely come much later than they otherwise would have absent strong inflationary pressures, we believe that once the US is hit with the deflationary tsunami that is coming, prices will collapse much faster than most expect. Nomura fails to accept this and instead it predicts a pace of rate cuts which will likely to be slower than in previous recessions (Fig. 16 ), adding that "the Fed will continue to reduce the size of its balance sheet into 2023 considering its historically elevated size and their plans to tighten financial conditions beyond raising short-term rates. Both actions run against what policymakers would likely prefer to do in a standard recession." Again, we disagree and expect a full-blown QE episode to be unveiled as soon as early 2023.

Where we do agree with Nomura is in the bank's assessment that "fiscal policy support is likely to be absent, or outright restrictive":

Similar to monetary policy, we believe fiscal policy will largely remain on the sidelines for the expected recession, aside from the regular impact of automatic stabilizers like unemployment insurance. Policymakers in Washington across the spectrum have increasingly taken the view that significant, and unprecedented, fiscal support during the pandemic helped exacerbate inflationary pressures. That experience, combined with widespread voter dissatisfaction due to inflation, will make many members of Congress reluctant to provide any kind of discretionary fiscal stimulus. One of the most striking indications of just how quickly the conversation in Washington has changed has been recent commentary from Biden administration officials on the potential for deficit reduction to help combat inflation. Treasury Secretary Yellen in particular has suggested deficit reduction could help address elevated inflation pressures.

Furthermore, as we have frequently noted...

... Nomura is certainly correct in predicting Congessional gridlock: "with our expectation of a return to divided government after the November 2022 midterm elections – we believe Republicans are likely to take back both the House and the Senate – Washington will likely return to gridlock. Republicans face few incentives to collaborate with the Biden administration with an important presidential election looming in 2024. Moreover, Republicans may be emboldened during debt limit and regular appropriations debates to push for outright spending cuts, which could exacerbate the recession in 2023."

Here, we would predict that far from making monetary policy less likely, the fact that no fiscal stimulus is coming until at least 2025, means that the Fed's liquidity firehose will be front and center as soon as late 2022/early 2023.

Putting it all together

Nomura expects a "modest" recession to start in Q4 2022, Combining the factors above; relative to previous downturns, the bank expects a shallower and longer path, for three reasons.

  • First, robust consumer balance sheets and excess savings should limit how quickly growth decelerates.
  • Second, the lack of policy support – monetary and fiscal – at the onset of the recession will likely prolong its length.
  • Third, despite some concerns over corporate debt, there is no obvious financial accelerator to amplify the recession shocks like the GFC (Fig. 18 ).

In terms of annual changes, Nomura lowered its real GDP growth forecast in 2022 to 1.8% yo-y (-0.3% Q4/Q4), down from 2.5% (1.4% Q4/Q4). In 2023, we expect real GDP to decline 1.0% y-o-y (-1.2% Q4/Q4), down from +1.3% (+0.6% Q4/Q4).

In terms of unemployment, Nomura expects nonfarm payroll employment growth to begin decelerating, but not as quickly as overall growth. Labor demand remains elevated and some firms may engage in labor hording during the initial stages of the downturn, resulting in weak productivity growth. NFP is likely to start declining in February 2023 under our base case. The unemployment rate will likely rise from an expected trough of 3.3% in the next few months to 3.5% by end-2022, 5.2% by end-2023 and 5.9% by end-2024. Our unemployment rate trajectory is less severe relative to the GFC, but slightly higher than 2001, reflecting less initial policy support (Fig. 19 ).

Finally, when looking at its update inflation outlook, Nomura writes that it expects Inflationary pressures remain strong and, due to a number of reasons, and thinks that the economic downturn may not exert substantial near-term disinflationary shocks, resulting in only modest revisions to its inflation forecast.

First, supply constrains will likely continue to help prices remain at elevated levels. To be sure, there have been some encouraging signs of inflationary imbalances easing in certain goods prices, such as home appliances and furniture, which motivates Nomura to lower its forecast for core goods prices modestly. However, vehicle prices, determined by complex supply chains, continued to increase, and it will take time to meet accumulated pent-up demand for vehicles, even if auto production picks up. As a result, Nomura expects core goods prices to continue to make a positive contribution to core PCE inflation on a y-o-y basis until mid-2023 (Fig. 20 ).

  • Second, the Japanese bank expects inflation to be driven more by service prices, which are “stickier” than goods prices. In particular, rent and owners’  equivalent rent (OER) have been accelerating in recent months and private data on rent and house prices suggest BLS rent inflation and OER will likely continue to firm for the next few quarters (Fig. 21 ).  Considering rent and OER are cyclical components, rent-related components will eventually decelerate in reaction to a recession. However, rent/OER tends to lag the broader economic trend as rent for existing leases only updates every one or two years and economic uncertainty could increase the flow of prospective home buyers towards renting. Historically, the impact of recessions on monthly changes in trend inflation measures becomes more pronounced only 6-12 months after a recession begins (Fig. 22 ).
  • Third, long-term inflation expectations might have started to de-anchor as Nomura expects the Fed’s CIE index to jump in Q2 2022 (see Fig. 3 ). If  households and businesses continue to raise their inflation expectations, the risk of an emergence of a new, high-inflation regime would increase, suggesting high inflation could become more persistent despite a recession (forcing the Fed to raise its inflation target to 3% of more). Considering the formation of inflation expectations by households is sensitive to commodity prices, such as food and gasoline, higher commodity prices could enhance the persistency of inflation. Altogether, Nomura lowered its core PCE inflation forecast in Q4 2022 and 2023 only modestly by 0.1pp to 4.4% and 0.4pp to 2.4%, respectively. On a m-o-m basis, Nomura expects core PCE inflation to move below 0.17% (annualized 2%) in Q3 2023, which is consistent with our expected timing of the Fed starting rate cuts.

Of course, Nomura is just the first of many and now that the seal has been breached, we expect many more banks to not only make a recession their base case but to set the timing squarely into second half 2022 territory. What happens next, and predicting (correctly) how - and when - the Fed reacts to this recession will make some people very, very rich in the coming months.

There is much more in the full note available to professional subs in the usual place.

Tyler Durden Mon, 06/20/2022 - 11:45

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Steps to building a more patient-centric industry

Lack of access, strict regulations, and demanding schedules have made it extremely difficult for patients to participate in
The post Steps to building…



Lack of access, strict regulations, and demanding schedules have made it extremely difficult for patients to participate in clinical trials. A 2018 NIH survey found that patients felt clinical trial participation to be inconvenient and burdensome, and nearly half (49.0%) said it disrupted their daily routine. In 2021, a CISCRIP Perceptions and Insights Study reported more disruption to daily routines compared to previous years, citing length of visits, travel, and diagnostic tests as top burdens.

To ease this burden, the life sciences industry has been searching for ways to make clinical trials more accessible for patients and to drive participation numbers, increase participant diversity, and improve overall patient experience. For many patients, this change starts with choice.

A recent survey of clinical trial professionals found that more than two-thirds of respondents (61%) believe giving patients choice will have a positive impact on clinical research, and well over half (58%) said that their organisations plan to give patients the option to choose how they participate in clinical trials moving forward. Some examples of these choices can include video visits, phone visits, and remote monitoring.

As the industry focuses on creating a more holistic, inclusive patient experience, here are key steps to consider in order to help bridge the gap between clinical research and the patient experience.

Build a base in the community

According to the FDA’s 2020 Drug Trials Snapshot Report, only 8% of clinical trial participants are Black or African American, as compared to nearly 14% of the US population. The fact is, many minorities never learn about vital clinical trials in play, or that they’re eligible to participate. Subsequently, they are excluded, creating an evident gap in participants, and subsequently needed data on how treatments respond across different demographics of people.

Creating a broader, more inclusive patient experience starts with building a network of advocates who can help organisers meet patients where they are located and educate them about the availability and value of the trials. Initially, there needs to be a more proactive and sustained nationwide outreach effort to raise clinical trial awareness within minority communities.

It’s also important to partner with trusted people within minority communities, such as religious and government leaders that have the credibility needed to share clinical trial information to counter scepticism. If sponsors can partner with patient-advocacy groups to inform design, recruitment, follow-up, and even data collection (particularly for patient-reported outcomes), it will help to keep patients engaged longer and potentially derive higher quality data sets that can lead to better patient outcomes over the long run.

Embrace technology to expand reach

Technology – especially related to automation and the cloud – can help create a more flexible clinical trial model, thereby making it easier for patients to participate. Digital tools used in decentralised trials, remote enrolment tools, consent forms, wearables, and remote devices, as well as data capture, can help to expand overall access to clinical trials. For example, with remote monitoring, doctors and trial administrators can analyse all the data coming in and, if there’s a problem, they can act more quickly and respond back to the patient through a mobile device such as a smartphone.

Cloud platforms can open two-way communication channels for patients, doctors, and trial administrators to talk and share data, essentially in real-time. Some early examples of these capabilities were part of the US Centers for Disease Control and Prevention’s (CDC) v-safe program, developed by Oracle, which is used to track the effects of the COVID-19 vaccines through voluntary, scheduled survey prompts, and to remind people about boosters. Today, capabilities like this are being extended so that trial data from wearable devices and home-monitoring systems can be communicated directly to trial sites.

A new solution

One significant roadblock to clinical trial inclusion of minority groups has been location and transportation. Many potential participants lack transportation to and from clinical sites, and some trials are only held in large city hospitals, instead of smaller community hospitals that participants can sometimes access more easily. Thanks to decentralised trials and technology that collects data remotely, people from anywhere can participate.

One approach the industry has been exploring is to utilise community retail pharmacies as a central location for people to learn about and participate in clinical trials. By collaborating with pharmacy retailers, sponsors will have more opportunities for patient recruitment because they can offer patients the convenience and comfort of visiting familiar community sites.

For example, CVS and Walgreens have instituted flexible clinical trial models that combine patient insights, technology capabilities, and in-person and virtual-care options to engage broader and more diverse communities. The result is a much more expansive pool of participants and potentially much better information about populations where the drug is effective, and other populations where it might not be effective.

Keep it simple

There’s a notion that because the healthcare and life sciences industries are very complex, the systems that support them have to be equally complex. In fact, the opposite is true. Easier-to-use systems will increase participation rates, and we will have better outcomes as a result. With so many technology advancements at its disposal, the industry must find a way to bridge the divide between patient experience and clinical research. The patient journey must be a positive one, so that they will encourage others to participate.

Imagine, clinical research as an accessible care option to anyone. Technology has given us the opportunity to make this goal a reality. But as an industry, we must innovate to bring new experiences to market and improve the clinical research ecosystem for patients, healthcare professionals, sponsors, and regulators.

About the author

Katherine (Kathy) Vandebelt is global head of clinical innovation at Oracle Health Sciences. With over thirty years of experience in clinical research working in different geographies and across various TA, Kathy has worked with various organisations to advance their clinical operations and business processes to a better operating model. She believes patients are the most important constituent in clinical development and provide the necessary information to assess the safety and efficacy of new medicines. She strives to introduce new experiences and make the clinical research ecosystem better for patients, healthcare professionals, sponsors, and regulators using the power of technology.

The post Steps to building a more patient-centric industry appeared first on .

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42 Biden Admin Officials Put On Notice By House Republicans

42 Biden Admin Officials Put On Notice By House Republicans

Authored by Jack Phillips via The Epoch Times (emphasis ours),

At least 42 Biden…



42 Biden Admin Officials Put On Notice By House Republicans

Authored by Jack Phillips via The Epoch Times (emphasis ours),

At least 42 Biden administration officials were sent letters by Republicans on the House Judiciary Committee this month requesting testimony from a variety of White House officials.

Flanked by House Republicans, U.S. Rep. James Comer (R-Ky.) speaks during a news conference at the U.S. Capitol in Washington on Nov. 17, 2022. (Alex Wong/Getty Images)

Those letters primarily dealt with the suspected politicization of the FBI and Department of Justice (DOJ), investigations into U.S. border security, and President Joe Biden’s son Hunter.

A recent letter (pdf) led by Rep. Jim Jordan (R-Ohio) to White House chief of staff Ron Klain requested testimony from Biden administration staffers relating to alleged “misuse of federal criminal and counterterrorism resources to target concerned parents at school board meetings.” Interviews from four White House officials were requested.

Around the same time, another letter (pdf) from Jordan was sent to the Department of Education requesting testimony from three officials, and another letter to the Department of Homeland Security requests interviews from around a dozen administration officials. That includes embattled Homeland Security Secretary Alejandro Mayorkas and U.S. Immigrations and Customs Enforcement chief Tae Johnson.

Even more DOJ and FBI officials were asked to testify during the next Congress, according to two separate letters (pdf, pdf) sent by Jordan and others last week. They’re seeking testimony from Attorney General Merrick Garland, FBI Director Christopher Wray, Deputy Attorney General Lisa Monaco, and dozens of other DOJ and FBI officials, according to a Washington Examiner analysis of the GOP-backed letters.

It’s likely that Republicans will seek to investigate how the FBI and DOJ handled investigations into former President Donald Trump and the raid that targeted Mar-a-Lago in August. Republicans and Trump have long said the two agencies have exhibited a politically motivated animus toward the former president, coming after Garland announced he had appointed a special counsel, Jack Smith, to investigate him.

FBI Director Christopher Wray (R) and Attorney General Merrick Garland speak at a press conference at the Department of Justice in Washington on Oct. 24, 2022. (Kevin Dietsch/Getty Images)

More than a week ago, Garland appointed Smith as special counsel to “oversee two ongoing criminal investigations” into Trump, namely events surrounding the Jan. 6, 2021, Capitol breach and the Mar-a-Lago raid, according to a DOJ statement. Just days before, Trump announced he would be embarking on a third presidential bid in 2024.

Other Investigations

House Majority Leader-elect Steve Scalise (R-La.) revealed that some of the GOP’s priorities for the incoming Congress are probing the origins of COVID-19, the widely criticized U.S. withdrawal from Afghanistan, and allegations surrounding Hunter Biden.

The House Oversight Committee, under its top Republican and likely next chairman, Rep. James Comer (R-Ky.), is “ready to go start looking into a lot of the questions that people have had,” Scalise told Breitbart this weekend.

Whether it’s Hunter Biden’s dealings with all kinds of foreign countries [or] the laptop scandal, which the liberal media tried to dismiss when it came out in 2020,” he added. “It’s been verified.

It turns out there’s a lot of information on that laptop that raises serious questions, and James Comer’s committee’s going to be asking those.

Read more here...

Tyler Durden Wed, 11/30/2022 - 22:25

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How Inflation Changes Culture

How Inflation Changes Culture

Authored by Jeffrey Tucker via,

The midterm elections are over (no Red Wave), but nothing…



How Inflation Changes Culture

Authored by Jeffrey Tucker via,

The midterm elections are over (no Red Wave), but nothing has changed. In fact, the Biden regime will probably become even more emboldened to pursue destructive economic policies because it will interpret the lack of a Red Wave as some kind of mandate.

Every day seems to be a day of spin, with every regime apologist assuring the public that inflation is getting better. Just look at the wonderful trend line! They point to the latest inflation numbers, which were down a bit from the month prior.

The regime insists that yes, inflation will vex us for a bit more time but will settle down in a few months. Plus, the president is working to fix this! And we know the American people are on board with him since no Red Wave materialized.

But in the footnotes, you’ll find the truth: it was a tiny drop and mostly for technical reasons and the main reason for the drop has already disappeared from the price trends.

Has any political propaganda on this topic ever been this ineffective? It’s truly a joke.

Where’s the Relief Coming From?

The producer price index that came out recently paints a clearer picture. It’s grim. It reveals no softening at all. In fact, it shows that there are plenty of coming price increases. Here is the index by commodities from 2013 to the present.

Remember how last year many people finally came to the conclusion that we had to learn to live with COVID? That was a smart choice because there was no way that the China-style suppression method could work.

Well, here we are now with a preventable inflation pandemic and the realization that we have to learn to live with inflation. Soon we’ll realize that we have to live with recession at the same time.

But what does this mean?

The impact will be felt not just in terms of economics but in culture. Inflation causes a society-wide shortening of time horizons.

True Prosperity

Let’s review some basics. All societies are born desperately poor, fated to live off foraging and just getting by. Prosperity is built through the construction of capital, which is the institution that embodies forward thinking.

To make capital requires the deferral of consumption: you have to give up some today in order to make tools that enable more consumption tomorrow. This means discipline and a future orientation. And it means, above all, savings that can be invested in productive projects. Only through that path can societies grow rich.

A key component of this concerns the stability of the medium of exchange. And not just stability: a currency that rises in value over time incentivizes saving and thus investing for the long term.

The late 19th century provided a good example of this. Under the gold standard, money grew more valuable over time, thus rewarding long-term thinking and instilling that outlook in the culture at large.

Live for Today

Inflation has the opposite effect. It punishes saving. It forces a penalty on economic behavior that is future-oriented. That means also discouraging investment in long-term projects, which is the whole key to building a complex division of labor and causing wealth to emerge from the muck of the state of nature. Every bit of inflation trims back that future orientation.

Hyperinflation utterly wrecks it.

Living for the day becomes the theme. Taking what you can get now is the method and the theme. Grasping and spending. You might as well because the money is only going down in value and goods are in ever shorter supply.

Better to live hard and short and forget the future. Go into debt if possible. Let the devaluation itself pay the price.

The Seeds of Destruction

Once this attitude becomes instilled in a prosperous society, what we call civilization gradually devolves. If inflation persists, this kind of short-term thinking can wreck everything.

This is why inflation is not just about rising prices. It’s about declining prosperity, the punishing of thrift, the discouragement of financial responsibility, and a culture that gradually falls apart.

Another factor in reducing time horizons is legal instability. This was my first concern when the lockdowns began. Why would anyone start a business if governments can just shut it down on a whim? Why plan for the future when that future can be wrecked by the stroke of a pen?

Many people had assumed that this new path would be short-lived. Surely the politicians would wise up and stop the madness. Surely! Tragically, it got worse and worse. The spending and printing began and ramped up over time. It was a perfect storm of sheer madness, and now we are paying the highest possible price.

The Hinge of History

We need to speak frankly about what’s happening to the global economy. It’s not just about supply chain breakages. Those can be repaired. It’s not just about inflation affecting every country. We are living amidst a fundamental upheaval in the whole world.

The most significant single danger to global prosperity now comes in the form of a devastating and deeply tragic wreckage of the country that was set to lead the world in finance and technology: China.

The WSJ summarizes the current pain:

China in 2021 accounted for 18.1% of global gross domestic product, according to International Monetary Fund data, behind the U.S. at 23.9% but ahead of the 27 members of the European Union at 17.8%. It accounts for almost a third of global manufacturing output, according to United Nations data from 2020. China’s economy expanded modestly at the beginning of the year but data for March and April point to a sharp slowdown.

The trouble there traces to the top. When Xi Jinping locked down Wuhan, the world celebrated him for achieving what no other leader in history had achieved: the eradication of a virus in one country. Even now, he gets accolades for this.

The rest of the world followed, and elites in all countries said that this path was the future.

Going Backwards

Now the virus is on the loose all over the country, and the eradication methods are intensifying. This is crushing economic growth and now threatening genuine economic depression in the country that only a few years ago was seen as the greatest economic engine of the world.

It’s truly the case that Xi Jinping has put his personal pride above the well-being of all people in China. The scientists in the country know that he is wrong about this but no one is in a position to tell him.

We cannot really trust the data coming out of China but officially the rate of infection in that country is one of the lowest in the world. Billions more people need to get the bug and recover in order to have anything close to herd immunity. This means that lockdowns are the way for years to come so long as the present regime remains in power.

American prosperity for decades has relied on: relatively low inflation, fairly stable rules of the game, and widening trade with the world and China in particular. All three are at an end. Yes, it is heartbreaking to watch it all unfold.

I’m not defending China’s human rights abuses. Far from it. But the best way to end these abuses is through engagement, not estrangement.

We all need hope right now but it’s very difficult to find, since we are on a course that is not likely to be fixed for a very long time.

Tyler Durden Wed, 11/30/2022 - 19:05

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