Markets Are Failing To Grasp The Painful Fact That There Is No Quick Resolution To The Energy Crisis

By Michael Every of Rabobank

Post-liberal liberalism and post-Marx Marxism

Yesterday saw a three-way global ideological split on how to deal with our energy crisis: hair shirt; unwind markets; and eat-the-seed-corn. None will solve the short- to medium-term problem, much as financial markets are failing to grasp that painful fact.

• The UK, after removing energy price support for households from April, may also remove the pensions lock to inflation (as CPI hit 10.1% again today); so old people will be doubly unable to afford their heating bills, bringing us ‘demand destruction’; and PM Truss or Tory Party destruction. The BOE said it would continue with QT. Markets hated the idea.

• The European Commission dodged an immediate cap on gas prices due to EU splits, but will ask members’ approval for a temporary “maximum dynamic price” on benchmark TTF Dutch gas as a “last-resort” – with the caveat that this cannot boost demand. Which, by implication must also mean matching rationing. Goodbye free markets and economies. That’s as Qatar warns it sees global LNG shortages until 2025, which Bloomberg helpfully recounts come on top of similar heads ups from: the IEA; Germany; Uniper; Woodside; Morgan Stanley; Chevron; ICIS; Rystad; the International Group of LNG Importers; and our own Joe DeLaura.

• US President Biden is going to release another 15m barrels of oil from the Strategic Petroleum Reserve, which has as much to do with the mid-term elections and bad Democrat polling as Hunter Biden did with a laptop. The administration also claims this action should be a signal for the domestic energy industry to ramp up output, despite it implying the opposite.

Meanwhile, the same diverse ideologies to try to solve structural problems, and markets head-in-sand approaches, are also evident on the global stage.

Yesterday, Branko Milanovic published ‘Let’s go back to mercantilism and trade blocs!’, which has been the underlying warning/prophecy here since 2016. He agrees: “There are two reasons why the West should abandon globalization. The first is that it was not good, economically, for its middle classes… Second, geopolitically, globalization helped the rise of China which is already now, but will be even more so in the future, the main military and political competitor of the US…. The idea was, to the great but undeclared chagrin, of the American liberals first raised by Donald Trump. Now the liberals, in this respect like in several others, are happy to follow in Trump’s footsteps.”

However, this raises a problem:

“How to explain this volte-face to the rest of the world. The Western narrative has, since 1945, been built precisely on the opposite view… Now, the West that was the principal ideological champion of free trade has soured on it because it no longer works in its favour… We are now told that we need to go back to the drawing board. But we are not allowed to call these reversals by their real names. Their real name is trade blocs.”

And these aren’t new, having previously been called:

“UK imperial preferences, Japan’s co-prosperity zone, Grosse Deutschland’s Central European area, Soviet Council for Mutual Economic Assistance. They also responded to geopolitical interests of the countries that introduced them. For some 80 years they were held to have been ideologically retrograde, part of “beggar-they-neighbour” quasi autarkic policies. Now, we are to believe that  “friend-shoring” is somehow different. It is not. It just mercantilism under a new name and trade blocs in a different costume”.

Milanovic is not alone in these thoughts. Even the UK’s right-wing conservative Daily Telegraph’s @NJ_Timothy tweeted at length yesterday:

“The real problems with the British economy are about poor productivity, regional disparities and an unsustainable trade deficit. We need a new approach based on active government, long-term investment, economic rebalancing, skills and training, and domestic production.

We’re not as rich as we think we are. Inflation is a brutal correction. Pay stagnation tells its story. So do the trade deficit and the state of the public finances. We have become addicted to super low interest rates and QE. Personal debt stands at 133% of household income.

Our economic model is dependent on consumption, but too many are too poor to consume without credit. We have run down manufacturing and built a services economy that makes a small number of people rich while creating lots of low-productivity, low-skill, low-paid jobs.

So we have fewer productive and well-paid jobs, and fewer such jobs outside the south-east of England. Even more important, our unbalanced economy means fewer exports and a huge trade deficit, which creates a series of perverse outcomes.

To protect Sterling Britain needs foreign capital. Companies and assets like utilities and housing are sold off, risking a vicious cycle. Good young firms are sold before they can grow. Utilities profiteer without investing. R&D spend is kept low. Asset prices are propped up.

We need economic growth through a rebalanced economy. Everything – from education to immigration, fiscal and monetary policy to energy, industrial strategy, the regulation of labour markets and supply of housing – must be directed at achieving that objective.

We’ll need to smash shibboleths. Ever freer trade may not work as conventional wisdom assumes. Aggregate demand matters. Intervention works. The supply-side reforms we need most – like retraining programmes and infrastructure and R&D spend – cost money…

Without a radical change in our economic model, there can be no levelling up, no great improvements in productivity or pay, and no improvements in inequality and fairness. This is the only way to build a better society in which everyone can contribute.”

He’s not wrong either: and his solution smells like mercantilism rather than Thatcherism – though I presume the UK, and West, will try to retain as much liberalism as it can.

Of course, there are those who cheer the austerity the UK is about to introduce, despite it showing its fiscal pendulum swinging from extreme stupidity to opposite extreme stupidity without pausing anywhere sensible in the middle of the spectrum. Perhaps they should note that just as US Secretary of State Blinken warned this week –without evidence– that China has accelerated its timetable for action on Taiwan, China is reportedly trying to poach ex-RAF fighter-jet and helicopter pilots to teach the PLA how to evade UK defences for £240,000 a head – the inflation-adjusted cost of 30 pieces of silver, as some put it.

Less romantically, Mike Bird of The Economist notes this is the price of a drab 1-bedroom flat an hour’s commute from London. The West used to be able to coax Soviet experts to defect when the very best the USSR could ever give them was that kind of paltry reward: now we can’t even offer that to our own non-financial elite. Worse, the government is about to slash state spending, which could see a further slew of highly-trained soldiers willing to work for those who can pay their mortgage and gas-bills. If you take a mercenary approach to running the state, is it any surprise its citizens take the same mercenary approach back?

Oops, I am actually describing the bedrock view of neoliberal economics – that individual selfishness produces the best of all socio-economic outcomes, and free trade always rules: yet that ideology was hypocritically fleshed out on the fat back of British mercantilism(!)

At the same time, the Asia Nikkei notes of the 20th CPP congress in Beijing, ‘Xi’s speech hints at ambition to surpass Mao: Chinese leader suggests direct ideological descent from Marx’. The congress rewrote its section on ideology into “A New Frontier in Adapting Marxism to the Chinese Context and the Needs of the Times,” and Xi was referenced as a “Marxist politician, thinker, and strategist.” As importantly, the SCMP reports ‘China’s ideology tsar Wang Huning tipped to head the National People’s Congress’.

For Wall Streeters who only know the name of Li Keqiang, Wang is a brilliant, and brilliantly ideological, intellectual. He sees Western liberalism as failed experiment leading to social, cultural, and economic collapse, and looks to Confucius, Plato, and Schmitt –the source of Nazi jurisprudence– as support for his views that society always comes before the individual. He is, as the SCMP puts it, the “brains behind the throne”, and the architect of the ‘Chinese dream’ concept. The NPC chairman is normally headed by the CCP’s number 2 or 3, and so holds enormous power; the NPC itself is the final interpretation authority of Hong Kong’s Basic Law.

As academic analysis puts it:

“As one of China’s leading “neo-authoritarian” establishment intellectuals during the late 1980s, Wang constructed a China-specific version of modernization theory inspired by American political scientist Samuel P. Huntington… Wang is therefore one in a long line of thinkers who have identified modernization as a process in permanent tension with the shared belief systems that bind human communities together. Viewed from the perspective of political order, modernization is desirable only insofar it can be counterbalanced with the creation of new value systems whose functional role is to keep institutions strong and societies governable. Strong states are culturally unified states. For an establishment intellectual in the context of CCP-ruled China, this means preserving and centralizing Party authority; renovating and expanding faith in Party socialism; and recalibrating globalization to make the international system more conducive to Party survival.”

If you were waiting for some kind of Pavlovian “now buy all of the things!” signal from the 20th congress, this was not it. By contrast, even if markets are too ignorant to see it –something the deeply-insightful Wang would have predicted to be the case– his promotion would underline how ideological the world is becoming. Bloomberg tried to chip in timidly yesterday that ‘China’s Shock GDP Delay Shows Communist Party Trumps Economy.’ That was a very, very small step in the right (or rather Left) analytical direction.

Post-Marx Marxism, which is mercantilist, is here to stay as a bulwark against Western liberalism. That will accelerate Western liberals shifting to post-liberalism and mercantilism as a response.   

At this stage I am supposed to tell you what goes up and what goes down, “because markets”. This should be obvious really. *All* markets will be mightily shaken up in that scenario. However, to spell it out in short, such a process:

• Is both inflationary and deflationary. It’s inflationary in the West, and means rates are going to rise further and then not go down by much. It’s deflationary for China. Or it’s even more inflationary for both China and the West, depending on Beijing’s policy response.

• Disrupts the real economy, with losers –and winners– by geography and sector. All that is solid melts into air.

Then again, could we see greater market volatility than we already have this year? Could we see more solidity melt than we already have? I’m not sure. That only underlines how far down this ideological path we have already come, even as most of our politicians, and much of the market, clings to denialism.