Rabobank: Countries Fearing Hunger Will Want To See A “Bread-on Woods” Deal

By Michael Every of Rabobank

Bread-on Woods

Today, I find myself in the unusual position of agreeing in public with something Janet Yellen also said. That didn’t happen all the time she was at the Fed, nor since she entered politics (while continuing to talk as if she is still at the Fed). Nonetheless, she just said it will be a “Long time, if ever” before the USD is replaced as key global currency: which matches what I argued in “Why ‘Bretton Woods 3’ Won’t  Work”.

I’m sure we had very different reasons for saying it, especially given Yellen was in favor of massive US fiscal stimulus, but not of onshoring supply chains to ensure it was not inflationary. I’m sure she wasn’t thinking that saying ‘Bretton Woods 3’ is to say “mercantilism is baaaack!” – and that an incumbent military, commodity, and financial superpower, with key global alliances, and willing to run a trade deficit with those it favours, can thrive in that realpolitik environment,… if the people running the place recognize it. (Just Google ‘Hamilton’ – and I don’t mean the musical.)

Moreover, Yellen spoke about Bretton Woods too (not Two) at a speech at The Atlantic Council. She noted the Ukraine War and Western sanctions, “are now seeing higher commodity prices that have added to global inflationary pressures and are posing threats to energy and food security, trade flows, and external balances across many countries. Much of our work next week during the IMF and World Bank Spring Meetings will be centred on how we can better support developing countries as they weather these shocks…”

As we had predicted in our pre-war analysis of the dynamic that Western sanctions would unleash, she warned that the time for being neutral is coming to an end:

“Let me now say a few words to those countries who are currently sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and backfilling the void left by others. Such motivations are short-sighted. The future of our international order, both for peaceful security and economic prosperity, is at stake… Going forward, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security.”

There was a named threat to China only: “The world’s attitude towards China and its willingness to embrace further economic integration may well be affected by China’s reaction to our call for resolute action on Russia.” (Not Germany, which is till refusing an immediate Russian energy ban.)

Yellen showed the US, like China and Russia’s ‘new world order’, also wants to shake the global architecture up. Specifically, Yellen mentioned the need achieve free but secure trade to prevent countries using their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage. “Let’s build on and deepen economic integration and the efficiencies it brings – on terms that work better for American workers.” Again, Google ‘Hamilton’. “Let’s do it with the countries we know we can count on. Favouring the “friend-shoring” of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy, as well as to our trusted trade partners.”

She also pushed to implement last year’s global tax deal, revamp the IMF, better mobilise capital in support of people in developing countries, expedite the global transition to a more secure and cleaner energy future, and strengthen the global health architecture.

There were no details on any of these, and one can look for the synergies or the inconsistencies between them. However, the clear logic is that either China changes, or all economies will have to choose between dealing with either China or the West. In the Q&A, Yellen stated she did not want to see the evolution of a “bipolar” global system, with US- and Chinese-led camps, but that is exactly what is being threatened.

Of course, Wall Street will ignore this. They have the very high PPI number yesterday to worry about, where core pipeline inflation was double market estimates at 1.0% m/m, so 12% annualized: as I said yesterday, and Yellen didn’t last year, inflation looks entrenched.

Of course, big businesses will ignore this – in public at least. The potential disruption of only being able to do business where your government likes their government, even if you don’t like your government, is going to make corporate governance tricky.

Of course, China will ignore this too(?) Opinions are split – and so are the signals. Russian usage of CNY is booming, yet Huawei is boycotting Russia. However, Reuters says China’s oil giant CNOOC is preparing to exit the UK, Canada, and US over sanctions fears. Why would it be retreating if China is not going to do anything that could cause it to be subject to secondary sanctions?

Then one has to ask if the White House are serious (and is this seen as a serious White House?). If they mean it, there is likely to be bipartisan support in Congress, if not now, then after November.

The countries fearing hunger while watching this US-China-Russia stand-off will want to see a ‘Bread-on Woods’ deal as soon as possible: that is going to make food production and supply a vital geopolitical interest. From what was ‘bread and circuses’ to just plain bread.

Meanwhile, to underline what a serious world we are now in, it appears Russia’s Black Sea Fleet flagship, the Moskva, with 480 crew, has been sunk by Ukraine: what will the reaction to that loss of life and face be? In France, presidential challenger Le Pen has stated she views Crimea as Russian, which will make things very awkward for the West were she to win; and the US is sending much heavier weapons to Ukraine, such as artillery and helicopters.

I hope what is being discussed above — the role of the USD vs. commodity currencies and CNY, the global trading and financial architecture, and a future split within it — is sufficiently weighty that markets can grasp the implications. For those who prefer to focus on the smaller picture…

China is reportedly close to cutting its reserve requirement ratio and interest rates again, perhaps even today. Not that this has worked at all so far: and given Xi Jinping just underlined he is sticking with zero Covid lockdowns, it will be even less effective now.

By contrast, following the Bank of Canada and RBNZ both moving rates up by 50bp this week, Singapore also just de facto tightened monetary policy by the same amount, and the Fed is now set for aggressive hikes ahead. As noted in my report yesterday, what does that say for the outlook for Western fiat currencies vs. a ‘Bretton Woods 3’ CNY?

The RBA really doesn’t want to follow despite a booming commodities, what was soaring housing until market rates spiked without the RBA, and consumer inflation expectations rising to 5.2% from 4.9%, so may cling to Aussie jobs data (17.9K vs. 30K consensus; unemployment still at 4%, not 3.9% as expected). The ECB also meet today and will of course not move rates from 0.25% regardless of inflation because Euro-reasons.

Given tomorrow is a holiday, Happy Thursday, Easter, Chag Sameach, and Ramadan Mubarak.