Aurelia Butler

Investing.com — Liz Truss is to succeed Boris Johnson as the U.K.’s new Prime Minister, after winning a run-off for the leadership of the ruling Conservative Party.Truss, currently Foreign Secretary, defeated her rival Rishi Sunak by a margin of 81,326 to 60,399, after fighting a campaign based on a promise of tax cuts and increased spending on defense. She’s also mooted ending the Bank of England’s independence. Concerns about how those pledges would be financed have helped drive the pound and U.K. government bond prices down sharply over the course of the last month. The pound fell below $1.15 for the first time in over two years in early trading on Monday, hurt by a fresh surge in the price of natural gas amid the ongoing economic war between Russia and Ukraine. It’s now only a whisker above its lowest level since 1985.Likewise, the 10-year U.K. government bond yield rose another 8 basis points on Monday to trade above 3% for the first time since 2014. In a short acceptance speech, Truss repeated her pledge to lower taxes and also pledged to “deliver” on the energy crisis facing the country, both with regard to the short-term issue of soaring energy bills and with the longer term issue of supply. She had earlier promised a package of energy-related measures within a week of being confirmed in office. Her speech appeared to lend weight to unconfirmed reports that Truss may announce a freeze on household bills, meaning that the 80% rise in average prices outlined by the regulator Ofgem, last month, would not take place.Her previous comments have indicated she intends to incentivize new drilling for oil and gas in the largely depleted North Sea basin, while taking a more skeptical approach to rolling out renewables (singling out the use of agricultural land for solar farms in particularly disapproving terms). More

Welcome to my first appearance in the Trade Secrets newsletter since the end of July. In case you missed them, the two excellent editions in the interim by Financial Times colleagues are here (the great Edward White on grounds for optimism on fisheries subsidies) and here (the magnificent Andy Bounds on how US climate policy became trade policy and created a transatlantic row over cars).No big surprise about the two (related) themes that have emerged over the summer and which we’ll be looking at from various angles in coming months. One is climate change, the impact of which is underlined by the current horrors in Pakistan on top of droughts around the world. The other is what the now fast-arriving energy shock means for globalisation. Since you ask, here’s my column from last week about how energy self-sufficiency and energy security are not the same thing.As ever, I’m on [email protected] and my Twitter DMs are open at @alanbeattie for hints, tips, special requests, offers to pay my gas bills in London this winter, knitting patterns for thermal gloves and so on. Today’s Charted waters looks at how Russia’s energy squeeze complicates Europe’s battle with inflation.The forces that governments struggle to controlToday’s newsletter will sketch out the broad themes of what I’m likely to be writing about over the next few months — though let’s be honest, the remarkable capacity of the world’s governments, weather systems and malign pathogens to push globalisation off course means it’s hard to make firm plans. Time was, back before Covid-19 and beyond, the trade issue was more narrowly about trade policymakers doing trade policy, or at least so you would have thought from a lot of the (let’s be honest, not always lavish) media attention it got. And to be honest there often wasn’t that much policy about to make much of a difference in the real world. Multilateral trade deals that never happened, bilateral and regional agreements that often didn’t make a lot of difference when they did, a lot of legal argy-bargy over antidumping in mature industries such as steel and so on.Well, there’s now rather a lot of substantive traditional trade policy about: Donald Trump’s tariffs against China, which President Joe Biden has just announced will largely stay in place indefinitely, the US’s local-content requirements in electric vehicles, the EU tooling up with a bunch of unilateral measures against allegedly subsidised, dumped or unethical imports, the battle for dominance of the Asia-Pacific with the CPTPP and so on — not to mention the blackly amusing sideshow of the UK’s hapless Conservative party finding out what the Brexit a bunch of them fervently voted for actually means.But the real action in globalisation more broadly defined these days isn’t trade policy as such: even extraordinary interventions such as Trump’s trade war with China haven’t been as cataclysmic as you might have thought. More important are the direct effect of events in the real world, particularly the economic cycle, climate change and the energy shortages, and the collateral effects from governments setting policy in other areas.The massive real-world shock in the near future is the coming economic crunch. Obviously this is likely to be bad for trade in the near term, at least in goods. Imports have traditionally dropped a lot further during a recession than growth overall. On the other hand, as we’ll explore in future newsletters, the world saw big inflationary-recessionary crunches in the 1970s and 1980s, and they didn’t stop the medium-term march of globalisation. Even the massive collapse in goods trade during the financial crisis in 2008, and then again in the first year of the Covid pandemic, haven’t sent the post-cold war surge of globalisation into reverse.Climate change in its various manifestations also has the potential directly to affect trade and globalisation in the medium term. But it’s not at all clear in which direction it will go in terms of increasing or reducing cross-border commerce. As my esteemed colleague Helen Thomas points out, freight barges being unable to progress down the dried-up Rhine or Danube will concentrate minds on the threat from relying on shipping. Companies may wish to shorten supply chains accordingly. On the other hand, if unreliable harvests create shortages in populous food-importing countries they will require more imports rather than fewer.Similarly, you might assume that higher energy prices and hence transport costs will reduce the returns to long-distance trade in goods with low profit margins, and lead to shorter supply chains and the reshoring of production. But then again, as European manufacturers have discovered, more expensive fuel can also provide incentives for the offshoring of energy-intensive goods such as bicycle parts to Asia where power costs are generally lower.On the policy side, explicit trade-related actions such as the electric vehicle credits in Biden’s big climate change bill are important. But a vast spending programme designed to put the US at the forefront of the renewable technology is a much wider issue for the world economy in the long run than the specific trade-focused aspects. (Also, it’s much less likely to be a bad idea overall.)Similarly, there are attempts to put trade policy at the service of geopolitics, including an expanded sanctions regime from the US and EU, and lots of talk about governments encouraging their companies to “friendshore”, that is construct supply chains with political allies. But in reality, the geopolitical developments that are really likely to affect companies’ decisions in the medium term are the much more fundamental ones. Overwhelmingly, the biggest thing the US can do to affect the configuration of supply chains in the Asia-Pacific is to protect Taiwan from even a credible threat of Chinese military incursion, not fiddle around signing minor regulatory co-operation deals with its allies there.Globalisation is too important to be left to governments, and the future of trade is definitely too important to be left to trade policymakers. We’ve got a far more robust global trading system than the often feeble or wrong-headed response of governments deserves. Let’s see if we can keep it.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersThe big economic news item this week will be the European Central Bank rate-setting committee’s decision on how far and how fast to tighten eurozone monetary policy. The expectation is for an aggressive move, raising the benchmark deposit rate to 0.75 per cent. Trade — or rather the breakdown in trade via the Ukraine conflict — is at the centre of this issue. The primary cause of the inflation surge is the sharp rise in wholesale gas prices in Europe, fuelled by Russia throttling gas supplies. Russia’s decision to indefinitely suspended natural gas flows through the Nord Stream 1 pipeline spooked the markets, pushing down the euro to a 20-year low against the dollar, further fuelling inflation by pushing up the prices of imports to the EU, especially energy. This complex problem is not going to go away easily and the solutions are likely to be painful. (Jonathan Moules)Trade linksThe academic Richard Baldwin, the globalisation wonk’s globalisation wonk, has embarked on an epic multi-part assessment of the state of said phenomenon, which starts here (and to which I will return).The former US Treasury international finance guru Mark Sobel, in a lengthy post for FT Alphaville, says that the global architecture for resolving sovereign bankruptcies is messy (as I noted here in July), but there’s going to be no sweeping reform, so better deal with it as it is. He’s very likely right.The EU is set to make it much harder for Russian travellers to get visas, following demands from central and eastern member states. There’s already political tension with Turkey after a sharp rise in rejections of Turkish applications for visas for the free-movement Schengen zone inside the EU.The US ambassador to Japan (and former Barack Obama chief of staff) Rahm Emanuel muses about the next era of globalisation.My former student politics contemporary Liz Truss will today almost certainly be announced as the new prime minister of the UK, and as the FT’s excellent Britain after Brexit newsletter points out here, she is surrounded by a bunch of ideological deregulators and sovereigntists whose ideas appear somewhat at odds with business reality.Trade Secrets is edited by Jonathan Moules More

Turkey’s official inflation rate exceeded 80 per cent for the first time since 1998 in August as policymakers insisted that runaway price increases would soon begin to slow.The consumer price index increased at an annual rate of 80.2 per cent last month, according to data published by the government statistics agency — the highest level since President Recep Tayyip Erdoğan took power almost two decades ago. The figure was up from a rate of 79.6 per cent in July.Turkey has pursued what some economists have termed a giant economic experiment as the Turkish president, a notorious opponent of high interest rates, has insisted on maintaining one of the world’s lowest interest rates in real terms and inflation has soared as a result. With the central bank’s benchmark rate now at 13 per cent after an unexpected rate cut last month, the real cost of borrowing now stands at minus 67 per cent. Government officials, who argue that they are pursuing a new economic model, have insisted that inflation will begin falling in the final months of 2022 even as they raised their year-end forecast to 65 per cent over the weekend.“In the months ahead, we will witness inflation losing speed even more,” Nureddin Nebati, the country’s finance minister, wrote on Twitter in response to Monday’s data. He said the latest figures supported his view, adding: “We will drive high inflation out of these lands, never to return again.” Turkish officials are hoping that cooling inflation will help Erdoğan’s campaign for re-election in polls that are scheduled for June next year. Soaring inflation and a plunge in the value of the lira have eroded living standards and fuelled dissatisfaction with the president’s leadership. Most analysts agree that inflation will start to fall next year as the impact of the soaring rate of increase in early 2022 falls out of the index. But many have warned it still has further to rise before it begins to decline — and could end up stuck at a much higher level than the single-digit rate of 9.9 per cent that officials say they are ultimately targeting in 2025.

Liam Peach, a senior emerging markets economist at the London-based consultancy Capital Economics, said he expected inflation to peak at 85 per cent before falling sharply in early 2023.Peach warned that price rises would remain “entrenched at high levels for some time” because of Erdoğan’s deeply unorthodox economic policy.“The central bank is likely to remain beholden to President Erdoğan’s wishes for looser policy, and it seems that further interest rate cuts are more likely than not later this year,” he said.Monday’s inflation data was slightly below the consensus expectation among analysts of 81 per cent. Opposition parties and some analysts, however, have cast doubt on the official figures, accusing the government of publishing artificially low numbers. Inflation data published by the Turkish Statistical Institute, a state-run agency, has diverged strongly in recent months from a cost of living index produced by the Istanbul Chamber of Commerce, which increased almost 100 per cent year on year in August. The two indices had previously tracked each other closely. More

UK private sector business activity contracted in August, in a sign of consumer demand being hit by the intensifying cost of living crisis. The S&P Global/Cips UK purchasing manager index for manufacturing and services dropped to 49.6 in August from 52.1 in July and below a flash reading of 50.9.This was the first time the reading fell below 50 — the threshold between contraction and expansion — since January 2021, when the country was in a Covid-19 lockdown.With inflation at a 40-year-high, the figures come as rising energy and food prices are putting pressure on households’ finances, while soaring costs add to business challenges.Chris Williamson, chief business economist at S&P Global Market Intelligence, said the figures showed that incoming prime minister Liz Truss “will be dealing with an economy that is facing a heightened risk of recession, a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy”.Williamson said demand for consumer-facing services, such as restaurants, hotels, travel and other recreational activities, was “collapsing under the weight of the cost of living crisis”. He added that demand for business services was also coming under pressure amid concerns over rising costs and the darkening economic outlook.The final reading for the services sector was 50.9 in August, down from initial estimates of 52.5 and the lowest since February 2021. The corresponding reading for manufacturing, published last week, was 47.3. That indicated the worst contraction since May 2020, when strict Covid curbs were in place.Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said: “The latest PMI data signal that the economy is on the brink of a recession.”Among services providers, operating costs rose sharply, according to the figures, and there was evidence of higher wages and salaries being paid.The growth in price setting “will worry the [Bank of England’s] Monetary Policy Committee more than the stalled recovery”, added Tombs.

Output price inflation also accelerated compared with July, marking almost two years of uninterrupted growing output charges. The results chime with the Bank of England Decision Maker survey released last week, which showed that momentum was still building in price and wage expectations, even if demand was weakening.With price pressures building, markets are pricing in a 75 per cent probability of a 75 basis points increase in the policy interest rate at the MPC’s next meeting on September 15. They expect interest rates to rise to 4 per cent by February next year from the current 1.75 per cent.John Glen, Cips’ chief economist, said that while port disruption, Brexit paperwork and shortages were all contributing to high inflation, the services sector was “relatively powerless” faced with ever-increasing energy bills. “Services businesses will have their eyes firmly on the new prime minister this week as they hope for a policy-driven solution to rocketing costs,” he added. More

Unlike many progressives, I worry a lot about debt. Public debt, private debt, personal debt — I don’t like any of it. You could maybe chalk it up to my Midwestern upbringing or being the child of immigrant parents. I like having cash on hand, and have always been willing to pay a return price to hold it. You never know when bad times are coming.So I was particularly interested in a paper by economists Francesco Bianchi of Johns Hopkins and Leonardo Melosi of the Chicago Fed, that made a huge stir last week in Jackson Hole. The typically low key academic title, “Inflation as a Fiscal Limit,” belies the heat that it is generating in academic, policy and even financial media circles. The frightening upshot of the work is that it doesn’t matter what the Federal Reserve does right now in terms of hiking rates to try and get inflation under control. If monetary policy isn’t accompanied by appropriate fiscal policy (or to be more accurate, a “mutually consistent monetary and fiscal policy”), then stagflation will be the result.For some people, that might sound like, “well, duh,” of course central bankers can’t do it all themselves. And indeed, it’s worth pointing out that Fed chairs since Ben Bernanke have been begging Congress to do its part in helping the US economic picture. Until recently, that’s been more about calling for investment. We’ve just come through an unprecedented period of easy money that would have been the perfect time to do cheap, public investment into education, infrastructure, clean energy — you know the story. Instead, we got Trump’s tax cuts and corporate share buybacks.Now, rates are rising, which is a much tougher time to make investments, not just for political reasons, but because according to the paper, this is when you want to be reducing debt not adding to it. Let me pause here and give my huge caveat (which co-author Francesco Bianchi would agree with) — all fiscal spending isn’t created equal.Unfunded entitlements are one thing. But investments into the moonshot technology transition of our time — clean energy — paid for by taxes on corporations with higher profit margins than they’ve had in history? That’s fine. In fact, as Bianchi put it to me, “these types of investments could make a country’s economic position better over time,” by creating jobs and growth and tax receipts that bring down deficits. Indeed, Bianchi was understandably a bit concerned that by pointing out that debt matters when fighting inflation, he was at risk of being labelled a hard core Republican (he’s not).The Biden administration obviously gets all this — witness the clean energy bill that just passed under the title the “Inflation Reduction Act.” But this idea that rate hikes and a deteriorating fiscal position aren’t a good mix dovetails with another uncomfortable truth — deglobalisation, climate change and the end of the neoliberal world may be fundamentally inflationary, at least in the short term.Think about what it will take to build more regionalised industrial systems, resilient supply chains, and a new clean energy supply. All of it is necessary, in my view. It also involves spending, which is inflationary. And I’m not even getting into what our nascent move into a post-dollar world could add to this equation. It’s one thing to spend, spend, spend when the dollar is the reserve currency. It’s another to rack up debt (again, I’m taking unproductive debt, here) when that’s changing.How will all this play out? I’ve written in the past about the possibility of a “dollar doomsday” scenario (see here for part II of that series) in which both currency and dollar assets fall. I don’t think we are headed there now, in part because the US is still the cleanest dirty shirt in the closet. All these trends I’ve just laid out will hit Europe even harder, and China feels riskier and even more opaque that it has always been, with the possibility that Xi Jinping could anoint himself ruler for life. So, the US is safe for a while. But both Republicans and Democrats need to start thinking hard about what the dovetailing of deglobalisation and rate hikes will mean — that’s a topic I tackle in my own column today. In the meantime, Ed, are you keeping more cash under the mattress these days? Or do the English do it differently? Recommended readingMy colleague Martin Wolf flagged an article for the FT editorial board on some frightening University of Chicago research showing that up to 20mn Americans believe political violence is justified. How do we counter this? By working with the other side, always, to make it clear that it’s totally OK to have diametrically different views, but it’s never OK to express them violently.This New Yorker piece on the connections between refrigeration and economic growth is exactly the sort of thing I love to geek out on, but I do think the author should have taken on the challenging question of how air-conditioning itself poses climate risk even as it is totally necessary for creating more jobs in the hottest places on earth. Hmm . . . And everyone should read my colleague Jemima Kelly’s look at why intellectual humility is a rare and under-developed virtue. Do it especially if you think you know what the piece will say!Edward Luce responds Rana, if you literally mean cash then the answer is no. I almost never have cash on me since almost everything can be settled with plastic. With US inflation at these rates — and the UK’s rate forecast to go as high as 19 per cent this winter — it’s a particularly bad time to have lots of cash lying around. Might as well reap the upside of those rising interest rates. To be frank, though, I am still not sure I agree with the paradigm shift you’re sketching out. For sure, there is an element of deglobalisation taking place and that is worsening the supply chain problem, which is inflationary. I was intrigued to hear talk from Jackson Hole of a new age of volatility following 30 years of great moderation. That sounds disturbingly plausible and will challenge all walks of economic policymaking, fiscal and monetary. Either way, I am feeling uncharacteristically humble in anticipating what will happen. We are living in a time when phrases such as “reversion to mean” and “all things being equal” sound increasingly fanciful. All of which is to say that all kinds of forecasting are going to get tougher and political risk will seep into everything. Will a coherent new paradigm replace the one that many people, including you, believe is vanishing? I think the future will be messier and less coherent than that, which isn’t a good thing. To paraphrase the journalist Lincoln Steffens, I haven’t seen the future so I don’t know if it works. Your feedback And now a word from our Swampians . . . In response to ‘The unanswered question of Mar-a-Lago: why did Trump do it?’:“I am impressed that in Rana’s response, citing the words ‘id-driven man-child’, she managed to avoid the words ‘Boris’ and ‘Johnson’.” — David Gordon, North London, England “The way a narcissistic, paranoid [person] became president of the United States has been possible in the context of the deep crisis the country is suffering. He is a crazy demagogue but product of several unhealthy and disruptive trends.” — Mariano Aguirre, Spain More