Economy

From the front yard of her ranch-style home, Pam Lemos peered out on the vast valley of her childhood.She can still picture the way it looked back in the 1980s — citrus groves blanketing hillsides, dairy farms stretching for acres and horses grazing under a bright blue sky. These days, when she looks toward the horizon, she mainly sees the metal roofs of hulking warehouses.“Now it’s all industrial,” said Ms. Lemos, 55, who has lived in Colton, 60 miles east of Los Angeles, her entire life. “We are working to change that and starting with these warehouses.”Ms. Lemos is part of a growing coalition of residents and leaders in Colton and neighboring cities — a logistical hub for the nation — who are increasingly frustrated with the proliferation of warehouses in the region, as well as the side effects of the rapid expansion.As warehouse construction has ballooned nationwide, residents in communities both rural and urban have pushed back. Neighborhood apps like Nextdoor and Facebook groups have been flooded with complaints over construction. In California, the anger has turned to widespread action.Several cities in this slice of Southern California, known as the Inland Empire, have passed ordinances in recent months halting new warehouse projects so officials can study the effects of pollution and congestion on residents like Ms. Lemos. Similar local moratoriums have cropped up in New York and New Jersey in recent years, but on a much smaller scale.Labor groups and business coalitions have entered the fray, warning that the new ordinances — along with a push in the state Legislature to widen the restrictions — will cost the region tax revenue and needed jobs and could further disrupt a shaky national supply chain.The Inland Empire, where the population has quadrupled to 4.6 million in the last 50 years as people were priced out of places closer to Los Angeles, is a critical storage-and-sorting point because of its proximity to rail lines that are a short jaunt from the ports of Los Angeles and Long Beach, global hubs that handle 40 percent of the nation’s seaborne imports.In the early 1990s, there were about 650 warehouses in the region, according to a data tool from Pitzer College in Claremont, Calif. By last year, there were nearly 4,000.Pam Lemos has lived in Colton her entire life. “Now it’s all industrial,” she said. “We are working to change that.”Amazon is a major presence, with more than a dozen warehouses in the Inland Empire. Although it is slowing its warehouse expansion nationally and has closed or mothballed some buildings, it is constructing a five-story, four-million-square-foot facility in the city of Ontario. The warehouse, which is scheduled to be completed in 2024 and expected to be one of the company’s largest in the nation, will provide jobs for roughly 1,500 people.Susan Phillips, a professor of environmental analysis at Pitzer who has studied the growth of warehouses in the Inland Empire, says the only way to regulate construction is through the municipal planning process.“Warehouse growth is totally demand-driven,” Ms. Phillips said. “Developers and many municipalities do not want any regulation on this, and at this point warehouses are growing at many times the rate of population growth.”Since 2020, elected officials in a half-dozen Inland Empire cities, including Riverside, its most populous, have imposed moratoriums on warehouse construction. The timeouts are meant to assess, among other things, the effects of pollution, the appropriate distances between homes and warehouses, and the impact of heavy truck traffic on streets.Tucked in the shadow of the San Bernardino Mountains, Colton has long been known as “Hub City” because it is a crossing of two railroads — BNSF and Union Pacific — that shuttle cargo to and from the ports. Today, the city of 54,000 is home to 58 licensed warehouses.Isaac Suchil, a councilman in Colton, was a sponsor of his city’s moratorium, which was recently extended through May 2023. While he stresses that he is not “anti-warehouse,” Mr. Suchil said he would like to see buffer zones requiring that new facilities be at least 300 feet from schools and residential areas. The current requirements vary and are applied differently from project to project, he said.“The moratorium gives us time to address future projects,” he said.Residents have grown increasingly frustrated with the proliferation of warehouses in the region.Isaac Suchil, a councilman in Colton and a sponsor of the city’s moratorium on warehouses.Colton, a city of 54,000, is home to 58 licensed warehouses.Assemblywoman Eloise Gómez Reyes, who represents several Inland Empire cities, including Colton, has taken the fight to Sacramento, the state capital. She sponsored a bill this year that would require new logistics projects in Riverside and San Bernardino Counties that are 100,000 square feet or larger to be at least 1,000 feet from homes, schools and health care centers.“The warehouses bring with them trucks producing diesel particulate matter,” Ms. Gómez Reyes said, noting an American Lung Association report this year that found that those counties were among the worst for annual particulate pollution.Ms. Gómez Reyes, who withdrew her bill from consideration after struggling to find votes, even among fellow Democrats who dominate the Legislature, said she planned to reintroduce the measure next year.The efforts to suspend and regulate warehouse construction have faced staunch opposition from groups including the Laborers’ International Union of North America, which represents construction workers in the United States, and the California Chamber of Commerce.Jennifer Barrera, chief executive of the California Chamber of Commerce, said a measure like the one put forth by Ms. Gómez Reyes would hurt job growth and apply a one-size-fits-all approach that would strip local jurisdictions of necessary freedom around land-use decisions.In the first half of 2022, there were roughly 135,400 warehouse jobs in the Inland Empire, according to the Inland Empire Economic Partnership, a group that works with business and government leaders. In 2010, there were roughly 19,900 warehouse jobs in the region.“A warehouse ban would only exacerbate the goods movement and logistics backlogs California consumers are facing,” Ms. Barrera said. “With more people ordering goods online and wanting quick delivery, the need for storage space is growing.”But some local residents are tired of feeling that their region is losing out on more than it is gaining.This summer, a deal was reached to relocate an elementary school in Bloomington, Calif., to make space for a warehouse, and earlier this year, the City Council in Ontario approved the construction of a warehouse on the site of an area that was once home to a dairy farm. In both instances, residents voiced their frustration on social media and at public meetings.“For too long it’s been build, build, build, with no repercussions,” said Alicia Aguayo, a member of the People’s Collective for Environmental Justice, a group that has pushed for some of the moratoriums.Ms. Aguayo, a lifelong resident of the Inland Empire, says that in recent years she has met more and more people in her community who have asthma and cancer. She would like to see more resources dedicated to studying the health impacts of pollution in the region.“It’s environmental racism and hitting mostly Latino communities,” Ms. Aguayo said.Last year, Southern California officials adopted rules for warehouses that aim to cut truck pollution and reduce health risks.Morris Donald has witnessed the warehouse boom from his backyard in San Bernardino, Calif.The regulations from the South Coast Air Quality Management District require large warehouses to curb or offset emissions from their operations or pay fees that go toward air-quality improvements.In San Bernardino, where a proposed effort last year fell one council vote shy of establishing a 45-day moratorium on the construction of new warehouses, Morris Donald has witnessed the warehouse boom from his backyard.For 11 years, he has rented a three-bedroom home in a neighborhood now surrounded by four warehouses. In recent years, he said, most of the neighbors he knew have moved away and several landlords have sold to developers.“It’s taken away the neighborhood feel,” Mr. Donald said. “Kids don’t play outside. No one is in their yards.”But he sees the benefits as well — he works as a forklift mechanic at a Quiksilver warehouse, his wife is a manager at another and his son works as a security guard at a third facility.“If you want jobs,” Mr. Donald said, “they’re out here in the warehouses, and that’s a fact.”In Colton, Ms. Lemos spends some of her free time volunteering for groups that work closely with the People’s Collective for Environmental Justice. The moratorium, she said, could not have come soon enough.“How did this get so out of control?” Ms. Lemos said, noting that in the months before the moratorium was enacted, the city approved a pair of warehouses with a combined square footage of 1.8 million.On a recent afternoon, Ms. Lemos twisted her Jeep Wrangler along a winding two-lane road, which was pockmarked with potholes left behind, she said, from the semi trucks that shuttle goods from warehouses. The air was thick, and a line of smog hovered along the horizon. A horn from an incoming train pierced the air.“There is always something going on here — trucks, trains, construction from warehouses,” she said. “It’s like we’re living in this logistical bubble while trying to raise our families.” More

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The hiring frenzy that has gripped developed economies since the pandemic is starting to ease, as employers worry about rising costs, falling demand and a darkening economic outlook.On both sides of the Atlantic, unemployment rates remain low. But data published in the past week suggest vacancies are falling from historically high levels and companies are becoming more cautious about taking on staff.If it persists, this combination is good news for central bankers, who are keen to cool wage growth in their battle with high inflation, without triggering a surge in unemployment. “In all advanced economies, we are at peak labour market tightness,” said Simon Macadam at the consultancy Capital Economics. The US jobs market in particular shows the strongest signs of “coming off the boil”, he said.Central banks on both sides of the Atlantic are engaged in the most aggressive rate raising cycle since the early 1980s as they try to combat soaring prices. Officials are concerned that a scramble to attract workers could trigger a 1970s-style wage-price spiral, where inflation lingers for years to come. In the US, data released last week showed openings fell at their sharpest rate since the start of the pandemic. In the eurozone, the closely watched purchasing managers’ index surveys for September showed job creation had dropped to an 18-month low across the bloc, with employment in services no longer growing. In the UK, vacancy numbers have dropped from record highs and surveys suggest hiring activity is slowing despite staff shortages.Central bankers face a delicate balancing act. Some economists argue that the pace and scale of the monetary tightening risks leaving millions without work, notably in the US where the Federal Reserve has increased borrowing costs by 0.75 percentage points at each of its last three policy meetings.“Inflation is a hardship, especially for those living pay cheque to pay cheque, but no pay cheque is a disaster for families,” said Claudia Sahm, founder of Sahm Consulting and former Federal Reserve economist, adding that it was time for the Fed to be patient. “The housing market is slowing markedly now. We will see that in the broader economy and inflation next year.” US data published on Friday showed the economy added 263,000 positions in September — half the pace of jobs growth seen over the course of 2021, but still well above pre-pandemic averages. Meanwhile unemployment fell to its pre-pandemic low for an unwelcome reason — a renewed rise in the number of people choosing not to job-hunt — suggesting labour shortages will persist, even with fewer vacancies.Chris Waller, a Federal Reserve governor, said last week that a payrolls increase in the region of 260,000 would show “that the labour market is slowing a bit but is still quite tight”, supporting his view that it may be possible to reduce vacancies — and wage pressures — without big lay-offs.“We currently do not face a trade-off between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation,” he said.Data due in the UK this week is expected to paint a similar picture of a slowing, but still tight, jobs market in which many older workers are standing on the sidelines. Dave Ramsden, Bank of England deputy governor, has described this rise in inactivity among older workers as “one of the most significant legacies of the pandemic”. But economists are revising up their 2023 unemployment forecasts for most countries.In the US, the annual unemployment rate next year is forecast at 4.2 per cent, up from the 3.5 per cent that was forecast in February, according to Consensus Economics, a company that averages leading private forecasters.“It’s unlikely that the Fed can lower job openings without raising the unemployment rate against the backdrop of high inflation, fading profit margins and interest rates,” said Richard Flynn, managing director at the brokerage Charles Schwab.

Economists have revised up their German 2023 unemployment forecast by 0.6 percentage points to 5.5 per cent over the same period. This contributed to pushing the eurozone rate above 7 per cent in September’s forecast, up from below 6.8 per cent only a few months before.In the UK, the 2023 unemployment rate was being revised to 4.5 per cent, up from 4.1 forecast in February, even before the “mini” Budget sent interest rates expectations up, leading many economists to predict a deeper recession.Unemployment rate expectations for 2023 are now higher than they were a few months ago also in New Zealand, Australia and Canada as interest rates rise and recessionary risks increases. While showing smaller upticks than in other countries, the unemployment rates forecasts are revised up for all the markets tracked by Consensus Economics, including South Korea, Hong Kong and Japan.  More

The writer is chair of Rockefeller InternationalThe surging dollar has demonstrated its power over the world in recent months, exacerbating the stress in financial markets and in every country alarmed by the prospect of paying bills and loans in increasingly expensive greenbacks. Most analysts attribute the dollar’s surge over the past year to rising US interest rates, which are necessary to fight inflation. But the dollar has become a wrecking ball, rising far higher than one would expect based on fundamentals, including the gap between interest rates in the US and the rest of the world. Its extraordinary spike is driven by investors who think the dollar is the only haven and speculators betting that it will keep rising.Irrational behaviour has consequences. A dollar disconnected from fundamentals has no purpose, and can trigger a financial accident that tips the world economy into recession. This is the moment then for the Biden administration to abandon its indifference to the surging dollar, recognise its destabilising effects and rally countries to weaken the dollar by selling it. Almost no one expects Washington to do this, because Biden aides have made clear they aim to help the Federal Reserve fight inflation in the US and believe that a strong dollar helps contain inflation by making imports less expensive. This logic is widely accepted. It’s also largely wrong. Imports amount to 12 per cent of gross domestic product in the US, about a third the average for developed countries, and have a minor effect on US prices. More importantly, the dominant dollar is used to price most global goods including 95 per cent of US imports. Thus a change in the value of the dollar does little to change the price Americans pay for these imports. This immunity is rare. Other countries pay more bills in foreign currencies and are more vulnerable to currency swings. When the dollar falls by one per cent, inflation rises in the US by just 0.03 per cent. When other currencies fall that far, inflation rises three times faster in other developed economies, and up to six times faster in emerging economies. The key point is that the Biden administration could help to weaken the dollar without undermining the Fed’s effort to contain US inflation. In fact, America faces less risk from the dollar’s imaginary impact on US inflation than from its proven impact on the global economy. Before last week the dollar had spiked more than 20 per cent in 12 months, matching or exceeding surges that accompanied the last seven major global financial meltdowns going back to the Latin American debt crisis of the early 1990s, and including the dotcom bust of 2001 and the global financial crisis of 2008. These crises engulfed multiple countries including the US, disproving another piece of received American wisdom — that a strong dollar is a “problem” only for the rest of the world.This year two out of three central banks in the emerging world are selling dollars, a record share since at least 2000. Japan has joined them, intervening directly in the currency market for the first time in a quarter century. But piecemeal national efforts to bolster their own currencies have less impact than co-ordinated intervention.Since central banks including the Fed cannot — should not — stop raising interest rates until inflation is clearly under control, co-ordinated selling is the only tool left to ease the dollar-induced stresses still visible worldwide, from low-income countries to Europe. US-led efforts to weaken the dollar have generally proved successful in the post-Bretton Woods era, particularly when these conditions are met: the dollar is seriously overvalued; speculators are heavily long the dollar; co-ordinated government intervention hits markets as a surprise; and central banks’ monetary policy is pushing currencies in the same direction.Today chances of success are good. Though Fed policies are pushing up the dollar, it is now seriously overvalued, fuelled by high speculative positions, and co-ordinated intervention, which would be led by the US Treasury, would come as a shock. Normally government meddling in currency markets is ill advised, but the dollar remains at irrational highs — by one measure nearly 40 per cent more expensive than at any point since 1980 — and a further rise could trigger a global recession. The Biden administration has everything to gain by moving now. By acting to protect the US from the real risk of global recession rather than the imaginary risk of dollar-driven inflation, it would earn the plaudits of a world reeling from the administration’s hands-off dollar policy. More

The US and Germany are leading calls from shareholders in the World Bank for an overhaul of its business model to boost action on climate change at this week’s annual meetings.The bank, a leading provider of loans and grants to poorer nations, has come under increasing pressure to provide greater financial support to developing countries to help their economies grow while coping with the consequences of climate change.Germany is the latest to join those countries pushing for reforms and is expected to propose a series of actions to make the bank better able to deal with global crises including climate change. The World Bank’s leadership has come under fire for lagging in its efforts, with a renewed attack on its Trump-appointed president, David Malpass, in recent weeks after he refused to say whether he believed in human-caused climate change. He later clarified that he did.“We are in a climate crisis. We expect more from the bank. We also expect more from David Malpass; he is heading this institution which is key to saving the planet,” said one senior German official. “The question is can we make better use of the bank’s balance sheet?” Measures the bank could take include incentivising action on climate change with better borrowing terms and using its money to de-risk clean energy investments in developing nations.Svenja Schulze, the German federal minister for economic co-operation and development as well as Germany’s representative on the World Bank’s board of governors, also said the bank “must get fitter for the great challenges of the future”.The bank’s current model was primarily based on the demands of individual countries, she said, and this model needed to be adapted in a time of global crises.US Treasury secretary Janet Yellen last week called on the bank to develop an “evolution road map by December”, and said that “deeper work” should begin by the spring, effectively setting it a deadline.According to two senior development officials, Yellen and the US administration have stepped up their pressure on the World Bank and other multilateral development banks (MDBs) this year. The US is the bank’s largest shareholder and traditionally appoints its president.Yellen suggested the development banks broadly should make greater use of concessional finance, including grants, to fund investments where the benefits are shared globally, and specifically to middle-income countries to help them shift their economies away from coal.Protesters call for the dismissal of Malpass outside the World Bank in Washington last month © Jim Lo ScalzoJ/EPA/ShutterstockDevelopment banks could lend to sub-sovereign entities, such as green city initiatives, she said, and should adopt stronger targets for mobilising private finance. A broader array of instruments, including insurance products and guarantees, could be used.The proposals for how the bank should change come ahead of the COP27 UN climate summit in early November, where the thorny subject of international climate finance is expected to dominate debate.As a result, the issue has risen sharply up the global policy agenda. Mia Mottley, the prime minister of Barbados, has become the most high-profile advocate of efforts by smaller, less wealthy nations to secure funds related to climate change.Mottley put forward several suggestions to be enacted by the World Bank and IMF, including the redistribution of $100bn in special drawing rights and the new issuance of long-term, low-interest debt instruments to help finance clean energy projects. Some policymakers are increasingly in favour of the banks using more of their funds to guarantee investments by acting as first investors and de-risking projects that could then attract private investors.

International financial institutions “must overhaul their business model and approach to risk” and “intensify” their efforts to leverage private sector finance, said the UN secretary-general António Guterres recently.MDBs should “go into countries and sectors that commercial entities are unwilling to finance”, said Ivo Mulder, head of the climate finance unit at the UN Environment Programme.Guaranteeing projects “could be a quick win” but MDBs were “quite risk averse”, he said. “There can be a false perception that an MDB will always take much more risk than a commercial entity.” Last week, climate activist groups hit out at the World Bank for its continued financing of certain fossil fuel projects. Although the bank has said it will not finance new oil and gas production, it has made no commitment over gas distribution and has said “natural gas may be useful in accelerating the transition away from coal”.The World Bank said it had delivered a record amount of climate-related financing this year and that it looked forward to “working with our shareholders during the annual meetings to hear their ambitions and priorities for the World Bank Group in a changing world”.The German official said there was “now much more appetite” from shareholders to reform the bank, and that the institution itself was also more amenable to change. But Joe Thwaites, international climate finance advocate at the Natural Resources Defense Council, said Malpass was “not out of the woods”. “There is going to be a lot of pressure on him to show how the World Bank is working, and it needs to go beyond him just apologising.”  More

However reckless the British government, however botched its “mini” Budget, it alone cannot explain the fragile economic outlook. Interest rates are rising, financial markets are creaking, the strength of the US dollar threatens to reveal that many companies and governments have been bathing costume-free.“There’s just this incredible disconnect,” says the US economist Jason Furman. “If you’re just looking at the standard economic data, everything looks fine, yet there’s this sense that we’re right on the precipice of something terrible. People are tossing around terms — I think in some cases too loosely — financial crisis, recession. I’ve seen some people warn about a depression.”Furman was chair of the US’s Council of Economic Advisers during Barack Obama’s second term. Long relaxed about government deficits — “I don’t think we really need to care about the level of debt, I think we need to care about the level of debt service” — he has nonetheless become a leading voice warning about US inflation. He is also one of the bluntest economic commentators. Of the “mini” Budget, he opined: “I can’t remember a more uniformly negative reaction to any policy announcement by both economists and financial markets.”If UK prime minister Liz Truss disregards mainstream economics, Furman represents it — almost by definition, given that he co-teaches the introductory economics class at Harvard University.

Over the past 18 months, his view that the Federal Reserve should raise interest rates sharply has gained adherents. “Last year there was a lot of wishful thinking,” he says. Such optimism has largely dissipated. In September, Fed chair Jay Powell said he wished “there were a painless way” to tame inflation — implying there wasn’t. Furman himself has suggested that US unemployment may need to rise to 6.5 per cent for two years, a change that would reverberate globally.How likely is a recession? “I don’t think it’s certain at all,” he says — adding that maximum danger is likely to come in the second half of 2023. A soft landing for the US economy “really is a possibility, but I don’t think you want economic policy based on the best possible outcome”.Yet the risks of rate rises were highlighted by the UK’s turmoil. The Bank of England intervened to protect pension funds; one banker said it was close to “a Lehman moment”. Other weaknesses are surely lurking in the financial system. Does this not call for caution? “A lot of what’s breaking is financial markets, as opposed to the real economy,” insists Furman. “The initial brunt of the tightening has been borne more by the wealthy, whose wealth is evaporating, than it has been by the workers. I don’t think it’s always going to stay that way, but I do think some of the voices we’re hearing now are people who are looking at their stock portfolio, or the money they’re managing, and are unhappy to see it going down. I’m also unhappy to see it going down, I just wouldn’t make my unhappiness with my stock portfolio the basis for public policy.”In Europe, inflation owes much to potentially transitory energy prices. But in the US, the case for tightening is less complicated, driven by the hot jobs market, says Furman. “If you’re looking at the actual inflation data, it’s just ugliness after ugliness after ugliness. Underlying inflation has not come yet at all.” Stopping rate rises would be “wildly premature”, at least until inflation has come down by a percentage point. But inflation expectations, a key factor, have come down? “A time when our models really have not worked very well, I think, is a bad time to rely on a forecast,” says Furman. “I would rather financial markets be pleasantly surprised in the future that less is needed to deal with inflation than have the false dawns we’ve had over the past two years.”***For Furman, the appeal of economics is its mix of rigour and real-world relevance. At high school, he volunteered for Walter Mondale’s presidential campaign. As a college freshman, his intellect intimidated his roommate, the actor-to-be Matt Damon, who later recalled: “Jason was the first person that I met at Harvard, and I literally almost turned around and went home.”Furman joined the Obama campaign in 2008. His appointment infuriated unions: he had once argued that Walmart was a “progressive success story”, because it pushed down retail prices perhaps 50 times more than it pushed down retail wages. At the White House, Furman learnt to keep his advice to the economics, and let Obama decide the political risks. “The worst type of economic adviser is someone who is advocating for something because it’s politically expedient but pretending that it’s actually a good economic idea.” Furman, 52, is hyper-articulate: when we speak on Zoom, he is fluent, even when the white glow on his face gives away that he is looking at other windows. He is also alive to his profession’s shortcomings. He is suspicious of studies that say working from home boosts productivity, and inclined to agree with chief executives who say that it doesn’t. “I think there are some economists who are just so excited about work-from-home — maybe because they do it themselves and it works well for them — that they want to generalise. I also wonder whether work-from-home might have worked better in 2020 when there was nothing else to do on a Friday than now when there’s a Red Sox game.”Did Donald Trump’s election make him wish that the Obama administration had done more for those left behind by globalisation? “The obstacle was Congress,” he says, adding that policies to reduce inequality would not necessarily have stymied populism. “The Affordable Care Act was the largest thing we’ve done for people losing out in the [US] economy in the last 50 years. But that didn’t calm our politics, precisely the opposite. For a while, it made things worse politically.”

His worry now is that, under Joe Biden, US policy has overcorrected: from too little fiscal stimulus to too much; and from too sparse antitrust actions to too broad. The Federal Trade Commission’s antitrust approach, such as objecting to Meta’s takeover of the virtual reality fitness app Within, seems to seek goals beyond greater competition. (Furman himself led a competition review for the UK government, which proposed stronger oversight, short of dramatic legal actions.) On stimulus, he opposed Biden’s cancellation of student debt, saying: “Pouring roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning is reckless.”Furman has called for a higher minimum wage, but is now an inflation hawk. What did he make of BoE governor Andrew Bailey’s comments in February that workers should not ask for a big rise? “The way to tackle inflation is not some collective effort that everyone wakes up every morning figuring out how to tackle inflation. Everyone should wake up every morning figuring out how to get paid more, or if they’re running a business how to make more of a profit. And it’s up to the central bank to ensure that, when they’re doing that, their incentives are consistent with inflation being lower. Inflation isn’t a moral issue. It’s not that there’s villains or people that need to behave better. It’s just too much money chasing too few goods, and the central bank is the place that decides the amount of money.”***As prime minister, Truss has argued that the UK needs to focus less on redistribution. Furman argues that this is not possible: everything is redistribution. “The painful reality of the economy right now is it can’t really produce any more than it’s currently producing. If you give to one group in a way that enables them to raise their consumption, you are going to lower consumption of other groups. Maybe that happens because inflation goes up. Maybe it happens because interest rates go up, so mortgage payments go up. Maybe you borrow more from other countries, but then you have to pay that back in the future.”Truss also insists that she’s looking to “grow the pie”. Furman supports a growth agenda, including the politically contentious removal of the cap on bankers’ bonuses. “You want to let companies pay in the way that works best for them; that’s not taking money from somebody else to pay the bankers.” The problem was high-income tax cuts, which (had they not been abandoned) would probably have hurt growth, once the cost of greater government borrowing was included. This illustrates what Furman sees as a frequent problem: a policy’s direct impact is evaluated, but not its indirect impact, which may be just as large.What could improve productivity? “It’s a long list, but immigration is so much more important to the US, the UK economy than almost anything else you could do.” Truss’s predecessor, Boris Johnson, had hoped that limiting immigration would increase wages. “I think it’s impossible that unskilled immigration is a large negative for wages. There have been lots and lots of studies, lots of natural experiments,” says Furman. Some studies have found a small negative effect on inequality, but even this is likely to be outweighed by the benefits, especially over the long run. Furman, who has three children with the publisher Eve Gerber, has also argued for more pre-school childcare, to enable parents to stay in employment. “It’s just going to require lots more money.” (Gerber once remarked she had given Furman a pass for eight years in the White House: “NO MORE!”)Such ambitions, for the moment, are secondary to the immediate uncertainty. What would be the global fallout of continued US rate rises? “Last year the United States gave people so much money in the United States that we bought lots of goods and that raised prices around the world and strengthened the dollar and made it harder for others. Now I think we’re jerking everything in the exact opposite direction with a monetary contraction.” Yet he insists: “The biggest issue isn’t caused by the United States. It’s caused by global commodity prices, it’s caused by the domestic policy choices countries have made. If you look at emerging markets, ones that have borrowed less short-term in foreign currencies have much less to worry about right now than ones that are more exposed to the world. As brutal as it sounds, the Fed’s job is to look after the United States.” Global problems could spill back to the US. But “we’re trying to slow our economy. Some of the spillbacks that normally you might worry about at this point might be a good thing.” More

For the first time in more than a decade, the cost of an electric car battery is set to rise this year.Soaring prices for battery raw materials — such as lithium, cobalt and nickel — have led commodity research provider BloombergNEF to predict the reversal of a long-held trend towards cheaper cells, which had seen costs come down from $1,220 per kilowatt-hour in 2010 to $132 per KWH last year. And a return to more expensive batteries, alongside a supply chain squeeze, calls into question how quickly electric vehicles can become affordable mass-market products — at a time when transport still accounts for a quarter of the carbon dioxide emissions that are a driver of global warming.Industry analysts forecast that carmakers will experience prolonged production disruptions, akin to those caused by semiconductor shortages over the past two years.So, faced with constraints on their ability to acquire raw materials, automotive companies are planning to take over the buying of vital inputs themselves, rather than leaving it to a vast base of suppliers.“Carmakers are worried about critical mineral access,” explains Jon Hykawy, president of research firm Stormcrow Capital, adding that taking the lead on raw material sourcing is the only option they have.Tesla was the first carmaker to venture onto this path at its landmark Battery Day in 2020, with founder Elon Musk saying the company would intervene directly, where necessary, to supplement the supply of battery materials.Direct to source: recent filings suggest Tesla is looking into building a lithium refinery © Suzanne Cordeiro/AFP/Getty ImagesPublic evidence of Tesla moving up the supply chain has so far been relatively muted. But filings last month showed the EV maker has applied for tax breaks to build a potential lithium refinery in Texas or Louisiana.Such a move is seen by many industry observers as necessary to achieve Tesla’s ambition of 20mn electric car sales by 2030. It comes with great risk, though. Lithium refining — complex chemical processing — is a far cry from the carmaker’s core expertise of designing vehicles and relies on the company being able to secure a type of lithium ore known as “spodumene”.Here, availability and cost problems can be serious. Prices of lithium hydroxide, the refined product, have skyrocketed to more than eight times the level of the start of 2021 at almost $70,000 per tonne, close to the record highs hit in March, according to Benchmark Mineral Intelligence.But, despite the high prices, capital flows into lithium are still meagre placed next to expected soaring demand, says Sam Jaffe, vice-president of battery storage solutions at E Source. As a result, his consultancy revised up its medium-term forecast for battery costs to $138 per kilowatt-hour in 2024 — the same level as last year. A cost of $100 per KWH has long been viewed as the level that will make electric cars affordable.

Tesla is the industry frontrunner in securing battery raw materials but some incumbent automakers, frustrated by supply chain disruption, have recently stepped up their own efforts to secure resources by going directly to producers.General Motors agreed to pre-pay Livent, a lithium mining group, $200mn to secure supplies, while Ford said it would stump up financing for Liontown Resources to develop a lithium mine. Stellantis has even taken a €50mn equity stake in Vulcan Energy Resources, which aims to produce lithium in Germany.“What we’ve seen, where car manufacturers have been dabbling in the supply chain, is the very beginning stages of what is going to happen,” says Jaffe.Some carmakers are going directly to lithium mining companies to source raw materials © BloombergWhile some see these moves as a much-needed shift in strategy, others say certain deals smack of panic. “It tells you how desperate they are for lithium units — they are willing to do deals with companies that have no production,” says Chris Berry, president of Mountain House Partners, a consultancy. However, Lukasz Bednarski, principal research analyst at S&P Global Commodity Insights, suggests the doom mongering is overblown.“The fact that the market is tight is a good enough reason for the automakers to look at their supply chains. Before, they had the mindset: ‘we buy batteries but let’s leave buying the battery materials to the battery manufacturers’. That is changing slowly.”But, he adds: “It’s still not common for automakers to go out and buy the lithium mine. I don’t think such a trend will really take place because that would be very unusual.”Higher prices come as western governments commit to industrial policies that will influence where carmakers source their raw materials from, through limits and incentives.“I don’t think it’s just the pricing environment,” says Yayoi Sekine, head of energy storage at BloombergNEF. “The geopolitical environment has created a lot more questions around securing the supply chain.”US President Joe Biden’s Inflation Reduction Act includes tax credits for EVs with a certain percentage of raw materials sourced from the US, or free trade partners or recycling, which has left automakers and battery cell manufacturers scrambling to rework supply strategies. It also prevents vehicles from accessing those credits if any of the critical materials are extracted, processed or recycled by a “foreign entity of concern”.Berry says economic and geopolitical changes — which also include soaring energy costs because of the Russia-Ukraine conflict and rising interest rates — could turn what would have been a blip in battery prices into something more lasting.“The entire investment thesis rests on batteries getting cheaper and cheaper every year and getting more energy dense,” he says. “Here we are, for the first time ever, where battery pricing has stagnated.” “Given so much change across the battery supply chain . . . industry has to turn on a dime, and that means some of these cost pressures could be structural.” More

Vishnu Kurella is founding portfolio manager of Volar Capital. The views expressed in this article are those of the author and do not reflect those of any affiliated organisation.Economist Milton Friedman is famous for many insights. None feels as relevant today as the “long and variable lags” he said characterised the delay between the implementation of monetary policy and its eventual impact. Friedman pointed to data — borne out by subsequent analysis — that suggest it can take up to 24 months after monetary policy changes for economic activity and prices to respond. A common metaphor to represent this lagged effect is adjusting the temperature of a shower with very long pipes. With this in mind, the fact that we haven’t yet seen much in the way of an economic slowdown or job losses after this year’s rate hikes shouldn’t come as a surprise. Fed chair Jay Powell recently quoted Friedman directly on the subject, and even used the same water pipe metaphor. After keeping policy too easy for too long, the Federal Reserve has made clear that it now views itself as having a single mandate in the near term: price stability. Given the lagged impact of monetary policy, the Fed will — by waiting to see inflation drop considerably for several months — necessarily over-tighten. But the full fallout from the coming hikes will probably not be felt until the end of 2023 or even 2024. Whether these rate hikes will do the job is a separate question. Unfortunately, many of the factors that drive inflation are out of the Fed’s control. Monetary tightening does not increase the supply of goods and services, which is impacted more by macro factors such as energy prices, deglobalisation and supply chain disruptions. Ironically, rate hikes, due to the flow-through effects of higher costs of capital, will reduce supply, ultimately muting the effectiveness of the policy.The Fed will therefore only be able to quell inflation by pushing extremely hard on the demand side. This will result in an aggressive economic slowdown and considerable spikes in unemployment. These aren’t side effects, but rather the intended outcomes. So the question is not whether we will have a recession, but how bad it will be. Paul Volcker, who led the Fed during that early 1980s period, is lauded for “keeping at it” in order to beat inflation. However, his policies benefited from the fact that long term interest rates then had room to move substantially lower, providing a welcome tailwind to asset prices and allowing for cheaper costs of capital. Given the current low level of nominal rates, there is no possibility of such a support blanket; thus, 1982’s downturn may unfortunately represent an optimistic outcome from our current position. Many market practitioners have focused on the fact that yield curve inversion is a signal for a recession; rather, the more important takeaway is that asset prices would be in a much steeper tailspin if bond yields were in fact higher. While global central banks are now embarking on concurrent quantitative tightening, there are still many governments employing expansionary fiscal policies and creating large deficits. It begs the question: if central banks are selling and governments are spending, who will buy all these bonds? September saw a bond buyers’ strike in the U.K., with yields skyrocketing until the Bank of England stepped in and committed to temporary bond buying, an unsustainable policy given the bank’s inflation mandate. This episode should be a cautionary tale for the rest of the world’s governments. Let’s also not forget that with higher yields come larger fiscal deficits and additional bond issuance required to pay the interest. These new bonds will undoubtedly crowd out private sector investment, and cash will be scarcer, potentially forcing interest rates even higher. The reflexive debt sustainability question becomes alarming as yields approach 5 per cent.There is also insufficient focus on the correlation between bonds and other asset classes. Since 1980, it has been very rare to see yields rise as economic activity slows; when it has happened previously, the combination has caused substantial damage. Today we have already seen once in multi-decade carnage in retirement portfolios, and the stage is set for derivative-selling casualties in the vein of Orange County or LTCM.However, the systemic threat will most likely start from abroad. The overpowering strength of the dollar is forcing other central banks to hike aggressively to prevent currency depreciation and worsening inflation. The contagion catalyst will therefore probably be real estate purchased with floating rate mortgages, as interest payments will double or triple in coming months at the same time that lay-offs pick up. Global construction loans are also exposed because borrowing costs will go up simultaneously as demand goes down. There may also be a ‘sudden stop’ in available financing for higher-risk companies, as the combination of increased costs of capital and slower growth will make it uneconomic for them to continue. As bankruptcies start to hit on various fronts, the impact on credit markets will be swift and broad-based. However, unlike in 2008 or 2020, central bankers cannot be there to save the day. Yes, the shower is still warm now, but the pipes are filling up with ice cold water for next year. Jay Powell appears to be petrified of becoming the Arthur Burns of his era — the Fed chair who presided during the cataclysmic inflation of the 1970s — and therefore seems determined to keep turning the faucet colder. Let’s hope the Fed, in an effort to avoid the 1970s, doesn’t lead America to repeat the 1930s instead. More