Abundance of good news hides risks to US prosperity
Well-heeled audience, alums of an elite Northeast college, chuckled inside a well-appointed, if deliberately understated, drawing room at an upscale conclave in Los Angeles. Object of their derision was another educational institution closer to the venue, almost stone’s throw from where they were. Blasphemy, sacrilege, surrender to baser instincts – words of disgust flew in gusts of anger and contempt. Could not happen at ours, a hundred heads nodded in agreement. A month later it did. Not a mirror event, but equally damaging in every way. That was not supposed to happen.
“The Economy that wasn’t supposed to Happen”, headlined The New York Times in response to blockbuster jobs report Friday. Tight labor market and a surge in economic productivity had barely any nudge in inflation, leading many to postulate that “using data from few decades in the middle of the 20th Century to set policy in the 21st isn’t actually a good idea”. True that.
Technology is the deciding factor. Gig economy might be a new and novel concept here, but for those of us from the Subcontinent, gig economy – or the “underground economy” as the moniker closest in spirit in the Indian context – has always been alive and well. With or without technology, hordes of young men, and some women, do errands while they were also looking for a more permanent job. Word of mouth did the task that technology does in a gig economy, moving thousands across miles but close enough so they would not have to pay for new quarters, for opportunities where they do not have to pay for an auto or a vending cart.
That was not a panacea though. Even in a land of abundant labor, we have seen a localized supply of labor pool prove inadequate, pushing prices and contributing to overall inflation. We have seen pockets where local youth are too fed up with travails of the underground economy, drying up supply while extending lines at a job opening windows. And the mere existence of gig economy equivalent did not stop wild swings in inflation from happening.
Phillips curve, the relationship between unemployment and inflation, is not dead, its shape need be reviewed. The fundamental relationship does hint at a big economic risk that we will be remiss to ignore.
The second risk is to the Dollar as the Reserve Currency of choice. And I am not talking Crypto here.
Not many heard of INSTEX, but they should. The Instrument in Support of Trade Exchanges (INSTEX) is a European government-controlled legal entity specifically meant to allow companies based in the EU + UK “to continue to engage in business with Iran without running afoul of U.S. sanctions”. INSTEX can, in theory, be opened to other countries or be replicated once resilient to US threats. By making trade opaque to US monitoring and global financial system, what INSTEX implicitly does is to negate the central role of US Dollar in global trade.
Over the decades, more often than not, news of the demise of US Dollar was greatly exaggerated. Alternatives were dependent on another country or economic system that failed to live up to promise, or technology that was too hyped up. This time it could be different, because it is a legal mechanism protected under Sovereigns, and nearly uncorrelated with economic vagaries of states.
In the extreme, INSTEX-clone legal machinations can cleave global economic fabric – create silos and coalitions anathema to open trade. And it denies the safe harbor protection to US Dollar and all the bounties that come with it. Among others, loan service requirement of US Debt, already at its highest and growing frighteningly fast, will be higher by a multiple. Dollar would fall, and to counter Fed needs to raise the interest rate. That and fracturing of global trade would pose a sustained and severe risk of inflation which cascades to other areas.
I know I am being paranoid, but I am trained to look at known unknowns. US economic growth, already at its longest since the last downturn, is proving too good to be true. We are grasping for explanations, and I am looking at shadows that portend a Long Winter ahead. We are letting go of our defense mechanisms, even the Fed is acquiescent to bully pulpits that idolize Wall Street gains. We harangue our allies until they coalesce to invent an avoidance mechanism whose potency we pooh-pooh. And that’s only the beginning.
Embarrassment to Riches has a very unforgiving way of photo-bombing a Norman Rockwell storyboard. The US should do well to be cautious, for, we live in a world where only the Paranoid survive through cycles.
[Partha Chakraborty is CEO of Switchboard Systems. All opinions are of the Author alone and do not necessarily represent that of Switchboard Systems. The author alone is responsible for any error or omission.]