Zoltan Pozsar, a strategist at Credit Suisse is soon becoming one of the most followed albeit controversial voices on the emerging global geopolitical scene. Pozsar’s recent pieces on the future of the dollar-based global financial order is known for its big bold calls with fairly in-depth analysis and brilliantly written narratives. His most recent piece is on how the breakdown of trust amongst hitherto trading partners i.e, US-China and Europe-Russia, is impacting global supply chains and consequently inflation and financial markets.
Zoltan draws on trust as a basis for trade and globalisation from Dave Copeland’s book ‘Economic Interdependence and War’.
“Reviewing 200 years of history, including the Napoleonic and Crimean wars, the book explains that “when great powers have positive expectations of the future trade environment, they want to remain at peace in order to secure the economic benefits that enhance long-term economic power. When, however, these expectations turn negative, leaders are likely to fear a loss of access to raw materials and markets, giving them an incentive to initiate crises to protect their commercial interests”. This “theory of trade expectations” holds lessons for understanding not only today’s conflict between the U.S. on the one hand, and Russia and China on the other, but also the outlook for inflation. Put simply… …if there is trust, trade works. If trust is gone, it doesn’t. Today, trust is gone: Chimerica does not work anymore and Eurussia does not work either. Instead, we have a special relationship between Russia and China, the core economies of the BRICS block and the “king” and the “queen” on the Eurasian chessboard – a new “heavenly match”, forged from the divorce of Chimerica and Eurussia…”
Zoltan lays the pieces with a new bloc – TRICKs (Turkey, Russia, Iran, China and North Korea) against the west with those like South Korea and India still non-committal.
He then establishes his take on the economic consequences of this mistrust around re-industrialisation of the west and re-emergence of the military-industrial complex through three moments of reckoning:
First, about not having enough stockpiles of basic artillery: “how do you wage wars on multiple fronts when a single front in Ukraine showed how quickly stockpiles can deplete in a war of attrition, and how slow the replacement is”, quoting an FT article “Total annual U.S. production of 155 million artillery shells, for example, would last only about two weeks in Ukraine, a conflict that marks “the return of industrial warfare”.
Second, there isn’t capacity to make some of the cutting edge weapons quickly enough ““in May, when Washington ordered 1,300 Stinger anti -aircraft missiles to replace those sent to Ukraine, the chief executive of Raytheon replied: ‘it will take us a little while ’ ”. And this is not just a replacement issue: the delivery of Stingers to Taiwan has been delayed recently to enable the flood of weapons to Ukraine, and Saudi Arabia also faces delays as it aims to re -stock its arsenal”
Third, China’s recent blockade of the Taiwan Strait: “…chips are useful when they can be shipped, not when stuck due to a blockade: how can the U.S. control its lowflation/QE-based economic destiny when the emergence of a multipolar world order is fracturing global supply chains, which frustrates its ability to obtain chips for missiles to defend the existing world order ?”
Zoltan then compares the current crises with the 2008 Global Financial Crisis, likening the then excessive financial leverage in the financial markets to the current excessive operating leverage through inventory and supply chain breakdowns. “Today, we are witnessing the implosion of the long -intermediation chains of the globalized world order: masks, baby formula, chips, missiles, and artillery shells, for now. The triggers aren’t a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but source, produce, and ship everything from abroad, where commodities, factories, and fleets of ships are dominated by states – Russia and China – that are in conflict with the West. Inventory for supply chains is what liquidity is for banks. In 2007 -08, big banks ran on “just -in -time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just -in -time” supply chains for which they assume that they can always source what they need without moving the price.”
He elaborates on this analogy and the risks posed by broken supply chain to the world economy and inturn financial markets. He ends with what needs to be done:
“…the West will have to pour trillions into four types of projects starting “yesterday ”: (1) re -arm (to defend the world order) (2) re -shore (to get around blockades) (3) re -stock and invest (commodities) (4) re -wire the grid (energy transition)”
He elaborates on how each of these are progressing before laying out the economic consequences:
“…any investor will have to be mindful that the above to -do -list is: ( 1) commodity intensive ( 2) capital intensive ( 3) interest rate insensitive (4) uninvestable for the East”
Whilst the first three are intuitive, what he means by the last is that China and Russia and others from the Eastern bloc are not likely to buy or even roll over the government bonds issued by the west or the G-7 in particular. We recommend reading the whole piece in its entirety.
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