The theme of the Kansas City Fed’s 2023 Economic Policy Symposium is “Structural Shifts in the Global Economy.” What will be discussed?
The symposium held in Jackson Hole, Wyo., each August asks experts to write papers on subtopics related to its main theme. Since inception, more than 150 authors have presented papers on topics such as inflation, labour markets and international trade. Papers are available online.
This year, the structural shifts referred to are geopolitical conflicts: Russia versus NATO and China versus the U.S. when it comes to technology.
In addition, the COVID-inspired shift to nearshoring ("friendshoring") can be seen in the chart below highlighting Mexican imports to the U.S. compared with Chinese imports. This rebalancing of the world’s supply chains is somewhat inflationary. So too is the U.S. CHIPS Act that seeks to invest in building domestic capacity in semiconductors.
Here is a good resource to keep track of global trade estimates. Volume of world trade in goods and services appears to be peaking. We can see the pre-pandemic trend losing momentum. Recall the U.S. versus China trade wars were heating up in 2017 and the post-Brexit 2016 period had a negative impact in Europe. With more workers globally producing the same amount of goods and services, productivity rates decline. While it’s good that there are more people working, constraints on labour forces given aging demographics are very real and could have long lasting inflationary impacts.
From the economic symposium in Jackson Hole set for next week, we expect to see some papers based on demographic changes and impact on inflation and growth patterns. This is an interesting podcast on where population growth is at and related implications on resources, such as coming supply-side inflation pressures. Sell China, buy India is the message. This demographic shift will likely only intensify the China versus West leadership race.
The big question at Jackson Hole will be the optimal R-star rate. This is the real (adjusted for inflation) rate of interest that is not too hot and not too cold. Market-based pricing and sentiment-based measures show long-term inflation expectations have been mostly in the 2.5 per cent to three per cent range since the dot-com peak in 2000.
We highlight and start with a technology event here as technological breakthroughs have historically been the major driving force of disinflation in recent decades, and generally over centuries of history. Major technological breakthroughs have always provided a disinflationary backdrop, for example, fire, the wheel, the steam engine, electricity, the microchip. Since the Berlin Wall fell in 1989, the “peace dividend” has been accruing to the world to improve productivity as well. The peace dividend may be backtracking now given geopolitical developments.
The discussion will be about what is that rate of inflation the U.S. Federal Reserve should target. This leads directly into the real rate. All will know that since the dot-com bubble bust and the era of negative and zero interest rates, short-term real rates have been very low. With the restructuring of the world, is two per cent too low? With all the debt in the world, is two per cent too high? This may be the most impactful U.S. Fed conference in years. Recall, the message last year was short and succinct: “Higher for longer.”
Follow Larry:
YouTube: LarryBermanOfficial
Twitter: @LarryBermanETF
Facebook: LarryBermanETF
LinkedIn: LarryBerman
www.etfcm.com