Harder Money in the “Changing World Order”

Prominent Ventures
HCM Capital
Published in
27 min readJun 30, 2022

People always want plain sailing, but life teaches us that short-term easing will always come with long-term pain.

The world is experiencing the “sequela” of global monetary easing since 2020, the root of chaos around the world. Accordingly, we will explore these latest economic crises and provide our long-term macroeconomic prospects.

Back to 2020, most central banks implemented certain expansionary monetary policies that created excessive global money supply and planted hidden dangers to our economy (inflation crisis, debt bubble, and even the conflicts between Russia and Ukraine).

More importantly, today's economic problems will have longstanding effects on our world. Specifically, the inflation crisis forces the US Federal Reserve to make a tough decision between inflation and recession. Global monetary easing incentivizes credit expansion and leads to a debt bubble. Unfortunately, there is no easy solution to this giant bubble, and the deleverage of such a bubble will induce overwhelming inflation, great recession, and another surge in the money supply.

Moreover, the recent conflict between Russia and Ukraine results in bans and sanctions on Russia that deteriorate the global commodity supply and further disrupt the global supply chain. More importantly, the removal of Russia from the SWIFT undermines the credibility of the US government and the attractiveness of its treasury assets. In the end, comprehensive sanctions on Russia will worsen the inflation crisis with persistent commodity shortage, encourage diversification in reserve currency as US assets are less reliable, and transform the inelastic global supply chain into a global supply net in the long run.

As the world suffered from so many economic crises, China had the recurrence of the epidemic and decided to lockdown Shanghai to stop the spread of the virus. Shanghai's lockdown hurts the Chinese economy over many prospects, in terms of global trade, manufacturing efficiency, investment growth rate, and aggregate consumption. In the short term, China has to reinvest in the real estate market to stabilize the economy and achieves its 5.5% GDP growth target in 2022. In the long-term, China will persist its industrial upgrading and structural transformation strategy and thus elevates its international status.

Overall, excessive money supply to deleverage the debt bubble, global economic recession due to restrictive policy, diminished reliability of US assets, and multiple settlement currencies under the global supply net will accelerate the crash of the global US dollar monetary system. Meanwhile, as China persists in industry upgrading and thus acquires stronger economic power, the RMB will have greater importance in the global monetary system. In addition, the development of sovereign assets around the world will attract more attention with tenser political relationships, especially in those countries with political neutrality and valueless local currency. At the end of the day, we expect the new global monetary system will include the devaluation of western currency, the reinforcement of eastern currency, and the emergence of sovereign currency.

1. Root of Chaos

Back to 2020, most major countries experienced significant economic downward pressures due to the spread of COVID-19. The US, EU, Japan, India, and ASEAN underwent -2.2%, -4.8%, -3.6%, -13.1%, -4.8% GDP growth rate respectively during 2020. With the expected lockdown and potential economic recession, capital investors became panicked and liquidated their positions for safer assets.

Figure 1. Global Equity Indexes Plummet at the Beginning of the Pandemic

In response to continuous bad news on health and economic fronts, the flight to safety behaviors became a dash for cash. In this scenario, investors started selling the safest and highly liquid assets, such as US treasury bonds, for cash and caused price to plummet even for the safest assets. Overall, global capital markets synchronically experienced dramatic liquidity constraints and price plummets.

Figure 2. Interest Rates Have Climbed Significantly During the Same Time

To address the liquidity crisis and possible risks of deflation, central banks across major economies simultaneously implemented expansionary monetary policy. Particularly, US Federal Reserve held several unscheduled FOMC meetings in March 2020 and determined to 1) lower the target range for the federal fund rate by 1.75 percentage points, to 0 to 0.25%; 2) started the quantitative easing of at least $500 billion treasury securities and at least $200 billion mortgage-backed securities (MBS) in March 2020.

Figure 3. Low-Interest Environment Motivates the Growth in M2

US Federal Reserve sustained its expansionary monetary policy from March 2020 to March 2022, expanded its balance sheet by about $4.5 trillion dollars, and boosted the US broad money supply by about $6.25 trillion dollars.

Figure 4. Federal Reserve’s Quantitative Easing Inflates M2 Even Further

In addition to the US, major economies including Japan, the EU, and most developing countries applied certain extent of monetary easing. Specifically, the Bank of Japan and the European Central Bank have maintained low or even negative policy rates for an extended period. Moreover, most central banks relaxed lending standards in addition to the net asset purchase.

Figure 5. Bank of Japan Expands its Balance Sheet by About 163 Trillion Yen

Figure 6. ECB Performs Quantitative Easing About 4.15 Trillion Euros

At the end of the day, the surge in money supply and broad monetary inflation occurs not only in one country but around the whole world. In the following parts of the article, we will explore how such global monetary easing becomes the root of the latest economic chaos, and how the short-term easing will cause long-term pain to our economy. The rest of this article will be structured as followed:

2. Inflation Crisis

3. Commodity Shortage

4. Consequences of Chaos

  • i. Federal Reserve’s Dilemma
  • ii. Debt Bubble
  • iii. Currency Reserve Diversification
  • iv. Global Supply Net

5. Shanghai Lockdown Effects

6. Conclusion/Macroeconomic Prospects

2. Inflation Crisis

One of the most obvious consequences of global monetary easing is the inflation crisis around the world. The latest macroeconomic data shows that US CPI YoY reaches 8.6%, a historically high since 1982. The UK and European Union also suffer from similar issues and experience inflation of 9.0% and 8.1% respectively.

Figure 7. Countries Have Experienced Outraged Inflation Since 2020

In addition, the structural increase in price level gradually transforms into general inflation and spreads across each category of necessity: energy, transportation, food, housing, etc. Given the fact that CPI generally understates the “true” price level of consumable goods, the real inflation outlook could be even worse.

Figure 8. Structural Inflation Has Transformed into General Inflation

2.1 Inflation Crisis: Fiscal and Liquidity Driven

As suggested previously, the root of such great and general inflation is the global monetary easing or the excessive increase in money supply around the world during 2020. Generally, the increase in the money supply without corresponding outputs will reduce the purchasing power of the currency and thus leads to a subsequent heightening in the price level.

In the current inflation crisis, monetary easing inflates the general price level mainly through two channels: government deficits and capital gains. Specifically, central banks could monetize deficits and allow the governments to implement a greater amount of fiscal stimulus and relief packages, which transfer money directly into individuals’ personal accounts, motivate higher aggregate consumption, and result in a higher price level.

Figure 9. Government Deficit is the Main Driver of M2 in 2020

Alternatively, the general increase in money supply will create excessive liquidity in capital markets, generate outperformance of assets, and contribute to individuals’ wealth accumulation through capital gains that will encourage improved living standards, larger consumption, and thus higher inflation.

Figure 10. S&P 500 Investors Could Earn 42% During the Pandemic

2.2 Inflation Crisis: Wage-Price Spiral

In addition to broad monetary inflation, the wage-price spiral exacerbates the inflation crisis by creating a vicious cycle. Generally, the wage-price spiral starts with labor constrained that increases the job opening levels. In order to fill in the job openings, companies will have to raise the salary, which has two simultaneous effects. On the one hand, companies will have higher costs of labor and thus narrower profit margins. To maintain profit margins at an acceptable level, companies will have to raise the price of finished products. On the other hand, laborers with higher regular wages will secure more disposable income that incentivizes their consumption and thus inflates the price level with greater demands. Then, with a higher price level and thus expensive living expenses, laborers will ask for even higher salaries, which delays the hiring process and constrains the labor supply further. In the end, the vicious cycle will continue.

In 2020, the pandemic and the subsequent lockdown policy started the wag-price spiral vicious cycle as lockdown suspended the operations of most industries and caused an extremely high unemployment rate. With the gradual easing of the lockdown policy, laborers were still unwilling to come back due to concerns about the virus, and hence the US job opening level kept climbing.

Figure 11. Latest US Job Openings Still Maintain a Historical High Level

Accordingly, the US average salary continued to rise, led to an endless vicious price-wage spiral cycle, and eventually deteriorated the inflation crisis.

Figure 12. Labor Constrained Further Catalyzes the Raise in Salary

2.3 Inflation Crisis: Supply Chain Woes

Another driver of the inflation crisis is the disruption of the local and global supply chain due to the pandemic and the later conflicts between Russia and Ukraine. In 2021, demands for commodities and raw materials bounced back as the global economy and industrial production recovered from the pandemic. However, labor constrained and tight shipping space created global shipping tension and thus boosted the freight charges.

Figure 13. Global Freight Costs Peaked During Global Economy Revival

Normally, the exporters will not bear the entire increase in shipping costs. Thus, part of the surge in freight charges will be transferred to importers. To maintain reasonable profit margins, importing companies need to raise the price of selling products and transmit the shipping costs to end consumers. The final outcome is the increase in the price level and the further deterioration of the inflation outlook.

Figure 14. Greater Global Freight Costs Cause Higher US Import Pricing

Overall, global monetary easing leads to the excessive global money supply that becomes the root of the current inflation crisis. With wage-price spiral, shipping constraints, and commodity shortage, the price level is inflated to a historically high level and ultimately evolved into a global inflation crisis.

3. Commodity Shortage

3.1 Commodity Shortage: Russia-Ukraine Conflict

Since the conflict between Russia and Ukraine, commodity shortage and energy crisis have drawn greater attention mostly because of propaganda and the dramatic increase in the cost of fueling. However, very few economists recognize that the Russia-Ukraine conflict is partially incentivized by global monetary easing since 2020.

Although it will be irresponsible to argue that the global monetary easing is the only factor that causes the special military operations, expansionary monetary policy did play a non-negligible role in this geopolitical conflict. Concretely, the US Federal Reserve’s immoderate implementation of expansionary monetary policy substantially devalues the US dollars and US treasury assets. The continuous depreciation of the US currency makes Russia and many other oil exporting countries reconsider their participation in the petrodollar system, the collapse of which will undermine the global monetary power of the US. Therefore, the US government will have the greatest incentives to avoid such scenario and thus attempt to distract Russia from leading an alternative oil settlement system by inciting the geopolitical tension between Russia and Ukraine, ultimately causing the unfortunate military conflicts.

Following Russia’s special military operations, many countries, including the US, the UK, EU, Japan, Canada, Australia, etc. imposed a series of financial, individual, import, export, and travel sanctions on Russia.

It is important to note that Russia and Ukraine are both important exporters of energy, commodity, and foodstuff. Specifically, Russia has global export shares of 11% in oil, 16% in gas, 16% in coal, 23% in nickel, and 17.6% in potash fertilize. Therefore, export sanction on Russia is a double-edged sword, which could put greater economic and political pressures on Russia to stop its military operations but also hurts most countries that lack commodity supply, a widespread issue due to global supply chain woes since 2020. More importantly, European countries have great energy import reliance on Russia, and export sanctions on Russia will push most European countries into an energy crisis this coming winter. On the other hand, Ukraine is also an important exporter of foodstuff, especially sunflower seed oil, wheat, and corn. As Russia’s special military operations prevent Ukraine from exporting foodstuff, the food crisis is exacerbated globally. In short, the Russia-Ukraine conflicts and following sanctions on Russia further diminish the supply shortage of commodities.

Figure 15. European Union Has Been the Top Buyer of Russian Oil

3.2 Commodity Shortage: Supply Constraint

Even though the Russia-Ukraine conflict is one of the most important drivers behind the commodity supply issues, more evidence suggests that the commodity shortage will persist even after the end of this geopolitical conflict.

Firstly, with expected sanctions on Russian export (unlikely to disappear immediately after the end of the military operations), Russia intends to reduce its oil production by 120 thousand barrels per day over the next three years. Even though OPEC plans to increase its production capacity to offset Russia’s production shrinkage, the reality is that OPEC+ keeps missing its oil output target (2,770 barrels per day short in May 2022 and 2,590 barrels short in April 2022) and poses greater uncertainty to oil supply in the long run.

Secondly, major countries have kept consuming their commodity inventory since June 2020 when they relaxed the COVID-19 prevention policy and resumed industrial operations. Since then, these countries cannot maintain a sustainable level of commodity inventory due to disruptions in the global supply chain and a significant increase in commodity demand from industrial production. As major countries have limited alternative commodity partners (other than Russia) to replenish their inventory, low commodity inventory levels will persist for a longer period and exacerbate the commodity supply issues.

Figure 16. Oil Inventory in the US Has Declined Since 2021 in Response to Economic Recovery

Finally, commodity and energy suppliers’ underinvestment in CAPEX will limit their ability to boost production capacity in the short run, thus extending the period of commodity supply constraint. More importantly, in the context of energy transition and innovation, traditional commodity and energy suppliers face elevated uncertainty about their operations and profits. Accordingly, they would like to maintain some extent of flexibility and are even less willing to make CAPEX investments, thus further constraining the supply of major commodities.

Figure 17. CAPEX in Energy Sector Has Declined Since the Popularity of ESG

3.3 Commodity Shortage: Demand Expansion

In contrast to an extended period of supply shortage, demand for energy and commodity will keep growing. In the short run, major developed countries still maintain a high level of industrial capacity utilization since the contraction in output tends to lag the tightening of monetary policy and weakening in consumption. Moreover, production utilization in China is likely to bounce back as Shanghai is back to normal. In the long term, developing countries in East Asia will be involved in the next credit expansion cycle and will initiate the process of urbanization and modernization, which requires a large consumption of commodities.

Figure 18. Countries Maintained High Level of Industrial Capacity Utilization

Overall, the demand-supply mismatch in commodities will persist for an extended period, and the demand-supply gap, coupled with continuous currency depreciation, will stimulate further price escalation in commodities.

Figure 19. Commodity Price Will Keep Climbing With Further Demands

4. Consequences of Chaos

Even though the purpose of global monetary easing is to prevent the economy from a great depression, ironically, such myopic easing will cause not only short-term economic issues but also long-term awful consequences the governments intend to prevent in the first place.

4.1 Federal Reserve’s Dilemma

As we discussed in section 2.1, global monetary easing is the root of current global inflation crisis. In addition to overwhelmed burdens of living, such crisis will have destructive effects on the economy and pushes US Federal Reserve into a dilemma.

With the devaluation of currency and supply shortage, the continuous increase in the price level will raise the cost of living, depress the consumer sentiment (Michigan University consumer sentiment index reaches a historically low level since the 1980s), and provoke potential social unrest, such as protest, gun violence, strikes, riot, and civil disorders.

Figure 20. Consumer Sentiment Index Moved to a Historically Low Level

To contain the outraged inflation, US Federal Reserve started raising the target federal fund rate and reducing the size of its balance sheet since March 2022. However, there is a lag between the tightening of monetary policy and the alleviation of excessive demand. Hence, the overheated inflation kept hiking after the implementation of the tightening policy.

Figure 21. Continuous Surges in Inflation Push Fed to Keep Tightening the Policy

In response to the continuous increase in inflation, US Federal Reserve implemented an increasingly restrictive monetary policy. Especially in the June 2022 FOMC meeting, Federal Reserve became extremely impatient and abruptly decided to raise the federal fund rate target range by 75bp, without step by step forward guidance they have usually performed over the last couple years. Federal Reserve’s anxious policy actions signal that overheated inflation is unexpected and could get out of control at this point. According to the latest speech of Jerome Powell (the Chair of the Board of Governors in the Federal Reserve System), Federal Reserve is willing to exhaust every effort and cost to contain the uncomfortably high inflation.

Even though Federal Reserve has great incentives to stabilize the strikingly high inflation, it could never accomplish this tough mission without pains and sacrifices. Generally, the stabilization of inflation could be achieved with either lower demand or greater supply. As long as US Federal Reserve could not print oil, copper, or wheat, the only feasible solution is to tighten the monetary policy and hence weaken or even destruct the aggregate demand. With restrictive policy, Federal Reserve could ultimately reduce inflation, but the economic recession will become inevitable with demand destruction. Therefore, as policy actions take effect, Federal Reserve will have to make a tough decision between the further containment of inflation and the smoothing of economic growth.

Figure 22. US PMI Index Implied Economic Slowdown since March 2021

Ideally, Federal Reserve planned to raise the policy rate to a level that could lead to modest inflation with the “soft landing” of the economy, but such expectation is impractical and unrealistic. Firstly, the implementation of a restrictive monetary policy will have indirect effects on price level but directly reduce demand and economic growth. In other words, the tightening of monetary policy will cause an economic downturn before such policy could have an evident influence on inflation. In addition, current outraged inflation is partially driven by the commodity supply shortage, which is going to last for an extended period and cannot be addressed by the government’s monetary policy. More importantly, the US economic outlook has weakened as early as 2021 even without restrictive policy because the whole economy lacks additional economic incentives, such as technological innovation or demand expansion. Even worse, the US government has already built up high leverage and will have limited capacity to stimulate the economy if needed. Finally, the global macroeconomic environment is not supportive as major economies around the world will endure the same economic slowdown with the gradual tightening of policy.

Overall, Federal Reserve will not be able to achieve the ideal moderate inflation with stable economic growth. Ironically, the ultimate reality will be the worst economic outlook that includes a relatively high level of inflation and an extended period of recession. Worse still, such unexpected economic patterns might not be confined to the US but become widespread around the world.

4.2 Debt Bubble

Another long-term aftermath of global monetary easing is the giant global debt bubble, driven by enormous credit expansion. Specifically, global monetary easing inflates the debt to GDP ratio to an unsustainable level and accelerates the pace of the latest long-term debt cycle.

Concretely, back to 2020, in response to the pandemic and potential risk of deflation, the US government distributed relief packages and unemployment benefits with massive fiscal deficits. At the same time, US Federal Reserve implemented quantitative easing (QE) and purchased government-issued bonds to support such enormous fiscal stimulus. On the one hand, such remarkable quantitative easing increased the broad money supply, led to a general devaluation of US dollars, and thus caused the following overheated inflation. On the other hand, expansionary monetary policy incentivized the US credit expansion and boosted the US public debt to GDP ratio (124.67%, Q1 2022).

Similarly, European Union had similar monetary easing and credit expansion as the US did in the last two years, but now the EU is in a much more awkward position. The EU monetary system requires that every EU member country shares the same central bank (ECB) and hence does not have an independent monetary policy to accommodate idiosyncratic economic issues. In other words (or as Nic Carter said in a recent podcast), the European central bank has to unite disparate economies under a single monetary policy, which is an efficient system during a normal period but becomes clumsy in an extraordinary macroeconomic environment.

Currently, most EU members have severe inflation problems (CPI YoY of France, Italy, and Spain are 5.2%, 6.9%, and 8.7% respectively) and simultaneously bear an unsustainable national debt to GDP ratio, 113% (France), 151% (Italy), and 118% (Spain). It is worth noting that the latest debt to GDP ratio of Italy is significantly above the level during the European debt crisis, an obvious warning signal to another debt crisis. In response, ECB has to make a tough choice between the deleverage of the historically high debt ratio and the control of the ever-increasing price level.

Figure 23. Italy Has Higher Government Debt to GDP Ratio than European Debt Crisis Period

So, we just summarize the significance of current debt bubble. However, as intelligent as we are, we cannot always focus on the past, we will have to look into the future. Unfortunately, to predict the future, we have to go back to more distant history. It has been widely discussed that the 2020s is an 80-year echo of the 1940s (Ray Dalio, Lyn Alden, etc), so we will come back to the 1940s, explore what happened in the history, and figure out what is going to happen next.

Back to the 1940s, with a decade of economic stagnation, countries started to fight for limited resources, which incentivized the break out of World War II (Russia/Ukraine Conflict in 2022). To finance the war, the US government implemented massive fiscal stimulus and expanded its military industrial production base. After the end of the war, US government provided soldiers with college education and training programs (Pandemic Relief Package in 2020 and 2021). In support of massive fiscal deficits, Federal Reserve cooperated with the treasury department and monetized the giant deficits (QE from March 2020 to March 2022). Ultimately, the creation of huge amount of base money significantly inflated the price level (US CPI YoY is 8.6% in May 2022), which persisted for a long period and came down until the realization of improved production efficiency by transforming military factories into domestic use.

Figure 24. General Deleverage Requires Inflation and the Surge in Money Supply

Following our discussions of the 1940s and the 2020s, it is easy to connect these two decades. More importantly, both these decades experience the deleverage of the long-term debt bubble that we are going to have in the next decade although the latest one is much more monstrous. Since the long-term debt bubble generally has a dramatically high debt to GDP ratio, it will not disappear easily with the bankruptcy of several individuals or corporations. Back to the 1940s, the long-term debt bubble was diluted by wars (life sacrifices), inflation, economic recession, fiscal stimulus, monetary base expansion, and improvement in production efficiency. Accordingly, it is reasonable to argue that our current larger and widespread debt bubble will be deleveraged at higher costs of acute inflation, greater recession, substantial fiscal stimulus, excessive money supply, potential technological and energy innovation (long-term), and eventually the start of another bubble (hopefully not World War III).

4.3 Currency Reserve Diversification

We have lived in the global US dollar monetary system for decades, and governments tend to take it for granted that the US dollar and treasury assets are the most secured and valuable assets to store the value and to allocate as currency reserve until the striking QE since 2020 and the removal of Russia from the SWIFT recently.

Flooding in the US money supply, created by US Federal Reserve’s quantitative easing (QE), instigates pronounced devaluation of US dollar and makes US treasury assets less attractive as currency reserves.

Figure 25. US Dollar Assets Experienced Continuous Decrease in Value

Moreover, as suggested by Saifedean Ammous, the US government is shooting itself in the foot with the SWIFT sanction on Russia since such sanction reminds other countries that their currency reserve in US dollar could be meaningless tokens in the case of political disagreement or conflict. Therefore, SWIFT sanction undermines the credibility of the US dollar, and countries will start to explore alternative assets and diversify their currency reserve. Even though such behavior is not widespread yet, we could observe certain countries have initiated this process. Specifically, China has reduced its holdings of US treasury securities and reallocated a greater percentage of reserves into alternative assets as early as 2011. In response to financial sanctions, Putin implies in his latest speech that Russia is going to adopt alternative valuable assets rather than US sanctioned tokens. In addition, Turkey recently announced that it will restrict lending to companies with a great amount of foreign currency assets (mostly assets denominated in US dollars), implying that Turkey will limit the allocation of currency reserves in US dollars. Overall, the world is not going to escape the global US dollar monetary system immediately, but such tendency gradually transforms from considerations to behaviors.

Figure 26. China Has Reallocated Greater Percentage of Reserve into Alternative Assets

As more countries explore alternative reserve assets, we believe that commodities could become an attractive option in the short term (Bretton Woods III by Zoltan Pozsar). The reasoning is that commodities will maintain its value over an extended period due to persistent demand-supply mismatch, discussed in greater details in section 3. However, in the long term, especially after the end of the energy transition period, the demand-supply gap of commodities will disappear as overvalued commodities will engage more producers and thus pull the price of commodities back to a fair level ultimately. Therefore, global monetary system will need to identify alternative valuable and sovereign assets as currency reserve in the long run.

4.4 Global Supply Net

The last important economic issue is associated with the intensive discussions on globalization. Supporters of globalization tend to argue that globalization could significantly improve production efficiency by encouraging specialization across countries and combining the cheap labors, sufficiently available commodities, and abundant capital around the world. Specifically, globalization transfers capital from the developed world to developing countries and creates opening positions for cheap laborers. At the same time, capitalists in the developed markets take advantage of lower manufacturing costs and earn greater profit margins. With lower production costs and improved efficiency, globalization is supposed to benefit laborers and tradespeople in the developed countries with cheaper goods and lower living expenses, even though they might have to adjust their skills for new jobs in this process.

However, globalization is not an impeccable proposal as it assumes that the global supply chain will always be available and efficient. In other words, globalization trades off resiliency to unexpected disruptions (virus or geopolitical conflicts). More importantly, laborers and tradespeople in developed countries never benefit from globalization as efficiency surplus is inflated away by conspicuous monetary inflation. Even worse, they lose their jobs and thus income during this process, the biggest reason why most working class in developed countries vote against globalization so badly.

As the voice against globalization becomes louder and louder, the idea of deglobalization has drawn greater attention, especially political attention, over the last several years. Back to 2016, the supporters of deglobalization had their first real progress in Brexit. In the same year, President Trump used “America First” as his campaign slogan and won the presidential race, implying the rise of nationalism in the US. One year later, President Trump signed several memoranda to impose tariffs on Chinese imports, starting the trade disputes between the top two economies and further deteriorating the efficiency of the global supply chain. Thereafter, the rise of nationalism globally in 2018, the pandemic in 2020, the geopolitical conflict between Russia and Ukraine in 2022, and the latest bans and restrictions on foodstuff export (Malaysia, India, Turkey, etc.) actualized the deglobalization.

Figure 27. Global Trades Have Trended Downward Since 2008–09 Crisis

Even with widespread support, deglobalization is mostly political, but not economic. Firstly, restructuring the local supply chain is costly in terms of labor, training, location, infrastructure, transportation, and culture, eliminating the possibility of deglobalization in the first place. Moreover, some countries lack or have limited access to energy resources or raw materials, such as oil, gas, coal, copper, and silver. Deglobalization will also discourage specialization and thus degrade the operating efficiency of the global economy. Finally, costs of goods sold will be boosted in the process of deglobalization and push manufacturers either increase the price of the finished products or go bankrupt with narrower profit margins. Ultimately, citizens in developed countries will either bear greater living expenses or become unemployed again. Ironically, deglobalization supporters will never earn the benefits promised by the politicians they vote for.

Although deglobalization is uneconomic, the modern global supply chain will become less efficient with extra geopolitical conflicts and macroeconomic uncertainty. Therefore, the new form of globalization needs to balance efficiency and resiliency. Accordingly, we tend to support that globalization will transform from the global supply chain to the global supply net (“Supply Chains Are Becoming Supply Webs”, Christopher Mims, WSJ).

Figure 28. Visualized Concept of Global Supply Net

Ideally, the global supply net can realize resiliency by multiple sourcing, where companies have diversified suppliers, or more specifically, countries could have several duplicated supply chains dominated by different major powers. With multiple sourcing, the global supply net can trivialize the idiosyncratic risks within any single supplier and improve operational reliability. On the other hand, the global supply net can maintain the benefits of efficiency from globalization through regional “nearsourcing”, which locates manufacturing close to final assembly and end consumption, thus improving the efficiency of logistics. The latest example of the global supply net is the coexistence of RCEP (Regional Comprehensive Economic Partnership) and IPEF (Indo-Pacific Economic Framework), which share very similar member countries but are dominated by China and the US respectively.

5. Shanghai Lockdown

While the majority parts of the world suffered from the inflation crisis and commodity shortages, China experienced another recurrence of the epidemic in Shanghai and lockdown this city to prevent the spread of the virus.

5.1 Shanghai Lockdown Effects: Global Trade

As the most important port city in China, Shanghai plays an important role in Chinese global trade. On the one hand, Shanghai lockdown will depress Chinese export, even though such negative effect is not obvious in terms of the export value growth rate, mostly due to the increase in the price level of importing countries. However, if we focus on the volume of export, the negative influence of lockdown will become obvious. Specifically, the average number of handsets exported has declined by 5.86 million, and the passenger car exports have dropped by 93.22 thousand on average during the lockdown period.

Figure 29. Chinese Export Value Experienced Limited Decline During the Lockdown

In addition, the lockdown of Shanghai limits the operating efficiency of ports, and some cargo ships are redirected to other ports in China, which directly reduces the efficiency of imports and thus the value of global trade.

Figure 30. Shanghai Lockdown Has Greater Influences on Imports

5.2 Shanghai Lockdown Effects: Economic Slowdown

Before Shanghai’s lockdown, Chinese economy has already experienced significant economic downward pressures due to demand contraction, supply shocks, and expectation weakening. Then, the implementation of the lockdown policy in Shanghai further deteriorates the economic outlook of China. Concretely, the lockdown policy prevents Shanghai residents from leaving their own apartments and restricts their consumption in the retail and service industry. Moreover, normal operations of most industries are disrupted by lockdown, thus increasing the unemployment pressures on average, lowering individuals’ disposable income, and further weakening aggregate consumption.

Figure 31. Shanghai Lockdown Interrupts the Recovery of Chinese Consumption

Finally, epidemic prevention and control policies lead to insufficient capacity utilization in manufacturing because most manufacturing processes could not operate without onsite laborers. At the same time, such strict prevention policies will keep weakening individuals’ and corporations’ economic expectations, thus depressing the aggregate demand and credit expansion for a longer period.

Figure 32. China PMI Has an Obvious Drop During the Lockdown

5.3 Industrial Upgrading and Structural Transformation

Although Shanghai is “only” locked for two months, the lockdown policy might have persistent effects on Chinese economy. Before the lockdown, China has strong persistence in industrial upgrading and structural transformation. Specifically, China tends to limit the growth of the real estate market and deleverage the economy with neutralized monetary policy. On the other hand, China provides strategic support to the growth of the high-tech industry with a superior CAPEX investment growth rate since 2019.

Figure 33. High-Tech CAPEX Investments Maintained at a High Level Since 2019

At the beginning of 2022, with demand contraction and expected economic recession, Chinese government was still hesitating to release the demands in the real estate market because it believed that overinvestment in the real estate market will constrain the upside potential of the economy. To stabilize the economy, Chinese government prefers investing actively in high-end manufacturing (aviation equipment, satellite manufacturing, medical apparatus, new energy vehicles, ocean engineering, etc.) and new infrastructure construction (AI, 5G, high-speed rail, industrial internet, big data center, etc.).

Figure 34. Chinese Government Tends to Stabilize the Economy by Active Investment

However, China confronts a worse economic outlook and overwhelmed recessionary pressures after Shanghai’s lockdown. Therefore, China is compelled to relax the credit standard for housing market and lower the average mortgage rate to incentivize the housing demands. Such short-term stimulus will stabilize the economy and allow Chinese government to achieve its 5.5% GDP growth rate objective, but it will postpone the strategic progress in the industrial structural transformation and upgrading.

Figure 35. Mortgage Rate Has Moved Down Since Policy Easing on Housing

Figure 36. Housing Market Will Bounce Back with Recent Policy Easing

Although short-term support for the real estate market could be a Chinese strategic mistake, it will have limited effects on long-term economic advancement. As the major economies are distracted by inflation, commodity shortage, recession, debt bubble, and geopolitical conflicts, China will preserve windows of opportunity to proceed with its industrial upgrading and structural transformation strategy. In the long term, China will achieve economic prosperity with a comprehensive supply chain, competitive high-end manufacturing, innovative clean energy, and sustainable debt to GDP ratio.

6. Conclusion/Macroeconomic Prospects

In this report, we keep reminding that global monetary easing is the root of chaos, and unfortunately we cannot prevent the upcoming crisis and will have to endure such pains caused by the previous easing. In this part, we would like to summarize the key takeaways of this report and provide our macroeconomic prospects as followed:

  • i. Global inflation crisis will persist for a longer period as long as the governments cannot print oil, gas, copper, and solve the supply shortage. Moreover, restrictive monetary policy cannot reduce inflation without demand destruction and thus economic recession. Although CPI YoY will bounce back to 2% or 3% ultimately after an extended period of outraged inflation, the price of consumable goods will never come back because of the permanent devaluation of major currency;
  • ii. Price of commodities will become stable in the short-term with demand destruction by restrictive monetary policy and hopefully the end of the Russia/Ukraine conflict. However, the commodity shortage will persist even after the end of the geopolitical conflict because of low inventory, inefficient global supply chain, the suppliers’ underinvestment in CAPEX over the last 10 years, and their unwillingness to expand production during the energy transition period. Finally, commodity prices will keep hiking in the long term with persistent supply shortages and further credit expansions in East Asia;
  • iii. US Federal Reserve has to face the dilemma between inflation control and economic stabilization, and current restrictive monetary will not be able to contain overheated inflation without causing a great economic recession. After all, US Federal Reserve will tolerate the outraged inflation and pause the restrictive monetary policy to prevent the US economy from another great depression;
  • iv. Global monetary easing incentivizes credit expansion and deteriorates the outlook of the debt bubble, and there is no perfect solution to this monstrous debt bubble. Ultimately, the deleverage of historically high debt to GDP ratio will provoke historically high inflation, economic depression, another undue monetary easing, and the start of another debt bubble;
  • v. Abuse of monetary policy will lead to continuous devaluation of major currency and thus motivates others to reconsider current reserve currency allocations. As countries start to explore alternative reserve currency assets and reduce the allocations to US treasury tokens, the currency reserve will become diversified and the crash of the global US dollar monetary system will be accelerated;
  • vi. Global supply net with a balance between resiliency and efficiency will be a more appropriate form of globalization in the context of tenser geopolitical relationships and increased macroeconomic uncertainty.

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