Axios Capital

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March 24, 2022

Situational awareness: A mere 187,000 Americans filed new claims for unemployment benefits last week, the Labor Department said this morning, the lowest since 1969. That's a mighty tight labor market.

  • This week in Capital, we look at divine versus malign coincidences, how much wealth Americans accumulated since the pandemic, the toughest central banking job on Earth, and the hidden advantage of being an older cousin. All in 1,402 words, a 5-minute read.

1 big thing: Globalization corrosion

Illustration of scissors about to cut into flight paths on a map.
Illustration: Maura Losch/Axios

If you are a globalist — someone who believes humanity can best thrive with the abundant flow of goods, ideas and people across international borders — it has been a dark decade. And getting darker.

  • The list of affronts to a vision of liberal internationalism keeps getting longer. Xi and Putin. Brexit and Trump. Bolsonaro and Erdoğan and Orbán. Pandemic-closed borders, and now war in Eastern Europe.

Why it matters: As countries feel a greater need to become more self-reliant, that means tossing out some of the benefits of interdependence — which could shape the world economy of the 2020s and beyond.

It is the "corrosion of globalization" as Adam Posen, president of the Peterson Institute for International Economics, puts it in a humdinger of an essay in Foreign Affairs.

  • "It now seems likely that the world economy really will split into blocs," Posen writes, "each attempting to insulate itself from and then diminish the influence of the other."
  • "With less economic interconnectedness, the world will see lower trend growth and less innovation," he continues. "Domestic incumbent companies and industries will have more power to demand special protections. Altogether, the real returns on investments made by households and corporations will go down."

Flashback: For years now, companies with complex multinational supply chains have grappled with unexpected costs. First there were the Trump tariffs, applied to different lists of products and import sources with little warning.

  • The pandemic, with its lockdowns and extreme travel restrictions, were even more disruptive, as the continued shortages at car dealers and on U.S. store shelves confirm.
  • Now, the price of oil and agricultural commodities has soared, and with Russia cut off from the world economy, there is the prospect of sustained shortages of crucial industrial materials including nickel, palladium and neon.

This is forcing businesses to shift from an emphasis on "just-in-time" to "just-in-case," as Atlanta Fed president Raphael Bostic said in a speech this week. That is, they are increasingly willing to sacrifice efficiency for reliability.

Leading investors are coming to the same view. BlackRock chief Larry Fink writes in a new letter to shareholders that the Ukraine war "has put an end to the globalization" experienced in recent decades.

  • Howard Marks, of Oaktree Capital, writes in a new investor letter that this era of globalization has been a boon for global GDP, but that the swing away from it may "improve importers' security," and "increase the competitiveness of onshore producers and the number of domestic manufacturing jobs."

The bottom line: The global economy of the 2020s is looking quite different from the world of the previous three decades — in ways that we're only starting to understand but could have profound implications for macroeconomic policy.

2. End of the divine coincidence

Former Bank of England Governor Mark Carney
Mark Carney, former Bank of England governor. Photo: Daniel Leal/Getty Images

For all the difficulties that faced economic policy in the 2010s, there was a saving grace. The twin problems that faced the U.S. and other advanced nations — too-high unemployment and too-low inflation — had the same solution: More stimulus.

  • But that era might be over. Mark Carney, former governor of both the Bank of England and the Bank of Canada argues that forces including the breakdown of globalization mean new, less appealing, tradeoffs.

Why it matters: If Carney is right, interest rates and inflation will be persistently higher in the decade ahead than we're used to — and current policymakers haven't adjusted yet.

The big picture: When demand collapses in the economy — say, because a financial crisis rips through — it tends to bring down both inflation and employment at the same time. As a result, stimulus helps on both frontiers at once.

  • Indeed, according to the dominant central bank models, the same policies should generate both full employment and steady 2% inflation.
  • Economists call this "the divine coincidence."

But when the problem is a shock to the supply side of the economy — say, a pandemic messes with global supply chains — more stimulus meant to help put people to work tends to also worsen inflation.

  • That's the world we're living in right now. "Just as globalization was deflationary, its unwinding will be inflationary," Carney said in a speech at the National Association for Business Economics this week.

Climate adaptation over the coming decade will also influence inflation and interest rates, he argued.

  • Investment in energy infrastructure will need to rise in the neighborhood of two percentage points of global GDP per year through 2050 to prevent the most severe implications of climate change, according to IEA estimates Carney cited.
  • This will increase inflation in the near-term, he argued, and increase the long-term neutral interest rate.

The bottom line: "The economic environment is now very different from that which reigned since the global financial crisis," Carney said. "Deficient demand and divine coincidence are out, trade-off inducing supply shocks and malign coincidence are in."

3. The $24 trillion pool of money

Data: Hamilton Project based on Federal Reserve data; Chart: Axios Visuals

Americans got richer during the pandemic, and researchers at the Brookings Institution's Hamilton Project have put a number on it.

The big picture: The wealth of American households is $24 trillion higher than it was before the pandemic, they found.

  • Only $5 trillion of that is due to additional savings — the rest is from growth in the value of assets like stocks and real estate.

Why it matters: That's bad news for wealth inequality, in the sense that gains from asset appreciation only go to people who owned assets in the first place. That is, people who were already rich.

4. The world's worst central banking job

Elvira Nabiullina, governor of the Central Bank of Russia
Russian Central Bank governor Elvira Nabiullina in 2021. Photo: Mikhail Svetlov/Getty Images

Every central banker faces challenges — from inflation and recession to financial crises or political pressures. They are nothing compared those facing Elvira Nabiullina, the respected governor of the Central Bank of Russia.

Driving the news: Bloomberg reported Wednesday that Nabiullina tried to quit her job over her nation's invasion of Ukraine — and that instead Russian President Vladimir Putin ordered her to accept a third five-year term as governor.

The background: Nabiullina, 58, is viewed by her counterparts in the West as a capable steward of Russia's often-troubled economy. She is viewed as loyal to Putin and was his aide immediately before becoming bank governor — but has repeatedly shown the technocratic chops to build Russia's foreign reserves and bring down inflation.

  • She was named "central bank governor of the year" by Euromoney in 2015, which praised her management of a crisis caused by the plunging price of oil.
  • She engineered a shift to a floating exchange rate and raised interest rates sharply, stabilizing the value of the ruble and preventing a banking system collapse.

But after Russia invaded Ukraine all bets were off. Western governments cut off the Russian central bank, essentially freezing access to much of the $600+ billion in reserves it had accumulated to guard against economic shocks.

  • In the face of a seemingly impossible macroeconomic situation, Nabiullina has raised interest rates and imposed capital controls. But those are Band-Aids for an economy experiencing gaping wounds.

The bottom line: Good macroeconomic management is essential for a nation to prosper. But it is not enough to overcome destructive decisions by national leaders.

5. First cousin advantage

Illustration: Eniola Odetunde/Axios

Birth order matters. First children in a family, according to a wide range of research, receive advantages that persist beyond childhood. As it turns out, the same may apply to first cousins within an extended family.

  • That's the implication of new research based on 1.6 million Swedish children born between 1972 and 2003, published as a National Bureau of Economic Research working paper. It found that the oldest of a group of cousins went on to have a higher school GPA, on average, than those born later.

Why it matters: Extra attention that grandparents, aunts and uncles pay to the first children to arrive in an extended family may have long-lasting consequences.

The details: Kieron Barclay of Stockholm University and Dalton Conley of Princeton found that among maternal cousins — first cousins related through the mother's side of the family — the second-born cousin ended up with a GPA percentile that was 1.04 percentage points lower. For the 10th-or later born maternal cousin, the gap was 4.97 percentage points.

  • The gaps were lower for paternal cousins, those connected by their fathers.

The researchers note multiple ways that grandparents can affect their grandchildren's future well-being, both through direct channels like reading, speaking and playing with them and less-direct channels like financial transfers and even simply acting as an enduring role model.

The bottom line: If you're a grandparent, aunt, or uncle, don't neglect the younger cousins in the family!

P.S.: Your newsletter-writer is the eldest of five cousins on his mother's side and the middle of five cousins on his father's side, which would appear to mean he has no excuse for his mediocre grades in school.