Inflation: the Savings Angle

Between the Ukraine war, supply chain shortages, energy shocks, and government policy that probably spent too much money for too long a period of time, Americans are feeling the pinch of ever-higher inflation on an ever-broadening array of goods. The question is whether Americans can’t afford it.
 
The chart below shows what percentage of their income Americans are socking away – that all-important “savings rate”. During COVID it hit record highs. But now? It has already plunged to pre-COVID lows.

It looks a bit spooky, right? Maybe even a little recessionary? After all, if Americans don’t have a savings buffer, any curveballs – and we seem to be living in world of nothing but curveballs – could cause immense damage.
 
But the chart needs context.
 
It’s one thing for Americans to no longer be saving, it’s quite another when you consider just how much they have already saved. Take a look at this second graphic (below) which stretches back to before the 2007-2009 financial crisis. Whereas the first graphic showed the savings rate (the percentage of income saved), this second one shows savings volume (the actual amount of cash).

Between the Trump and Biden Covid stimulus checks, Americans amassed an extra $13 trillion in savings.
 
So are Americans burning through their savings purchasing goods whose prices keep going up and up and up? Absolutely.
 
But $13 trillion is roughly how much all consumers in the United States spend in ten months. Even in an inflated environment, it will take most Americans two years to burn through the surplus.
 
It doesn’t quite make Americans price insensitive, but it certainly suggests that the current levels of consumption – and by extension current levels of demand-driven inflation – can be with us a lot longer than the headline “savings rate” would suggest.
 
How long? Well, that’s part of what we’ll be going through in our next seminar. We invite those of you who are interested to join us for our upcoming webinar, Inflation: Navigating the New Normal, on June 8th. More information at this link. Unable to attend the webinar live? No problem. All paid registrants and attendees will be able to access a recording of the presentation as well as a PDF of presentation materials.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

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The Bond Market and Inflation

The U.S. Federal Reserve is in the midst of raising interest rates. By raising the cost of borrowing and making debt (money) more expensive, you control spending thereby controlling inflation. 

The United States is currently experiencing the worst inflation crisis in some 40 years. The Federal Reserve’s interest rate hikes are the traditional tool in combatting such a problem. 

The challenge of inflation is not America’s alone. Across Europe and Asia, global currencies are seeing inflation drive up the cost of food, fuel, consumer goods, and housing. Unlike the United States, however, most countries’ central banks do not have as direct a course to combat inflation as the Federal Reserve.

A combination of demographic and Russian sanction-related inflationary pressures limit most European nations’ abilities to aggressively raise rates. A population as old and quickly aging as Germany or Italy’s is unlikely to see a bounce back in consumer spending once rates return to zero–where they have been for over a decade. This is a move the Europeans copied out of Japan’s playbook, whose nearly 20 years of near-or-at-zero interest rates are likely to be their foreseeable future.

So what does this mean for bond markets? The U.S. has the demographic strength and economic resilience to keep raising its interest rates, while the rest of the world will be forced to continue issuing bonds at or near zero. Which means their bonds, and ability to borrow, will soon become strongly uncompetitive vis-a-vis the United States.

What does this mean for inflation and the US economy writ large? We invite those of you interested to join us on a webinar that will cover these topics and more in depth on June 8th. More information at the sign up link below. Unable to attend the webinar live? No problem. All paid registrants and attendees will be able to access a recording of the presentation as well as a PDF of presentation materials.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

Sharing Food at the End of the World

My fourth book, The End of the World Is Just the Beginning: Mapping the Collapse of Globalization is scheduled for release on June 14. In coming weeks we will be sharing graphics and excerpts, along with info on how to preorder.

COVID-19 and the logistical issues that arose from lockdowns illustrated the importance of domestic supply chains. From semiconductors to fertilizer, countries that rely most heavily on imports faced the highest price increases. In a globalized system this means every country suffered at least to some extent. Although unhappily, the US should be able to withstand long backorders of new cars, appliances, and the like. What no country can do without is food; and no country can grow sufficient food without fertilizer. This graphic visualizes food stability around the world and is from my upcoming book, The End of the World is Just the Beginning.
 
From an agricultural point of view, the US is in a comfortable position. Domestic grain and soy production is strong enough that the US is the second largest exporter of wheat and soybeans and the single largest exporter of corn. Where I worry is not the US or Argentina or France, but countries whose agricultural system relies on imports—this includes grain and soy to feed livestock. Many countries in Africa and the Middle East cannot source their grain domestically, but instead rely on imports, largely from Russia. Additionally, American farmers, although unhappily, should be able to adjust to fertilizer price increases, but farmers in poorer, less-industrialized countries will simply have to do with less, and that means smaller yields.
 
Countries that fall into this category will be eager to join strategic trade partnerships with grain-producing countries. A country like Colombia can feel relatively safe relying on US imports, but elsewhere the logistics are not quite as simple. Egypt, the world’s largest wheat importer, sources 85 percent of its wheat imports from Russia and Ukraine. Sourcing its grain from a more stable region will be a top priority, especially as the Ukraine War drags on.
 
There is nothing more important than a country’s access to food. For this reason, I consider the agriculture chapter of The End of the World to be of particular importance. The globalized economic system has been largely responsible for lower hunger and poverty rates in developing countries. The question is how many of these gains can be preserved as the system disintegrates?

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

The Federal Reserve Plans its Next Move

The United States Federal Reserve is preparing to raise interest rates in 2022. The question is not longer one of “if” or “when,” but how frequently and by how much. The implications will reverberate throughout American society and the economy.  

It won’t just be new homebuyers scrambling to lock in low interest rates before the hike, or investors–jumping from tech stocks to crypto to GameStop to NFTs–who are likely to feel the pinch. Federal spending (and by extension, policy), investments in the manufacturing space, and global trade will all be impacted. And in the backdrop of a major global demographic shift, and countless opportunities and pitfalls abound. 

If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America.

The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.

Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.

Feeding America is a great way to help in difficult times.

The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.

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Gen Y vs. Z

Like their parents, the American Millennial cohort is defined by their size. Making up a larger share of the US population than either the preceding (and dare I say, cooler?) Gen X and younger Gen Z, they are having their own outsized impact on American society. 

Millennials and Zoomers are the future of the American workforce, and could not be more different. Where Millennials are touchy-feely, willing to work within teams and have a tendency toward leadership and collaborative work, most Gen Z wants to be left alone. Think Harry Potter vs the Hunger Games. This will have profound impacts on the evolution of the US labor market, especially as we enter the greatest era of industrialization in American society.

If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America.

The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.

Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.

Feeding America is a great way to help in difficult times.

The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.

DONATE TO FEEDING AMERICA

Last Chance: Join Us for The Face of Inflation

Join Peter Zeihan today, December 1, for the third in a three-part series on the here, now, and soon-to-be of the American and global economies. In Part III: The Face of Inflation we’ll be diving into not simply the inflation of the now, but also bringing together the wildly disparate inflationary trends that will entangle the American and global economies for the next four years. Everything from manufactured products to industrial commodities to energy to money itself.

Scheduling conflicts? Not to worry. Everyone who registers for The Face of Inflation will be provided with a recording of today’s webinar to watch at their leisure.

REGISTER FOR THE FACE OF INFLATION

Digital copies of the series’ previous installments can be purchased here:
Part I: Wither the Workforce

PURCHASE ACCESS TO WITHER THE WORKFORCE

Part II: Supply Chains No More

PURCHASE ACCESS TO SUPPLY CHAINS NO MORE

‘Tis the Season… for Inflation?

A lot of people are talking about how we’re currently facing the highest inflation levels in decades. Few are talking about how inflation–a bugbear that stalked the US economy for decades until the 90s–has been kept so low for so long. 

As with so much else in the era of globalization, most have mistaken the growth and development and stability of The Order as humanity’s default. Few things could be further from the truth.

Interested in more? This Wednesday we are hosting the final installment of our exploration of economic trends inInterested in more? We are hosting the final installment of our exploration of economic trends in an era of globalization tomorrow, Wednesday 12/1: Part III: The Face of Inflation. We’ll be diving into not simply the inflation of the now, but also bringing together the wildly disparate inflationary trends that will entangle the American and global economies for the next four years. Everything from manufactured products to industrial commodities to energy to money itself.

REGISTER FOR THE FACE OF INFLATION

Digital copies of the series’ previous installments can be purchased here:
Part I: Wither the Workforce

PURCHASE ACCESS TO WITHER THE WORKFORCE

Part II: Supply Chains No More

PURCHASE ACCESS TO SUPPLY CHAINS NO MORE

Please Join Us for Part III: The Face of Inflation

Gasoline costs. Housing costs. Food costs. Consumer goods costs. They are all going up. The inflation is real and it is only “transitory” if by “transitory” you are measuring time in years.
 
The real nut of the issue, however, is that few of the current price pressures have anything to do with government policy. Higher energy costs are the result of years of financial mismanagement. Higher housing costs are an outcome of large-scale internal migration decisions. Food costs largely boil down to transport issues. Consumer goods costs are an outcome of COVID-related demand whiplashes.
 
This might sound odd, but I don’t worry so much about these short-term inflationary pressures we’re currently experiencing. They are the outcomes of our current economic evolutions. That makes them uncomfortable, but ultimately, heh, transitory.
 
I’m far more concerned with the waves of inflationary pressures occurring just past the horizon:
 
The American economy is in the midst of the greatest rewiring in the history of the Republic, while the global system faces systemic breakdown. Those pressures are not simply inflationary, they will have a far greater impact upon prices than anything we’ve seen so far in 2021.
 
Here’s a more homegrown inflation source that will be — at least in part — an outcome of internal political and government decision-making.
 
Over the course of the past sixty years, we’ve become somewhat accustomed to the geopolitics of oil. Interrupt oil flows from the former Soviet or Persian Gulf regions, and we see energy inflation wash over us all. It forced us to pay attention to the ins-and-outs of politics in as calm, measured places as Gaza and Tehran and Riyadh and Caracas and Moscow and Kiev.
 
One of the (many) benefits of the American shale revolution is that America just doesn’t care very much about any of these places any longer. It’s a big piece of why energy prices are chronically lower in North America compared to the rest of the world, and why U.S. troop deployments abroad are now at their lowest levels in 120 years.
 
But the path to deglobalization isn’t a smooth one, wrapped up as it is in a variety of technological evolutions, some of which may force the United States to become more involved in managing the world. For as difficult as the geopolitics of oil has proven to be, it is nothing compared to the geopolitics of green energy. Yes, green electricity is generated at home, but the supply chain for constructing wind and solar facilities makes getting oil out of the Middle East look like a game of checkers.
 
For oil we needed to interface with Saudi Arabia and Iran and Venezuela and Russia, but greentech requires us to interface with Chile and Argentina and Bolivia and China and Australia and Congo and Gabon and Brazil and South Africa and Peru and Mexico and Kazakhstan and Turkey and India and Mozambique and oh yeah still Russia.
 
If the Green dream of 100% non-carbon energy is to take form, we will need to replace our one energy input supply chain with over a dozen more.

Interested in more? This Wednesday we are hosting the final installment of our exploration of economic trends in an era of globalization: Part III: The Face of Inflation. We’ll be diving into not simply the inflation of the now, but also bringing together the wildly disparate inflationary trends that will entangle the American and global economies for the next four years. Everything from manufactured products to industrial commodities to energy to money itself.

REGISTER FOR THE FACE OF INFLATION

Digital copies of the series’ previous installments can be purchased here:
Part I: Wither the Workforce

PURCHASE ACCESS TO WITHER THE WORKFORCE

Part II: Supply Chains No More

PURCHASE ACCESS TO SUPPLY CHAINS NO MORE

The Face of Inflation: An Energy…Mistake

On November 18 news leaked out of Taiwan, Japan, South Korea, China and India that the Americans have approached pretty much every country that matters about a joint, simultaneous release of oil from each country that maintains emergency reserves. The goal being to tamp down rising oil prices. The subtext is that the Biden administration’s efforts to get OPEC and its oil-exporting partners to produce more crude have proven unsuccessful.

Normally, I’d just dismiss this as media banter and rumor mongering. Stuff like this drops out of the ether every time oil prices rise. This time is probably different; Simultaneous indications from multiple countries that lack a track record of energy-related drama suggests the news is for real.

I guess the primary reason I would have normally dismissed the idea of oil releases is because…it is a really, really stupid idea.

First off, oil demand is inelastic. When prices go up or down by 10%, 20%, 50% it is rare for demand to budge at all. Only when prices go up (or down) by an extreme amount and stay there for months do we get fundamental shifts to demand. Which means any short-term price drop won’t impact the underlying market fundamentals one whit.

Second, even if every country on the planet with oil sitting in tanks or salt caverns agreed to follow Biden’s lead, they could not maintain the effort for nearly long enough to shift the demand picture. Most countries don’t have more than two months of import cover. Turns out that most find storing something like crude oil — a material that’s corrosive and toxic — to be difficult and expensive.

Third, what makes oil prices go down isn’t so much increases in flow but increases in production and above all storage. It is having extra oil on hand that weakens prices. Releasing crude from storage isn’t production. Releasing crude from storage reduces storage. It actually makes the market tighter.

Which means, fourth, as soon any releases end, demand fundamentals will not simply take prices right back to where they were, they will take prices higher because there is now less storage as a buffer.

And so, reserves are not tapped lightly. Historically speaking, the United States has only released oil from its reserves to impact pricing when there has been an actual production disruption. For example, in 1991 when Iraq invaded Kuwait, or in 2005 when Iraq descended into civil war and Venezuela got serious about its journey to self-destruction. Nothing like that is happening currently.

These aren’t particularly sophisticated economic talking points. “Oil 201” if you will. And that is what has me concerned. Transport Secretary Pete Buttigieg knows this. Energy Secretary Jennifer Granholm knows this. Commerce Secretary Gina Raimondo knows this. National Security Advisor Jake Sullivan knows this. The chances of this quartet of the smartest people on TeamBiden not advising the president of such a basic economic function are zero.

Which tells me that one of two things has happened.

Option1: There’s some sort of massive misunderstanding going on here and the information that’s leaking out of Asia is in some way wrong. If so, this’ll blow over very quickly and we’ll all go back to our lives.

Option2: Biden’s instinctive populism has overwhelmed his willingness to listen to basic facts, and he is pursuing a populist, Trumpesque economic policy in the belief that his diktats can direct the markets.

If it is Option2 then, well, crap. If the goal is to decrease oil prices, there’s an easier, faster, diplomatically cheaper, more economically viable and more environmentally friendly way to do it: The United States is the world’s largest oil producer because of the shale revolution. Using a mix of new production techniques developed in the past two decades, U.S. oil producers can bring new production to market in just six weeks. Even Saudi Arabia’s reserve capacity takes a minimum of three months to bring on-line. Shale output has far lower carbon output as part of its production than the global average, and because U.S. shale is produced in the United States rather than a different hemisphere, the shipping footprint is similarly lower. (Also, production taxes!) Politically, it would indeed be awkward for green-friendly Biden to approach the U.S. oil sector about producing more oil, but IMO not nearly as awkward as it has been for him to approach de facto Saudi Arabian leader Muhammad “Hacksaw” bin Salman…which he has already done. (Only to be turned down flat.)

I have been nursing some concerns about the Biden administration’s economic policies for some time. I’ve reserved judgement because most of his plans require Congressional action, and until Congress actually passes something of substance it is all just political theater. The oil-release action is in a different category because it can be done by executive order.

As a rule, I like to give presidents plenty of time before I declare them lost causes, and therefore part of the problem rather than part of the solution. With Obama it took until year five, with the specific straw being when Obama started barring people who brought him news he ideologically disagreed with from even entering the Oval Office. That action turned the entire Executive Branch into a tone-deaf echo chamber. With Trump it happened in year three when he decided he was “done” with coronavirus. That action is largely responsible for the death of a half million Americans. After seeing the quality of the people in Biden’s cabinet, it never occurred to me that it might happen before year two.

But here we may be. Arguing that Option2 is what is truly in play, is another energy-related action from Biden administration this week: an order that the Federal Trade Commission investigate American oil producers, refiners and gasoline distributors for price fixing. Fixing in the wildly unconcentrated American oil complex is functionally impossible. Leaving aside the hundreds of differently motivated oil producers and hundreds of regionalized gasoline distributors and tens of thousands of gasoline retailers, there are 135 operating oil refineries in the United States, and they tend towards cutthroat competition. Collusion among them would be hilariously unwieldy and only one tattletale hold-out would result in billions in fines for the other 134. Biden should know this too. Buttigieg and Granholm and Raimondo and Sullivan certainly do. This isn’t policymaking. This is populist blamestorming in the Trumpian style, using the tools of the state to target your political opponents.

But I digress.

What’s happening with the oil markets, what is driving prices higher, what is apparently prompting Biden to push for a mass release, are symptoms of an issue far larger and more substantive than mere presidential mismanagement. What’s happening is financial mismanagement on a global scale. Its effects are magnifying with time and will be with us long after Biden is gone. What we are seeing now, with oil prices well on their way to $90 a barrel, is just the tip of the iceberg.

But it will not be felt everywhere.

Interested in more? Energy inflation — deep, chronic, and above all varied — is a big piece of the broader, long-term inflation picture that we’ll be exploring in our final seminar on the evolutions in the American and global economies in the age of deglobalization. Join us December 1 for Part III: The Face of Inflation.

REGISTER FOR PART III: THE FACE OF INFLATION

Scheduling conflicts? Not to worry. Everyone who registers will be provided with a recording of the webinar to watch at their leisure. 

We hope you will also join us today the Supply Chains No More webinar and Q&A session. Registration information and more at the link below.

Part II: Supply Chains No More
Today, November 19, 1p Eastern

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Those who missed out on Part I: Wither the Workforce can purchase access to the recorded webinar and presentation materials at the link below.

PURCHASE RECORDING OF PART I: WITHER THE WORKFORCE

TODAY: Attend the Supply Chains No More Webinar

Join Peter Zeihan today, November 19 for the second in a three-part series on the here, now, and soon-to-be of the American and global economies. Part II: Supply Chains No More will focus exclusively on global supply chains, providing insight to the current status of delays and disarray, and identify which sectors will have no choice but to fundamentally restructure in the months and years to come.

Scheduling conflicts? Not to worry. Everyone who registers for Supply Chains No More will be provided with a recording of today’s webinar to watch at their leisure. 

REGISTER FOR SUPPLY CHAINS NO MORE

We hope you will also join us for the Face of Inflation webinar and Q&A session. Registration information and more at the link below.
 
Part III: The Face of Inflation
Wednesday, December 1

REGISTER FOR PART III: THE FACE OF INFLATION

Those who missed out on Part I: Wither the Workforce can purchase access to the recorded webinar and presentation materials at the link below.

PURCHASE RECORDING OF PART I: WITHER THE WORKFORCE