The Neoliberal Globalization King Is Dead! Long Live The Mercantilist Industrial Policy King!

By Michael Every of Rabobank

The coronation of Charles III was a gloriously arcane ceremony that felt like the South Park Royal Wedding ("The Prince is dipping his arms into the pudding, as is tradition"); British social media noted the UK’s labor shortage and cost of living crises are so bad that a 74-year old man was forced to take his first real job. Charles III was preceded by the regalia of US payrolls at 253K vs. 185K consensus, with negative back-revisions, and unemployment at 3.4% vs. 3.6%. Yes, ‘gig’ jobs might now be recorded as real, but if this is full-employment near-feudalism, as under King Charles II, explain how average earnings growth leap to 4.4% y-o-y without saying “noblesse oblige” or showing knobbly knees in this intellectual beauty contest. Something, apart from wages, is up. Like short bond yields. Or air fares, as passengers’ willingness to pay high prices continues. Or wheat if the Black Sea Grain Deal falls apart, as was being threatened on Friday. And let’s see if US CPI is this week too. Indeed, as we say ‘Long Live the King’, another ‘king’ is dead – neoliberal financial globalisation.

Adam Tooze says ‘Washington isn’t listening to business on China any more’, and while the US is not “eager” for a war with it, one is perceived to loom in 2025(!), and businesses “peace interest” has disappeared. He says the only way to avoid war now is a “new security order” for China in Asia, seen as “treasonous” and “non-planetary” in the US (and much of Asia!); as such, “the era of Davos man is over,” and multi-billion dollar investments now hang by a thread.

The recent policy speech by NSA Sullivan backed “modern American industrial strategy,” rebutted that free markets allocate capital best, and said geopolitics requires a new policy path to boost “specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions.” As all 50 US states start what the Financial Times calls as ‘arms race’ for new investment under the recently-passed IRA, what Sullivan said is rightly seen as the death of neoliberalism by some. And the likely 2024 alternative is Trump’s mercantilism.

Gcaptain notes the $25bn US Shipyard Act just introduced to the Senate to revitalize US maritime infrastructure to out-pace China, with reforms to accelerate production over bureaucracy. Today, Wall Street won’t lend to the US Maritime Administration due a lack of transparency, and US Navy admirals “do not understand Wall Street and are hesitant to learn about new financial engineering tools used by most large infrastructure funds today,” while Chinese shipyards can borrow cheaply. The Act aims to repeat the Truman Committee of 1941, which transformed US naval production into a WW2 colossus. Gcaptain concludes: “The urgency of this moment in history cannot be overstated. As [Senator] Wicker reminds the nation, we are in our most dangerous national security moment since WW2. He invokes the words of Winston Churchill, who once wrote that “the foundation of all our hopes and dreams was the immense shipbuilding program of the US.”” This step, with more to come on support vessels and the merchant marine, were flagged as logically inevitable in 2021’s ‘In Deep Ship’.

Germany is to subsidize up to 80% of energy costs for its industries after awful March retail sales, import, export, and factory orders data: the cost will be high at present energy levels and extortionate should they rise; it could rip apart the EUs’ internal level playing-field; and may see an ex-EU trade response. This is also the scenario we warned of in ‘Balance of payments  --and power-- crises’ - and it does not end well for free-trade Europe or the Euro.

Xi Jinping underlined China’s economic growth must focus on manufacturing, the “real economy”, not bubbles in finance and property - Wall Street is not “productive”, as laid out here in 2021. In fact, China plans to deal with high youth unemployment by sending them to the countryside, echoing Maoist practices. Where China gives up low-tech sectors like textiles, it aims to dominate looms and key materials such that it still controls the industry. This is objectively better than a financialised US economy: but given China already runs vast trade surpluses with the world --as the Financial Times says ‘Western companies warn of hit from China’s slow recovery’, and deflation is likely to loom in this week’s CPI and PPI data-- this overtly mercantilist stance will only trigger more mirroring policies from the West, then a global clash for market share, or worse – again something we’ve seen coming for years because it’s the historical pattern.

US banks had a good Friday, and some argue deposit withdrawals have stabilized if one looks at seasonally adjusted data; then again, some market voices say the entire system is underwater if we marked to market. Let’s see the loan officer survey today for an update, as well as the financial stability report. Importantly, if the system is OK, US rates are not coming down ahead. If the system is not OK, then it’s less clear what happens. Would the Fed really slash rates in a replay of 2007-08, despite high CPI and a US-China stand-off for global reputation? Would US politicians do nothing on stimulus as we head into the 2024 election – and the same US-China stand-off for global reputation?

Modern American industrial strategy” needs lots of liquidity into the US ‘real economy’ – i.e., the US Shipyard Act -- and lots less liquidity into anything ‘fictitious’ to stop services and asset-price inflation. Zero rates means more ‘fictitious’ US capital and imports from China, not more productive capital into US industrial/defence supply chains when D.C. is talking about possible war in 2025. Zero rates make zero sense from a national security perspective. As such, Fed funds may have to stay high despite banking pain, but with more acronyms, bail-ins/outs, and “strategic capitalism” slash moral suasion, as even the neoliberal Heritage Foundation now supports. All we need is US kids being sent to the countryside, and the mirroring of China is complete. Actually, no: that would require US capital controls to stop China holding Treasuries: no USTs, no trade surplus; bye-bye Chinese mercantilist excess production; and Wall Street financialisation.

That’s before we get to dedollarisation. Last week’s news that INR-RUB bilateral trade isn’t working because Russia doesn’t want to hold INR laughs at dollar bears. Yet it also shows the two countries must shift their physical trade patterns to match desired FX holdings, or bring in another economy and use that FX instead, which is all being pondered. Wolfgang Munchau argues ‘Why China and its trading allies are well placed to topple the dollar’: yes, if they want to embrace global disorder. Dedollarisation it’s not something that will happen via a flick of a switch - but it might do via the press of a button. To push back, the US would need to keep rates (and defence spending) higher for longer. Yet that creates global dollar shortages, more so as commodity prices now move with, not against the dollar. So, that requires Fed swaplines to EM, not just DM. But no US swaplines are going to head to China and Russia. As such, destabilisation --and more contagious global mercantilism-- surely lies ahead. As does a stronger dollar, which remains king even as many plot to behead it. As they say, if you aim to shoot the king, you better not miss.

To conclude: The neoliberal globalisation king is dead! Long live the mercantilist industrial policy king!

As such, the ‘lower for longer’ royal court looks as credibly dressed as some of the wild knickerbockers displayed at Charles III’s shindig. The ‘higher for longer’ or “it’s going to be very complicated” court are moving in, fluttering their fans. If you can't see that because of all your own intellectual regalia, then you risk ending up on the outs, or even like King Charles I - who got his head cut off.

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