The Jackson Hole Economic Symposium of 1990 celebrated a new era of globalization, with central bankers from behind the fallen Iron Curtain for the first time joining their Western counterparts in Grand Teton National Park to discuss a common economic future.
A new iron curtain of sorts has arisen, with Russia’s invasion of NATO-backed Ukraine and a U.S.-China trade war dividing the world again along West-East and democratic-autocratic lines. Throw in a pandemic and climate-related disasters, and the economic results include high inflation, supply-chain disruptions, volatile commodities prices and global grain shortages.
With the theme, “Structural Shifts in the Global Economy,” the 46th annual symposium in Jackson, Wyo., Aug. 24-26, will focus on how these changes will impact central-bank policy. Investors wonder what it means for them, with the Federal Reserve at a potential turning point in its war on inflation.
As Christopher Smart, the former Obama economic policy advisor now managing partner of the Arbroath Group, wrote in Barron’s: “Investors are grappling less with the next interest-rate decision than the far bigger forces that will shape growth and inflation beyond this year: geopolitical confrontation, transformative technologies and extreme weather.”
Welcome to the brave new world.
Back in the halcyon days of the 1990 conference, one of the key speeches was given by Vaclav Klaus, the Czechoslovakian finance minister. Eastern Europe’s leading free-marketeer, Klaus said everything the Western bankers wanted to hear.
“It is becoming more and more clear to all East Europeans,” Klaus told the assembly, “that the only practical and realistic way to improve their living standards is the total abolition of institutions of central planning; the dismantling of price and wage, exchange-rate and foreign-trade controls; and the radical transformation of existing property rights.”
While Klaus was ready to sweep away the communist past in a single stroke, The Wall Street Journal was more circumspect.
“The reformers will have to find a way to keep public support on their side if their bold economic experiments are to succeed,” the Journal’s Alan Murray wrote. “No amount of technical expertise or institutional refinement from the West can replace that.”
Events moved quickly. Klaus’ country would soon be erased from the map, along with the Soviet Union and Yugoslavia, which were also represented at Jackson Hole. Former Warsaw Pact nations flocked to the EU and NATO.
As maps changed, democracy and economic liberalization spread. Multilateral trade agreements such as Nafta proliferated, punctuated by the 1994 creation of the World Trade Organization. China joined in 2001, Russia in 2012.
“There was again a prospect that countries would conduct much of their trade relations in an orderly and predictable way,” the economist Andrew G. Brown writes in Reluctant Partners: A History of Multilateral Trade Cooperation, 1850-2000.
Economic gain was just one hoped-for result of an orderly global trading system. Another was peace, on the belief that trading partners are less likely to become military antagonists.
The European Economic Community, now the European Union, was created in 1957 for just that reason, in hopes of ending that continent’s “long and bloody history of political and military conflict,” according to Brown, former head of analysis and policy at the United Nations. And it worked, for decades.
Similar hopes were expressed at Jackson Hole in 1990, this time for a rapprochement between former Cold War rivals. It, too, worked, for a while.
The ‘90s had its share of regional conflicts, but no wars on the level of Vietnam or Korea, much less the World Wars. Global military spending dropped while the economy boomed amid record trade, a high-tech revolution, stable inflation, and soaring stock markets.
The peace dividend seemed real.
But globalization wasn’t popular with everyone. In the West, it attracted a diverse group of opponents: “labor unions; environmentalists; advocates of human rights, labor rights, and women’s rights,” and those with general anticapitalist agendas, according to Brown.
They converged on Seattle in December 1999 to protest a WTO conference, 40,000 strong. It got ugly.
“Seattle police SWAT teams used tear gas, pepper spray, rubber pellets and billy clubs against protesters who blocked access to the WTO meeting,” The Wall Street Journal reported, noting “the protesters were largely nonviolent.”
Days of confrontation followed before the conference collapsed, without an agreement—a victory for globalization opponents.
There were other forces working against globalization. In Eastern Europe, the initial embrace of free markets gave way to a reactionary backlash concerned that their traditional cultures were being subsumed by liberal Western ways. The Journal’s warning had been prescient.
By 2007, Russian President Vladimir Putin was banging the drum against his nation’s former Cold War foe.
The U.S. “has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations,” Putin said at that year’s Munich Security Conference. “Who is happy about this?”
Like-minded autocrats seized power in Hungary and Serbia (Yugoslavia)—which both attended the 1990 conference—as well as Belarus.
In China, meanwhile, Hu Jintao’s policy of “peaceful development” was replaced by Xi Jinping’s more belligerent approach, which emphasizes the Middle Kingdom’s military power and its inevitable reunification with Taiwan, by force if necessary.
“The Chinese people will never allow any foreign forces to bully, oppress or enslave us,” Xi said in a 2021 speech commemorating the 100th anniversary of the Chinese Communist Party’s founding. “Anyone who dares will have their heads cracked and their blood will flow before the steel Great Wall.”
Xi found his match in the U.S. President Donald Trump, who pushed an “America First” agenda and targeted China’s “pattern of misconduct” in trade.
China has “ripped off the United States like no one has ever done before,” said Trump, announcing sanctions in 2020. “China raided our factories, offshored our jobs, gutted our industries, stole our intellectual property, and violated their commitments under the WTO.”
Trump raised tariffs on goods not only from China but also from “friendly” trade partners including Canada and the EU. Nafta was reworked and all multilateral agreements—trade, health and security—were considered suspect.
President Joe Biden escalated the trade war, targeting China’s semiconductor industry and promoting a “Buy America” initiative.
But the final nail in globalization’s coffin was driven by Putin and his 2022 invasion of Ukraine. As Europe’s largest land war since WWII rages on, with casualties piling up and whole cities leveled, nations have been forced to take sides, much as in the last Cold War, and along similar lines.
Commerce tells the tale. Between 1990 and 2008, global trade—the sum of exports and imports of goods and services—as a percentage of global GDP rose from 37.59% to 60.96%. After cratering in 2009 due to the Global Financial Crisis, trade never recovered and has been trending downward ever since. Global trade represented 56.53% of GDP in 2021.
“[W]orld trade has lost momentum, with trade growth slowing in 2022 and remaining weak into early 2023,” WTO director-general Ngozi Okonjo-Iweala wrote in the organization’s 2023 statistical review. “[N]umerous downside risks, from geopolitical tensions to potential financial instability, are clouding the medium term outlook for both trade and overall output.”
Smart, the former Obama advisor, suggests that even with the “broader deterioration” of the U.S.-China relationship, supply lines will eventually be repaired, though through roundabout ways.
“Even if U.S. importers shift to suppliers in India or Vietnam, these suppliers will continue to depend on China for their inputs,” he told Barron’s. “There will always be a mutual dependence regardless of how bad relations may turn.”
Another concern for the economy are technical advances such as AI that threaten to destroy existing jobs.
“Innovation has always destroyed jobs, but new jobs have always appeared to take their place,” Smart says “The real challenge with AI is that the destruction may come so quickly that we don’t have enough job creation to offset the trend.”
Smart said he believes Powell is focused sharply on getting inflation down to 2% “as quickly as possible, so he can claim victory and then begin to contemplate rate cuts.”
But don’t hold your breath.
“I would be surprised if he is able to do so credibly before early next year,” Smart says.
That prediction is consistent with Powell’s warning last year that “restoring price stability will take some time”—interpreted by the market as interest rates “higher for longer.” So far he’s kept the course.
With all the challenges the economy faces now, from trade wars to real wars to natural and technological disruptions, Powell’s message this year may be higher for longer still.
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