War and the pandemic have exposed fault lines across the global economy
Security and resilience are comforting words for people, companies, and countries. This is especially so when the world, business, economies, and life in general seem so insecure and lacking in resilience. We are in such times today.
The shocks from the Russian-Ukraine war and events connected with it are driving inflation in food, energy, and other commodities and services. They are also part of the drivers of falling stock markets and other economic insecurities.
But the conflict in Eastern Europe is not the only driver of these events. Central banks across the world have pumped up stocks and markets by allowing free money with expansionary monetary policy for far too long. Effectively, they were overprinting money.
This monetary flood presented the illusion that looming financial and economic risks were not a big deal. It also built a high economic and financial cliff from which to fall. Stocks and other assets were overpriced.
Short-run overly exuberant expansionary fiscal policies drove overheated markets. Mountains of debts from expansionary fiscal policies have placed countries at great economic and political risk. They decided to pump up their economies using huge government spending programs that worked — until they did not.
Moderation and long-term thinking could have helped. But those two important aspects of leadership are often lacking. And, frankly, politicians rarely get elected for being moderate and thoughtful.
Trillions have been lost. These losses have been magnified by the collapse of some cryptocurrencies which had nothing backing them up except hype from their salespeople. When markets and economies are built on air, bubbles eventually burst. Too many were carried along by hype, deception, and loose monetary and fiscal policies. They were convinced the good times could not end. They have.
“Genius investors” became paper wealthy. They and others took out loans to buy more assets. Some bought plain foolishness. When you start seeing paintings of just one color, virtual investments that have nothing real behind them, and fixer-upper apartments selling for millions of dollars in modest areas, then real thinking has stopped. Inevitably, after the foolishness, this paper wealth collapses.
There are assets that remain strong and will remain strong because they have something backing them up, such as companies that have something to sell that people and other companies want to buy. How about that for a new idea? Other companies were built on foolish hopes and the thin air of unsupportable exuberance and hope — or lies — as well as cheap money and pumped-up economies.
But good companies and assets have been hurt because investment followed bad ideas. Good money that follows bad ideas always ends badly.
Stock markets are not gambling parlors. When one sees exceedingly high price-earnings ratios and debt levels in companies that do not have a future in invention and growth then is time to get worried — and bail out. It is not the time to buy more, like Las Vegas gamblers hoping their luck will turn.
How do we know if a country’s economy and a company are resilient? We do not until they are shocked, evaluated, and put through stress tests. Even then we cannot be sure because there could be even bigger shocks along the way. A resilient economy and company are those that can successfully bounce back from shocks, both big and small — especially from catastrophic ones.
The illusions that Sri Lanka, Peru, and others showed resilience proved to be facades that most everyone wanted to ignore until the façade fell on them. Think of the companies you know of that turned out to be vaporware as corporate examples of a falling façade.
Governments that ran up national debts when they knew they could not pay them back is a recipe for economic collapse. It is so bad in some places that they cannot afford to import fuels, food, and other necessities for their people. Often a country’s lack of resilience is due to its leaders.
Is this a form of corruption? If these governments used their power of the purse to keep getting elected the answer is a resounding yes. Is this a failure of leadership? Of course, it is.
But who pays the price of this corruption and failure of leadership? Mostly it is not the corrupt and failed leaders, but the poor, the vulnerable, and the middle class who pinned their hopes on better leadership, as they were often promised.
There are ways to help change this vicious cycle of poor governance and economic collapse. The number one answer is to make sure people, and by that I mean all people, are trained and educated in basic finance and economics. Even the basics can help them vote better and invest better. It might also help them see through political hype and business deception.
One would hope that people and their leaders might see and understand the other huge looming problems that continue to hang like a sword of Damocles over the world economy and business — the lack of resilient and diversified supply chains. When products and processes rely on a few sources and supply chains then the tyranny of small spaces and the tyranny of small numbers take hold.
Think about how reliant the EU has been on Russian energy and how reliant the entire world has been on Chinese supply chains. Then think about how a regional war stunned and broke EU-Russia supply chains, and how the COVID-19 pandemic repeatedly damaged and made Chinese supply chains unreliable. The health crisis, still with us, has allowed lessons to be learned on security, resilience, and reliability for those willing to listen, and for those educated enough to understand what they are hearing. Now think of what might happen to particularly important supply chains if there is a war in Taiwan.
Leaders at all levels, are you listening?
• Dr. Paul Sullivan is a senior research associate at KFCRIS and non-resident fellow, Global Energy Center, Atlantic Council