Do the tools we use to regulate our economic system work anymore?

Commentary

Peter Zeihan

Geopolitical Strategist
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The U.S. is in the grip of the worst inflation the country has endured in decades. In the wake of a steep interest rate hike, Federal Reserve Chair Jerome Powell faced bipartisan grilling from the Senate this week about the plan to rein in inflation. But will those actions be enough? Straight Arrow News contributor Peter Zeihan argues that as the U.S. and the world’s population gets older, tools such as interest rates may no longer be viable methods to regulate our economic system.

Excerpted from Peter’s June 23 “Zeihan on Geopolitics” newsletter:

The nature of the economic system so many governments are attempting to grapple with right now is unprecedented in modern history. For much of the span of human history since industrialization, governments could reasonably promise their subjects some kind of more. The promise of more held that the economy–no matter the political system in charge of it–could be expected to grow, largely through population growth and rising demand.Enter the End of More. A central theme of my equally cheery-titled new book, The End of the World is Just the Beginning, the pie for many countries is as big as its going to get. This is especially true for countries staring down terminal demographies: Germany, Italy, China, Japan. With population growth firmly in the rear view mirror, these countries can’t rely on a baby boom to spur consumption-led growth.Which brings us to our current problem with inflation. Central banks’ primary tool in battling inflation is through raising interest rates. Making borrowing more expensive usually dampens demand, thereby pressuring prices to fall. The trick is not dampening demand too much, and risking recession. For the world’s oldest populations, this is going to be an near-impossible balancing act. And now for a bit of good news–The End of the World is now officially a New York Times best seller! On behalf of myself and my entire team: thank you, thank you, thank you.

Hey everybody, Peter Zeihan here coming to you from the DC area where I’m about to give a work presentation in a room without electricity, because the power’s been out for the last 12 hours. So that’s fun. Two things I wanted to talk about today. The first is the nature of the economic system that we’re trying to wrestle with right now. The new book is called the end of the world is just the beginning and that’s in many ways. A lot of the tools that we have developed to regulate the economic system, most notably interest rates at the federal bank level…we’re not sure if they’re gonna work anymore. 

The whole idea of interest rates is that you make the cost of borrowing higher, so that demand becomes more expensive so that people and companies do less of it. But for that to work, you have to have a consumption as a primary drive in your economic system.

Most of the world doesn’t have that any longer. Most of the advanced world hit the point of no return with their demographic aging back in the nineties and places like Germany and Italy and Japan now have more people in their fifties and their forties than their thirties and their twenties and so on. Now in the United States, it hasn’t hit nearly as hard, but we still have this huge generation, the baby boomers are retiring and a very small generation, the Zoomers who are coming into the system right now in calendar year 2022. That’s a shortage of 400,000 workers. And by 2034, that number will have increased to 900,000. This is structural inflation, and this is a problem on the supply side. And when you raise the cost of borrowing, it doesn’t just impact people who are trying to buy a car or a destroyer. It also affects people who are trying to build out… industrial plant and productive capacity and train new workers.

It’s not clear to me whether in places where this demographic decline is advanced, such as Germany, will interest rates even work anymore. Because you are capable of strangling now supply with it and it doesn’t do anything to demand because there isn’t any. The, the economic rules of the past may not apply anymore. Now in the book, I called this something called the end of more, the idea that every economic model that we have developed in the last 500 years, whether it’s fascism or socialism or communism or capitalism, they were designed for an environment where the pie got a little bit bigger every year, largely because of population growth. That’s no longer true. 

And so when I look at the problems that the Fed, oh yeah, lovely sound in the background, those are emergency generators. Fun touch, huh? When you look at the problem that the US Federal Reserve is dealing with right now, they would like to get inflation under control and interest rates are the tool they have.

But if we’re in a world where the normal relationships between demand and consumption and supply and production are somewhat out of whack and might not go back, it’s not clear to me that they can raise interest rates to dampen demand without also crushing supply, because we’ve never had a significant problem on the supply side before. And because we are now facing the greatest labor inflation in American history, raising interest rates just might not be the right tool. 

And then it comes to the executive branch and that’s a whole other discussion of whether the Biden Administration is up to the challenge. Okay. So that’s the first big topic. I’m not sure that the tools apply anymore. 

The second big topic….we made the bestseller list. We came in number 12 on the NYT best seller list late last night. Um, I’m still trying to calm down, but thank you. Thank you. Thank you all. Thank you to everyone who helped put the book together. Thank you to everyone who shared it with your friends. Thank you to everybody who bought a copy or who says they’re going to buy a copy. This has been a wild ride for the last four months with the Russia war. I feel like I’ve dropped the ball in so many ways because there’s so much going on. I’m doing my best to keep up. My team is fantastic, but ultimately it’s for the viewers and the readers out there that have made this happen. So thank you. Thank you. Thank you. Okay. That’s it for me. I’m gonna go see if I can find a place with at least one bar of signal to upload this and I will see you guys next time. Bye.


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