From MarketWatch:
Excerpts:
Nearly five years ago, I warned that stagflation for the U.S. was only a broken supply chain away. A temporary outbreak resulted from the COVID-19 shock, as a surge in inflation coincided with an anemic recovery in global demand. But, like the pandemic, that economic disruption quickly subsided.
Today, a more worrisome form of stagflation is in the offing, threatening severe and lasting consequences for the global economy and world financial markets.
An important difference between these two strains of stagflation is the nature of the damage. During the pandemic, supply chains were stressed by significant demand shifts — during early lockdowns, people consumed more goods and fewer services, with a sharp reversal after reopening.
It took roughly two years for those supply-chain disruptions to begin to fade, and inflationary pressures begin to ease.
Such temporary disruptions now seem almost quaint compared with the fundamental reordering of global supply chains sparked by President Donald Trump’s “America First” protectionism.
The United States, for all intents and purposes, is disengaging, or decoupling, from global trade networks, especially from China-centric supply chains in Asia and potentially even from the supply chains that knit together North America through the U.S.-Mexico-Canada Agreement — the so-called “gold standard” of trade agreements.
Trump celebrated the imposition of so-called “reciprocal” tariffs on April 2 as “liberation day.” To me, it was more like an act of sabotage, triggering retaliation and a likely decline in the global trade cycle. If this continues, it will be exceedingly difficult for the world to sidestep recession.
The outcome of Trump’s agenda could be as destructive as that of the early 20th-century global trade war that followed the 1930 Smoot-Hawley Tariff Act, another protectionist policy blunder.
With U.S. tariffs now even higher than they were back then (and, in fact, higher than at any point since 1909), it is worth remembering the 65% contraction in global trade that occurred from 1929 to 1934.
Today’s world might be lucky to get away with stagflation.
