Why Russia May Blink; More Covid Spending; China Tech Woes; Full Employment
January 10, 2022
WE’RE FACING AN UNUSUALLY FULL WEEK of economic and geopolitical developments, so let’s jump right in —
WHY RUSSIA WILL BLINK: As tension grows over eastern Ukraine, we offer four reasons why Vladimir Putin will continue to stir the pot — but not invade:
First, the potential U.S. sanctions would be harsh as Joe Biden seeks to compensate for his Afghanistan debacle. Sanctions would impose severe constraints on Russian access to the global financial system, with major curbs on shipments of Western technology to Russia.
Second, Russia now has its hands full with the uprising in Kazakhstan.
Third, a Russian invasion of Ukraine would be met with well-armed resistance from guerrillas, inflicting casualties that would sink Putin’s job approval ratings back home.
Fourth, a sharp drop recently in jittery Russian markets surely has worried Putin. The ruble has plummeted, and the Russian stock market was down by about 8% last quarter. A war on the Ukrainian border could further rock the Moscow markets.
WE THINK WASHINGTON will offer some carrots this week, such as a pledge to scale back military exercises in the region, while not relenting on troop withdrawals or the makeup of NATO. We think an uneasy truce will prevail.
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MORE COVID FUNDING: This weekend’s fiscal trial balloon was that President Biden is considering a new Covid spending package that would fund more testing and vaccine distribution — a political necessity for the reeling administration, which can’t seem to offer clear messaging and will need to divert attention away from a near-certain defeat this week on voting rights.
THERE’S A GROWING CONSENSUS in Washington that more spending is coming, even though Republicans are lukewarm at best. The key issue is whether Covid aid could be combined with money for restaurants and rent assistance, two areas where funding has just about run out.
WHETHER AN EVEN BIGGER PACKAGE could emerge — embracing many of the stalled Build Back Better provisions — is unclear. Sen. Joe Manchin, who eventually could agree to a package, is still weeks away from getting everything he wants.
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MOST INTERESTING ARTICLE WE SAW this weekend was an eye-opener in the New York Times on Saturday titled “Gloom Settles on China’s Tech Industry.” The article focused on the Communist Party’s “harsh and capricious crackdown” on the industry, leading to widespread job layoffs.
THE TIMES CONCLUDED THAT “the crackdown is killing the innovation, creativity and entrepreneurial spirit that made China a tech power in the past decade. It is destroying companies, profits and jobs that used to attract China’s best and brightest.”
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NOW THAT THE U.S. HAS HIT FULL EMPLOYMENT, it’s clear that an unprecedented labor shortage will persist. Here’s our favorite factoid: New York City subway workers have been lured out of retirement with temporary jobs paying up to $35,000 for three months because of a shortage of workers. Huge sign-up bonuses are now available for transit workers around the country.
AS MORE AMERICANS retire, shift jobs or call in sick, it’s clear that fatter paychecks are only part of the solution. People want more fulfilling jobs, and they’re willing to retire early or start their own businesses.
PART OF THE SOLUTION involves the desperate need for more legal immigration to fill the growing shortage of service sector workers. Yet immigration was slashed in the Trump administration, and reform isn’t on the table in Congress.
JEROME POWELL will get grilled this week on inflation; this Wednesday’s CPI report is likely to hit 7% year-over-year, but commodity prices will begin to slide by summer as supply bottlenecks ease. Wages and benefits will continue to be the big inflation story; there simply aren’t enough workers to deliver grain or oil or lumber.
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