Economic Schizophrenia 

Dr Thomas C Schleifer

Surging inflation, global energy supply shortages, Russia’s invasion of the Ukraine, and Chinese pandemic-related disruptions to economic activity have brewed the perfect storm of economic instability. The excessive pandemic fiscal stimulus and ensuing inflation surge have added to the imbalance of supply and demand by artificially propping up demand without accompanying productivity on the supply side. An economy struggling with elevated rates of inflation and a pandemic sapping China of its economic vigor doesn’t know whether to inflate or dip into recession. It’s schizophrenic and has everyone on red alert. Even the so-called “experts” (like me) don’t know what to expect and hesitate to make predictions.

The World is Flat

Back in 2005, Thomas L Friedman published a best seller entitled, The World is Flat. The title alludes to the perceptual shift required for countries, companies, and individuals to remain competitive in a global market in which historical and geographic divisions are, according to the author, becoming increasingly irrelevant. The COVID-19 pandemic, the deportation of almost all technology manufacturing to China, and ever-shrinking world food supplies and mineral deposits have rendered the old competitive nationalist view of the world an anachronism. For example, the Russian invasion of Ukraine is so pointless and out of touch with how interdependent the world has become, it is clearly the foolhardy conduct of an egomaniacal dictator completely out of touch with the flat world he is living in. His worldview of a competitive nationalist environment is no longer accurate and will not serve his aims. His misadventure in the middle of a world-wide pandemic is exacerbating both fuel and food shortages across the world and needlessly polarizing nations against his own country rather than encouraging cooperation. The world is now flat and free trade and international cooperation are the only reasonable path to survival. 

The Symptoms of Economic Schizophrenia

Here are two examples of how this schizophrenia impacts the entire economic marketplace and the construction industry in particular.

  1. World-Wide Energy Shortages – Russia’s invasion of Ukraine has had a negative impact on the supply of natural gas to western Europe and it didn’t take long for U.S. natural gas prices to more than double from $2.90/MMBtu in 2021 to about $7/MMBtu in May of 2022. With the cost of gasoline also doubling over the same period, energy inflation will have a dramatic effect on the spending habits of every American family. In addition, the spike in global natural gas prices has resulted in an eye-popping surge in the price of ammonia, the primary source of nitrogen fertilizer, with adverse effects on future global crop yields, food prices, and food availability. 
  1. Single Family Home Construction – With home construction lagging housing demand for more than a decade, the inventory of vacant homes has markedly declined, currently standing at almost a 40-year low. This, of course, is causing the dramatic inflation we are experiencing in single family home prices. Housing affordability will only get worse as the Fed tries to take on inflation resulting in rapidly rising mortgage rates. With stubborn inflation currently resisting the Fed’s efforts, we can only expect continued mortgage rate inflation which will have an additional negative affect on affordability and the health of the market.

A Flat World

In The World is Flat: A Brief History of the Twenty-first Century, Friedman argues that technology has reduced the world to a level playing field in terms of commerce, wherein all competitors, except for labor, have an equal opportunity. He also emphasizes the inevitability of a rapid pace of change.

The U.S. is the primary architect of the flat world we now inhabit. In the 1970s hired professional managers began to run our publicly owned corporations in response to the stock markets that valued the owners’ interests and executive remuneration in multiples of current earnings. With the growth of the union movement back then, these professional managers began to look around the world for cheaper labor to protect profitability and their compensation and found a ready supply of cheaper labor in Asia. They began the slow but sure process of offshoring most of our manufacturing capabilities eventually leaving the U.S. in the position of reimporting almost all our manufactured products. Generations of Americans began to seek college degrees in order to join the corporate management class that continued to rise in America. The world was starting to flatten.

With the largest workforce in the world, China’s economic activity began to double every five years with amazing compounding results. China gradually became the largest importer of raw materials from around the world and the largest exporter of manufactured goods. The world was getting even flatter. 

Finally, with the introduction of computer technology and communication, the world was flattened into a level commercial playing field and international competition was transformed into international cooperation.

The Cause of Economic Schizophrenia

Resistance of national leaders in the United States, China, and Russia to the flattening of our world is the root cause of the current economic disruption. A lack of cooperation in fighting the pandemic from the outset, constant trade wars, currency battles, protective tariffs, political bickering, and saber-rattling mark their resistance and cause a flat world cooperative economy to sputter and stall out. Let’s imagine how efficient the world economy would be if all nations recognized the unique contribution of their trading partners and sought to improve trade relations rather than compete in a dangerous and pointless zero-sum game?

Tune in next week to see how your executive team can flatten your world.

Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge

For a deeper look into steering your way through this, read more here:  STRATEGIC PLANNING

For a broader view into market cycles, read more here: MARKET CYCLES

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