The United States is grappling with self-inflicted policy wounds that are eroding its global economic influence. The Federal Reserve's struggle to control inflation, coupled with a series of bank failures and a political deadlock over the debt ceiling, undermine U.S. authority. Geopolitical tensions, such as the Russia-Ukraine conflict and competition with China, further complicate the country's global issues. China, India, and Russia are advocating for "de-dollarization" to assert their own dominance and protect against U.S. sanctions. The dollar's position as the world's leading currency is slipping, with its share of central banks' reserves at a quarter-century low. The potential consequences of the U.S. debt-ceiling standoff are even more concerning, with the risk of a catastrophic default looming. This could harm America's reputation as a reliable debtor and impact its long-term attractiveness for world trade.

"Anything that moves us away from being viewed as the world’s reserve currency, of being the safest, most liquid asset in the world, is bad for the American people, bad for the dollar and bad for the US government."

Beth Hammack, Goldman Sachs

According to a study conducted by Ben Bernanke and Olivier Blanchard, the recent rise in inflation can be attributed to pandemic-induced supply shocks, while sustained high inflation rates are a result of an overheated economy fueled by fiscal stimulus and low interest rates. Economists argue that in order for inflation to subside, the economy needs to cool down, which implies a weaker labor market. Government stimulus measures, including the American Rescue Plan, have significantly increased demand and potentially pushed the economy into overheating territory, contrary to initial expectations. The unexpected surge in inflation was primarily driven by shortages and energy prices. The long-term effects of stimulus, coupled with pandemic-related disruptions to the labor market, have created an environment of persistent inflation even after the pandemic subsided. To address this, economists propose the need to cool down the overheated economy, which may involve reducing demand and implementing tighter labor market conditions such as higher unemployment or a return to pre-pandemic hiring norms.

Despite a sluggish European economy and disappointing Chinese reopening, Italian exports to China are experiencing a remarkable surge. Prime Minister Giorgia Meloni's threat to withdraw from a trade deal with China has not deterred this trend. While one might assume that the surge is driven by Chinese demand for Italian luxury goods, a closer analysis reveals that the dominant factor is the "Chemicals & Related Products" sector, particularly pharmaceuticals. One theory, as reported by Bloomberg News, suggests that Chinese consumers are purchasing a generic liver drug that claims to be effective in preventing Covid-19. Another speculation revolves around the possibility of medicines produced elsewhere in the European Union being redirected through Italy for re-export to China. The surge in Italian exports to China, driven primarily by the pharmaceutical sector, defies economic expectations and highlights the complexities of global trade.

Profit-Driven ESG Strategy: Asset Manager Highlights Financial Motive Behind Sustainable Investing

https://www.bloomberg.com/news/articles/2023-05-23/qblue-funds-among-0-2-that-dodged-aaa-esg-ratings-purge-at-msci?srnd=markets-vp&sref=l3FEFSDd

Written by:

Andrew Popp | Sr. Research Associate