January 20: War, debt, and other contagions

In which, in celebration of flu season we take a look at the various contagions sweeping the world.

It’s been sick people at our house for the last couple of weeks, so I’ve been thinking about germs, the spread of germs, and how to stay healthy in the midst of germs. Unsurprising, then, that I saw a certain theme develop as I surveyed world happenings this week: contagion.

Debt contagion

In the economic world, the concept of contagion is well known: in a globalized economy, financial crises can quickly jump national borders. Episodes of such contagion were well known in the 1990s in Latin America and Asia.

Today, financial contagion rears its head once more as countries stagger under massive national debt loads generated by debt spending during the pandemic, the resulting inflation surge, and war in Ukraine.

Governments across the world are scrambling to manage their balance sheets in a variety of ways, but are finding they have little room to maneuver with voters who are already hard pressed by cost of living increases.

In the US, Congress is facing a bruising debate over raising the debt ceiling (good luck with a GOP-controlled House) in the hopes of staving off some combination of tax increases, deep budget cuts and/or interest rate increases. With most Americans living on slim to nonexistent margins, there are no good policy choices here.

In France, President Macron’s pitch to raise the retirement age is being met with mass protests, even as business closures in France skyrocket.

Across the rest of Europe, leaders are acknowledging that efforts to keep costs of living down are falling short midway through this winter without Russian energy.

In China, the CCP announced a one-two punch of first-time negative population growth and 3% GDP growth. While the latter number would be great for an economy like the US, for a middle income country experiencing demographic decline, it could very well be a harbinger of the middle income trap. And, for a government that has pinned its legitimacy on rapid GDP growth, that 3% may as well be a recession.

Overall, then, the global economy is not looking healthy in the early going of 2023.

Conflict contagion

Like financial contagion’s effect on national, regional, and global economies, conflict can have a contagion effect too. I’ve specifically addressed this with regards to Russia and central Asia, but such conflict contagion is cropping up elsewhere as well.