War, Inflation, and the Revenge of the Old Economy

The Revenge of the Old Economy and the Next Commodity Supercycle

Following Russia’s invasion of Ukraine, there was a dizzying climb in the price of many commodities, including coal and food. Currie said that the root cause was a decade of underinvestment in “old economy” industries, such as energy, metals, and agriculture. 

“Did Putin cause the energy crisis? Absolutely not,” Currie said. “He took advantage of the energy crisis. The seeds were sown on this going back well over a decade.”

Currie explained that a demand shock after the 2008–09 financial crisis led to cuts in capital expenditure—cuts that were accelerated by the push to decarbonize. “We have not been investing in old economy output for well over a decade now,” he said. “Why? Because returns were poor, and we redirected the capital into the new economy,” such as technology.

After years of such neglect, Currie said, the recent higher commodity prices are “the old economy’s revenge.” And while the situation has eased, helped by mild winter weather in Europe, Currie predicts the world is entering a commodity supercycle over the next decade, similar to the 60s–70s supercycle, as well as the 2000s commodities boom.

“When we look at the outlook in 2023, your starting point is no inventories of most of these commodities, no spare production capacity of most of these commodities,” he said. Additionally, Currie pointed out that China, the world’s largest consumer of raw materials, had reversed its zero-COVID policy. “So what’s likely to happen—whether it is oil, gas, food, or any of these carbon-based commodities—is that demand is going to catch up to supply again,” he said. “And we’re going to be right back into the same problems we had before.”

Central Banks’ Battle to Tame Inflation

As global central banks try to tame inflation, driven by the boom in commodity prices, they are pushing interest rates to their highest levels in many years. Kroszner said that inflation was already rising for a year before Russia launched its assault on Ukraine, however.

He suggested the root of the issue is expansive economic stimulus, both fiscal and monetary, unleashed by policymakers in response to COVID-19. On the fiscal side, the stimulus is at least six times as large as the response to the 2008–09 crisis. On the monetary side, Kroszner noted that the US Federal Reserve initially stepped up its purchases of assets, including Treasurys, to address disruptions in the Treasury markets when the pandemic hit.

“They really didn’t need to continue to buy assets at the rate they were buying, but they kind of got themselves into a bit of a commitment to continue to do this as long as possible, to make sure the markets calmed,” he said. “And so it was harder for them to pull back. That’s one of the reasons you saw inflation take off in the US a bit before some other countries.” 

But faced with persistently high inflation, Kroszner said, the Fed and other central banks are now tightening monetary policy to maintain their credibility. “It’s been generations since the Fed and central banks have done what they normally do, which is take the punch bowl away when the party really gets going,” he said.

Kroszner predicts the Fed is likely to squeeze further until labor-market conditions soften, suggesting some job losses ahead. Unless there is a major shock, Kroszner said, “until the labor market quits, the Fed is unlikely to quit, given the wage pressures that a hot labor market generates.”

To hear what our panelists had to say about about these and other topics—including disinformation impacting elections, the climate crisis, cryptocurrencies, and more—watch a recording of the event on YouTube.