Geopolitical uncertainty is forcing economic and security policy to merge. Events like the Munich Security Conference now signal future inflationary pressures, as nations plan massive spending on defense and strategic infrastructure in response to shifting alliances.
The inflationary impact of tariffs and anti-migration policies is just starting. Businesses and migrants face complex, irreversible decisions that create a year-long lag before supply shocks and price increases become visible in the broader economy.
Apparent softening in the labor market, like rising African-American unemployment, isn't a cyclical downturn. Instead, it reflects idiosyncratic shocks, such as government spending reallocation and post-COVID hiring overhangs, masking underlying strong demand.
Europe is treating its relationship with the U.S. as an irreversible investment decision under uncertainty. Leaders must choose between waiting for a return to the old transatlantic alliance or committing massive capital to build independent security and economic systems.
Like past technological leaps, AI's economic impact will be sequenced. Expect immediate real income gains as new products emerge. The broader disinflationary effects from productivity improvements will only materialize later, after businesses fully re-engineer their operations.
Central bank credibility is a finite resource. By not fully stamping out inflation to its 2% target, the Fed depletes its credibility, making the next inflationary shock harder and more costly to control—a lesson from the recurring inflation of the 1980s.
Despite favorable conditions like tax cuts and deregulation, a broad investment boom has failed to materialize outside of AI. This isn't due to tight credit, but to massive policy uncertainty from unpredictable tariffs and immigration stances, which discourages long-term capital commitment.
The Federal Reserve's monetary policy is less effective today. The growth of private credit and large firms self-financing investments (like in AI) means significant economic activity is insulated from traditional bank lending channels, reducing the impact of rate hikes.
Extensive historical data reveals two primary predictors of a central bank causing high inflation: frequent, politically motivated turnover of its leadership and the direct purchase of government bonds from the treasury. Other supposed indicators of independence have less predictive power.