Moneycontrol Pro Weekender | Blood Moon Rising: A Week That Exposed the Cracks in the Global System

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Dear Reader,

It’s been a tumultuous week. Violent protests raged in Nepal and France, Israel launched an airstrike on Qatar, the assassination of a prominent conservative influencer rocked the US. The conflict in Ukraine, the carnage in Gaza, the mayhem in Sudan continued. It’s almost as if this week’s blood moon is an omen of disasters to come, of apocalyptic events. As Ariel said in Shakespeare’s ‘The Tempest’, “Hell is empty and all the devils are here”.

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The triggers for these disparate events were of course very different, but a common thread runs through them—they are symptoms of the unravelling of the global system. For decades, the hegemonic ideology that ruled the world was that of globalisation and neo-liberalism. Its promise was simple — free markets, free trade, and capital mobility would lead to unprecedented prosperity, under the rubric of a rules-based order policed by international institutions such as the IMF, the World Bank and the WTO.

For decades, this system delivered, creating an era of unprecedented global wealth and geopolitical stability. But its growth model contained critical flaws. The benefits of hyper-globalisation were distributed with extreme inequality. Capital, being mobile, flourished, while labour, largely immobile, faced intensified competition and stagnating wages. This created a fundamental rift within nations. As long as growth was strong, these differences could be papered over. But when growth slowed, the cracks widened and the backlash grew.

In advanced economies like France and the US, the promise that liberalisation and technological advancement would lift all boats has rung hollow for a working class facing precarious work, soaring costs of living, and a loss of social status. The populist surge in the US is a direct backlash against the economic dislocations and cultural disruptions attributed to the globalist project. Ditto for the populist regimes of Europe. For countries like Sri Lanka, Bangladesh, Indonesia, the Philippines and now Nepal, the outrage is against corrupt elites who have skimmed off the cream from projects and aid, while the masses got peanuts in sweatshops.

The political economy of the liberal rules-based order generated immense wealth, but failed to ensure its equitable distribution or foster resilient political communities. It created winners and losers both within and between nations. As the order’s economic promises wane and its geopolitical dominance fades, the internal tensions it suppressed are exploding to the surface in the form of populist revolts, nationalist backlash, and institutional fragility. The world is not witnessing the failure of individual nations, but the painful and chaotic unravelling of an increasingly irrelevant international system. Indeed, given the scale and violence of the change, we need new concepts to describe the new realities. In TS Eliot’s words, “For last year’s words belong to last year’s language.”

In the international arena, the weakening of US hegemony and the rise of China and other intermediate powers has created a power vacuum. The institutions (UN Security Council) and norms (respect for sovereignty, human rights) that were meant to mediate conflict are now ignored. This has led to a return of 19th-century-style realpolitik, where power and interests are pursued with minimal constraint. While within nations, the internal contradiction between capital and labour manifests as domestic protest and political polarisation, in the international sphere the same contradiction manifests as geopolitical conflict. The powerful pursue their interests with fewer constraints while the disenfranchised — whether entire populations or non-state actors — resort to violence as other avenues for change are closed.

The stable, globalised, low-inflation world that was the foundation of the decades-long bull market is over. In its place is the painful and violent arrival of the new, fragmented, and conflict-ridden world order whose birth pangs we are witnessing in protests and polarisation across the globe. We may well wonder, with WB Yeats, “What rough beast, its hour come round at last/Slouches towards Bethlehem to be born?”

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The end of globalisation is also the end of the ‘Great Moderation’ period in the developed economies, characterised by steady growth and low inflation. It is unravelling due to a relocation of supply chains, an emphasis on security rather than efficiency, higher fiscal deficits partly as a result of increased spending on defence and partly the result of industrial policy. Most important is the weaponisation of trade, with higher tariffs and sanctions. All this will drive up prices. We wrote about the tension between the cyclical and structural pressures at play.

This week, retail inflation in the US accelerated to 2.9 percent in August, the highest since January. Core inflation, which excludes food and energy, remained steady at 3.1 percent. The market, however, chose to focus on the marked slowdown in the pace of job gains, and the prospects of more rapid Fed easing. As a result, the yield on the 10-year US Treasury note fell to 4 percent, the lowest since April.

Critics warn the Fed against cutting rates at a time when inflation is still high. Jason Furman, American economist and Harvard professor, tweeted, “The whiff of stagflation is getting stronger as the unemployment rate continues to rise, job growth slows, and now inflation continues to pick up. There are no good options for the Fed given the set of circumstances we’re facing.”

The question is: Is stagflation, or a combination of lower growth and elevated inflation, the economic price that countries may have to pay for the unravelling of the old hyper-global economy?

In the midst of all this mayhem, the stock markets have remained remarkably cool. Faced with a pandemic, de-globalisation, geopolitical turmoil, hot and cold wars, climate change, an ageing population, debt mountains, blistering technological change and massive political uncertainty, the US markets have soared to new highs.
There are several reasons for their blasé attitude. Massive injections of cheap money by central banks have been a rising tide that lifts all boats, inflating asset prices and creating a disconnect between the financial markets and the economic hardships faced by the masses. The market is soaring because the current system brilliantly serves the interests of capital, because states and central banks intervene to protect asset prices above all else, and because corporate power has become so concentrated that a handful of firms can thrive even in a stagnant and politically volatile environment. The market isn’t betting on a healthy world; it’s betting that central banks and the governing elite will never allow a major correction.
In conclusion, the week’s chaos is not a series of isolated disasters, but the symptomatic unravelling of a dying global order. The post-Cold War system of neoliberal globalisation, while generating immense wealth, fractured societies by dividing the globe into winners and losers, both within nations and between them. As its economic promises fail, the suppressed tensions are exploding outward as domestic unrest and geopolitical conflict. This disintegration is now triggering a new economic reality, where the security of fragmentation replaces the efficiency of globalisation, threatening a return of stagflation. Ultimately, the buoyant stock markets are not a sign of health but a rational reflection of the system, a bet that elites will forever protect capital—even as the world it was built upon morphs into a vastly different and far more perilous reality.
Cheers,

Manas Chakravarty
In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

Stocks

Will high gold prices add shine to the CSB Bank’s stock? Subros, Why this construction major may reverse its underperformance, Escorts Kubota, Shaily Engineering, Shringar House of Mangalsutra Ltd IPO, Urban Company IPO, Control Print, Syrma SGS Tech, IRCTC, Cochin Shipyard, Crompton Greaves Consumer, ITC, Defence GST cuts, PN Gadgil Jewellers