text: Good morning. Here’s your Early Warning for Thursday, 01 September 2022.TODAY’S BRIEFING:READ TIME: 7 mins 24 secondsInFocus: Weekly Economic OutlookInside the BeltwayDomestic INTSUMGeostrategic INTSUMLow Intensity Conflict Activity Rollup & OutlookJoin the team this morning on the Early Warning briefing livestream at 0900 Central. Sign into your account, watch the brief, and ask your questions here: https://forwardobserver.com/early-warning-showInFocus: Weekly Economic OutlookFederal Reserve officials are signaling more economic pain through next year. This week, New York Fed Bank President John Williams said that the Fed needs a “somewhat restrictive policy,” that they still have room to raise rates, and they’ll continue to either raise or hold higher interest rates through next year. Cleveland Fed Bank President Loretta Mester says she doesn’t anticipate any Fed pivot next year (to rate cutting) and that bringing down inflation during this process will be “painful”. This is something Fed chairman Jay Powell said last week, twice in his speech: more pain is coming. Powell hopes to thread the needle, hiking rates enough to cause an economic slowdown below potential, but not enough to trigger a recession. Powell abandoned his hopes of a “soft landing,” and now hopes to very gradually push economic growth lower, probably into a mild recession.I think inflation is here to stay. This week, Credit Suisse’s Zoltan Pozsar, who’s been talking about a coming monetary revolution, pointed out that three things ensured low inflation over the past several decades: cheap foreign labor, cheap Chinese goods, and cheap Russian gas. With globalization reversing, Chinese industrial production shutting down due to zero Covid, drought, and lack of electricity, and Russian gas shutting off, these things no longer exist in the same way they did. What’s more, is that the concept of “Chimerica” – the financial coupling of the Chinese and American economies – and “Eurussia” are either over or coming to an end. These two economic alliances made things cheap, and they’re done. This means we’ve entered into a new inflationary regime. And Pozsar warns that things could get much, much worse from here.In his latest note to clients, Pozsar shares a quote from a book called Economic Interdependence and War, which is about how economic cooperation tends to decrease the risk of war because of the economic pain involved. The book’s authors find the reverse is also true: “[W]hen great powers have positive expectations of the future trade environment, they want to remain at peace in order to secure the economic benefits that enhance long-term economic power. When, however, these expectations turn negative, leaders are likely to fear a loss of access to raw materials and markets, giving them an incentive to initiate crises to protect their commercial interests”.This week, German economic minister Robert Habeck warned of “alarming” conditions as Germany’s industrial production is collapsing. He pointed out that cheap, abundant Russian oil and gas gave Germany’s industrial sector a production and price advantage, and that advantage “won’t come back any time soon, if it ever comes back at all.” (Expectations of the future trade environment have turned negative, and according to Economic Interdependence and War, this means Germany, and Europe in general, has an “incentive to initiate crises to protect their commercial interests”. After the U.S. and NATO get done using Ukraine to grind down the Russian army, it could mean Russia itself becomes the next NATO target.)Pozsar says this is leading to a “Minsky Moment,” which refers to “the implosion of long-intermediation chains of the shadow banking system” in the lead up to the Great Financial Crisis of 2008. But instead of financial disintermediation, it’s the implosion of the supply chain leading to the “Great Crisis of Globalization”. And it’s only just beginning. – M.S.INSIDE THE BELTWAY