www.bloomberg.com /opinion/articles/2021-11-28/max-hastings-texas-or-california-seceding-it-s-not-that-far-fetched

An American Secession? It’s Not That Far-Fetched

Max Hastings 35-45 minutes 11/28/2021

Politics & Policy

Texit. The new California republic. Polls in the U.S. show strong support for splitting the nation along blue-red lines. 

relates to An American Secession? It’s Not That Far-Fetched

We know that we live in weird times. Especially for us foreigners, however, it is almost unfathomable to see images of American demonstrators waving placards in support of “Texit” or a new California republic. When half the developing world is struggling to get to the U.S., still perceiving it as a paradise on earth, how can the word “secession” have made it even as far as the margins of political debate?

Yet a recent University of Virginia poll found that 52% of Donald Trump voters now “somewhat” favor Republican-controlled states “seceding from the union to form their own separate country,” while 41% of Joe Biden voters adopt the same stance about blue states.

Last year, the conservative George Mason University law professor Frank Buckley published a book arguing that the U.S. is “ripe for secession … There’s much to be said for an American breakup.” Meanwhile, left-winger Richard Kreitner, a contributor to the Nation, authored “Break It Up,” which asserts that Americans must finish the work of post-Civil War Reconstruction or “give up on the Union entirely.” 

There is a growing literature of neo-secessionism on the political right, from such bodies as Glenn Beck’s Blaze Media and the Claremont Institute. “We have in America today what are, essentially, two competing, radically different mutually exclusive conceptions of the Good, of justice, and of the proper role of the state in its interactions with its citizens,” writes Claremont’s David Reaboi.

“If we disagree on these big things — which will necessarily manifest in every political issue, large or small,” he adds, “what strong force could possibly reunite us? Or, to ask a question that’s perhaps more pertinent — maybe not today or tomorrow, but soon: what force could keep us from coming apart?”

This seems an important and also chilling statement. Reaboi is an extreme conservative voice, but in the eyes of many outsiders, it is that of the entire Republican Party. Its definition of truth seems something entirely different from that of Democrats, perhaps irreconcilably so.  

Some Canadian friends, serious people who are not in the least sensationalist-minded, told me this week that they are getting sincerely nervous about possibilities that beckon if Donald Trump or a Trump clone becomes president in 2024. They ask: could violence erupt, and secession become a serious issue? What might that mean for Canada, where Quebec is already halfway out of the nation, and Alberta is playing with such an idea ?

Before considering the past and the future, let us acknowledge that we are talking possibilities, not probabilities, none of them immediate. But in the past half century we have seen so many astounding things happen, most of them scarcely predicted, that it seems foolish to rule out anything. 

Because our own memories are relatively short, we forget how much the borders of many nations have surged and ebbed, sometimes shifted by external aggression, more often by the desires of segments of their own people. Take Pakistan. When India was partitioned before the departure of the British in 1947, a single state was forged from the Muslim northwest and eastern Bengal, the two portions geographically separated by more than 1,000 miles.

As a BBC TV reporter a quarter century later, I was a witness to the colossal political upheavals in East Pakistan — the explosion of a separatist movement that provoked brutal repression by West Pakistan, then the war in which India joined with the separatists to expel the western army, and finally the creation of the new state of Bangladesh, today with a population of 165 million people.   

Closer to home for me, being British, is the Irish independence struggle that has played a bloody role in our history, and is not yet entirely ended.  For four centuries, our monarchs and later politicians regarded “the British Isles” as an inseparable whole, and suppressed Irish freedom movements with ferocity. In the early 20th century, the U.K. Conservative Party supported Ulster Protestants in threatening to resist, by force of arms, the Liberal government’s proposals to grant Irish home rule.

Why did they adopt this reckless, unconstitutional view? Because those Tory grandees believed that if Ireland broke away, it would signal the beginning of the collapse of the Empire. They so far secured their purpose, that to this day the rump of Protestant-dominated Northern Ireland remains attached to Britain, and a focus of political strife, with a shaky peace imperiled by Brexit

There are many other examples of modern states uniting and breaking asunder. Think of the Soviet Union, which splintered three decades ago, and which Russian President Vladimir Putin aspires to reassemble. Czechoslovakia was created in October 1918, amid the ruins of the Hapsburg Empire, then in 1993 split into Slovakia and the Czech Republic. Norway was united with Denmark for four centuries, until in 1814 it was instead joined with Sweden. That marriage ended in a peaceful 1905 divorce. 

Many states whose boundaries were set by European colonial powers have since revisited them, or are today attempting to do so. Singapore was ruled by the British as part of Malaya for well over a century, and became part of independent Malaysia in 1963. Two years later, following ethnic strife between Malays and Singapore’s dominant Chinese, the island was expelled from Malaysia, and has prospered mightily as an independent republic ever since.

The above should represent enough history to remind us how fluid national borders can be, even before we start talking about Spain’s Catalan separatist movement, France’s seesaw relationship with Alsace-Lorraine, or the doubtful prospects of Nigeria remaining a unitary nation, save by force of arms. Even now, Ethiopia is riven by bloodshed between the rival forces of the Tigray, Amhara and Afar regions. 

Why should the U.S. be different? That may seem an absurd question, especially compared with the post-colonial breakups mentioned above. But consider: For the past 250 years, America has relentlessly expanded, as ever more people sought the privilege of participation in one of the most successful economic, political and social experiments in the history of the planet. Think Texas and the West; the transition of so many territories into states (celebrated exuberantly and unforgettably, in the case of Oklahoma in 1907, by Rodgers & Hammerstein); the accessions of Alaska and Hawaii. (In 1946, some Sicilians even petitioned President Harry Truman to allow their island to join the U.S.) 

Why couldn’t this expansion be partially reversed? The U.S. has always been riven by political fissures, profound divergences of view about how different regions’ citizens wish to live. For more than two centuries, the things that bind Americans together have proved greater than those dividing them. But if that changes, it’s possible that some portions of the country may decide to go their own way, most obviously California, with the fifth-largest economy in the world.

To have any prospect of rebuilding a peaceful center in American politics, a critical first step — again, in the eyes of outsiders — must be the disarmament of the citizenry, which is not going to happen. Moreover, however the issue is dressed up, at the heart of America’s divide is the issue of race, or white tribalism, a polarization getting unimaginably worse than I could have believed possible when I lived in an increasingly liberal mid-1960s America. 

New kinds of segregation movements are emerging, some of them created by the left. California, New York, Minnesota, Vermont and Connecticut restricted commerce with North Carolina after it passed legislation requiring people to use public bathrooms based on their birth gender. California also barred state-sponsored travel by its employees to states deemed to discriminate against lesbian, gay, bisexual or transgender residents. 

Such a swell of anger is running that it’s impossible to predict where it might end. Hundreds of millions of us around the world have no votes to cast, but by gosh we have a dog in the fight, because the U.S. is the only superpower we have got, to serve as standard-bearer for the Free World, against ever-more assertive authoritarian powers, China and Russia foremost among them.

Chinese President Xi Jinping and Putin would, of course, welcome a secession. The Russians, through their online offensives, promote every form of disruption in the Western world, including tensions in the union.

Prominent among the reasons I opposed Britain’s exit from the European Union was the likelihood that the issue would hijack our politics for a generation, for scant advantage. So it is proving. The same objection applies to the possible — even probable — departure of Scotland from the U.K.: Our government would get nothing done for years, save argue with Edinburgh over the division of assets and resources. 

The same would apply, in spades, in the event of a secession of a U.S. state. The vastness of the free trade area that is America has been a critical force in forging its dynamic, building its economic might.

Yet arguments of this kind carry little weight with secessionists. Texan Nationalist Movement organizer Joe Shehan says: “I see Texit more as a way of kind of creating … a bulwark or a bastion or a haven that can stop the slide into chaos, because that’s where I see it’s going … I have three daughters, but I have 64 sons because I’m a coach … I care about them and I care about their families.” 

State nationalists are still inspired by the 1836-44 Texas Republic experiment that began with the stand of William B. Travis, Jim Bowie, Davy Crockett and some 200 others at the Alamo. Yet historians chiefly remember independent Texas as having reintroduced slavery, abolished by Mexico, and perpetrated brutal violence toward Mexicans and indigenous people. 

If the enthusiasts for Texit ever get their way, the U.S. will wave goodbye to 29 million people and the ninth-largest economy in the world, along with almost 40% of U.S. oil production and a quarter of its natural gas. 

Yet there are moments in history when passions trump — no tasteless pun intended — not merely national interest but also self-interest, logic, reason. One of my favorite historians, the Canadian Margaret MacMillan, believes that sustained periods of peace and prosperity promote a self-indulgence that can do untold harm to societies. It may be that we are today facing such a threat. People begin to suppose that they can have all the political stuff they want cost-free, in the fashion that Britain’s Brexiters deluded themselves when they voted five years ago to leave the EU. Alas, it ain’t so.  

Plainly, no secession in the U.S. is imminent. But such a development has become conceivable, as it certainly was not as recently as the turn of the millennium. Its cost, were it to come about, would be vastly higher not merely for the U.S. but for the entire Western world than any mere breakup of the U.K., or even of the European Union.      

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Max Hastings at mhastings32@bloomberg.net

    To contact the editor responsible for this story:
    Tobin Harshaw at tharshaw@bloomberg.net

    We know that we live in weird times. Especially for us foreigners, however, it is almost unfathomable to see images of American demonstrators waving placards in support of “Texit” or a new California republic. When half the developing world is struggling to get to the U.S., still perceiving it as a paradise on earth, how can the word “secession” have made it even as far as the margins of political debate?

    Yet a recent University of Virginia poll found that 52% of Donald Trump voters now “somewhat” favor Republican-controlled states “seceding from the union to form their own separate country,” while 41% of Joe Biden voters adopt the same stance about blue states.

    Last year, the conservative George Mason University law professor Frank Buckley published a book arguing that the U.S. is “ripe for secession … There’s much to be said for an American breakup.” Meanwhile, left-winger Richard Kreitner, a contributor to the Nation, authored “Break It Up,” which asserts that Americans must finish the work of post-Civil War Reconstruction or “give up on the Union entirely.” 

    There is a growing literature of neo-secessionism on the political right, from such bodies as Glenn Beck’s Blaze Media and the Claremont Institute. “We have in America today what are, essentially, two competing, radically different mutually exclusive conceptions of the Good, of justice, and of the proper role of the state in its interactions with its citizens,” writes Claremont’s David Reaboi.

    “If we disagree on these big things — which will necessarily manifest in every political issue, large or small,” he adds, “what strong force could possibly reunite us? Or, to ask a question that’s perhaps more pertinent — maybe not today or tomorrow, but soon: what force could keep us from coming apart?”

    This seems an important and also chilling statement. Reaboi is an extreme conservative voice, but in the eyes of many outsiders, it is that of the entire Republican Party. Its definition of truth seems something entirely different from that of Democrats, perhaps irreconcilably so.  

    Some Canadian friends, serious people who are not in the least sensationalist-minded, told me this week that they are getting sincerely nervous about possibilities that beckon if Donald Trump or a Trump clone becomes president in 2024. They ask: could violence erupt, and secession become a serious issue? What might that mean for Canada, where Quebec is already halfway out of the nation, and Alberta is playing with such an idea ?

    Before considering the past and the future, let us acknowledge that we are talking possibilities, not probabilities, none of them immediate. But in the past half century we have seen so many astounding things happen, most of them scarcely predicted, that it seems foolish to rule out anything. 

    Because our own memories are relatively short, we forget how much the borders of many nations have surged and ebbed, sometimes shifted by external aggression, more often by the desires of segments of their own people. Take Pakistan. When India was partitioned before the departure of the British in 1947, a single state was forged from the Muslim northwest and eastern Bengal, the two portions geographically separated by more than 1,000 miles.

    As a BBC TV reporter a quarter century later, I was a witness to the colossal political upheavals in East Pakistan — the explosion of a separatist movement that provoked brutal repression by West Pakistan, then the war in which India joined with the separatists to expel the western army, and finally the creation of the new state of Bangladesh, today with a population of 165 million people.   

    Closer to home for me, being British, is the Irish independence struggle that has played a bloody role in our history, and is not yet entirely ended.  For four centuries, our monarchs and later politicians regarded “the British Isles” as an inseparable whole, and suppressed Irish freedom movements with ferocity. In the early 20th century, the U.K. Conservative Party supported Ulster Protestants in threatening to resist, by force of arms, the Liberal government’s proposals to grant Irish home rule.

    Why did they adopt this reckless, unconstitutional view? Because those Tory grandees believed that if Ireland broke away, it would signal the beginning of the collapse of the Empire. They so far secured their purpose, that to this day the rump of Protestant-dominated Northern Ireland remains attached to Britain, and a focus of political strife, with a shaky peace imperiled by Brexit

    There are many other examples of modern states uniting and breaking asunder. Think of the Soviet Union, which splintered three decades ago, and which Russian President Vladimir Putin aspires to reassemble. Czechoslovakia was created in October 1918, amid the ruins of the Hapsburg Empire, then in 1993 split into Slovakia and the Czech Republic. Norway was united with Denmark for four centuries, until in 1814 it was instead joined with Sweden. That marriage ended in a peaceful 1905 divorce. 

    Many states whose boundaries were set by European colonial powers have since revisited them, or are today attempting to do so. Singapore was ruled by the British as part of Malaya for well over a century, and became part of independent Malaysia in 1963. Two years later, following ethnic strife between Malays and Singapore’s dominant Chinese, the island was expelled from Malaysia, and has prospered mightily as an independent republic ever since.

    The above should represent enough history to remind us how fluid national borders can be, even before we start talking about Spain’s Catalan separatist movement, France’s seesaw relationship with Alsace-Lorraine, or the doubtful prospects of Nigeria remaining a unitary nation, save by force of arms. Even now, Ethiopia is riven by bloodshed between the rival forces of the Tigray, Amhara and Afar regions. 

    Why should the U.S. be different? That may seem an absurd question, especially compared with the post-colonial breakups mentioned above. But consider: For the past 250 years, America has relentlessly expanded, as ever more people sought the privilege of participation in one of the most successful economic, political and social experiments in the history of the planet. Think Texas and the West; the transition of so many territories into states (celebrated exuberantly and unforgettably, in the case of Oklahoma in 1907, by Rodgers & Hammerstein); the accessions of Alaska and Hawaii. (In 1946, some Sicilians even petitioned President Harry Truman to allow their island to join the U.S.) 

    Why couldn’t this expansion be partially reversed? The U.S. has always been riven by political fissures, profound divergences of view about how different regions’ citizens wish to live. For more than two centuries, the things that bind Americans together have proved greater than those dividing them. But if that changes, it’s possible that some portions of the country may decide to go their own way, most obviously California, with the fifth-largest economy in the world.

    To have any prospect of rebuilding a peaceful center in American politics, a critical first step — again, in the eyes of outsiders — must be the disarmament of the citizenry, which is not going to happen. Moreover, however the issue is dressed up, at the heart of America’s divide is the issue of race, or white tribalism, a polarization getting unimaginably worse than I could have believed possible when I lived in an increasingly liberal mid-1960s America. 

    New kinds of segregation movements are emerging, some of them created by the left. California, New York, Minnesota, Vermont and Connecticut restricted commerce with North Carolina after it passed legislation requiring people to use public bathrooms based on their birth gender. California also barred state-sponsored travel by its employees to states deemed to discriminate against lesbian, gay, bisexual or transgender residents. 

    Such a swell of anger is running that it’s impossible to predict where it might end. Hundreds of millions of us around the world have no votes to cast, but by gosh we have a dog in the fight, because the U.S. is the only superpower we have got, to serve as standard-bearer for the Free World, against ever-more assertive authoritarian powers, China and Russia foremost among them.

    Chinese President Xi Jinping and Putin would, of course, welcome a secession. The Russians, through their online offensives, promote every form of disruption in the Western world, including tensions in the union.

    Prominent among the reasons I opposed Britain’s exit from the European Union was the likelihood that the issue would hijack our politics for a generation, for scant advantage. So it is proving. The same objection applies to the possible — even probable — departure of Scotland from the U.K.: Our government would get nothing done for years, save argue with Edinburgh over the division of assets and resources. 

    The same would apply, in spades, in the event of a secession of a U.S. state. The vastness of the free trade area that is America has been a critical force in forging its dynamic, building its economic might.

    Yet arguments of this kind carry little weight with secessionists. Texan Nationalist Movement organizer Joe Shehan says: “I see Texit more as a way of kind of creating … a bulwark or a bastion or a haven that can stop the slide into chaos, because that’s where I see it’s going … I have three daughters, but I have 64 sons because I’m a coach … I care about them and I care about their families.” 

    State nationalists are still inspired by the 1836-44 Texas Republic experiment that began with the stand of William B. Travis, Jim Bowie, Davy Crockett and some 200 others at the Alamo. Yet historians chiefly remember independent Texas as having reintroduced slavery, abolished by Mexico, and perpetrated brutal violence toward Mexicans and indigenous people. 

    If the enthusiasts for Texit ever get their way, the U.S. will wave goodbye to 29 million people and the ninth-largest economy in the world, along with almost 40% of U.S. oil production and a quarter of its natural gas. 

    Yet there are moments in history when passions trump — no tasteless pun intended — not merely national interest but also self-interest, logic, reason. One of my favorite historians, the Canadian Margaret MacMillan, believes that sustained periods of peace and prosperity promote a self-indulgence that can do untold harm to societies. It may be that we are today facing such a threat. People begin to suppose that they can have all the political stuff they want cost-free, in the fashion that Britain’s Brexiters deluded themselves when they voted five years ago to leave the EU. Alas, it ain’t so.  

    Plainly, no secession in the U.S. is imminent. But such a development has become conceivable, as it certainly was not as recently as the turn of the millennium. Its cost, were it to come about, would be vastly higher not merely for the U.S. but for the entire Western world than any mere breakup of the U.K., or even of the European Union.      

      This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

      To contact the author of this story:
      Max Hastings at mhastings32@bloomberg.net

      To contact the editor responsible for this story:
      Tobin Harshaw at tharshaw@bloomberg.net

      UP NEXT

      Omicron Risk Already Looks Priced In, But Inflation Is a More Stubborn Threat

      Markets

      Omicron’s Market Risk Is Already Looking Overdone

      Calm is returning, unless you count holiday travel stress. But the new variant’s bigger impact could be on monetary policy, with the Fed unable to resist tightening. 

      By

      Welcome to Heathrow. There will be a “don’t do” list awaiting you.

      Welcome to Heathrow. There will be a “don’t do” list awaiting you.

      Photographer: Hollie Adams/Getty

      To get John Authers' newsletter delivered directly to your inbox, sign up here.


      Risk-Omicr-Off

      Some Thanksgiving break that was. Friday, with the U.S. markets only open in the morning as Americans digested their turkey, was the most dramatic “risk-off” day in more than a year. Not since June 2020 had U.S. stocks (represented by the SPY exchange-traded fund that tracks the S&P 500) fallen so far compared to long Treasury bonds (represented by the TLT ETF). This was a return to the old financial crisis days of “risk-on" and “risk-off” where all assets would move according to the perception of whether the environment had grown safer or more dangerous. Friday was a day when risk was off:

      Risk-Omicron: Friday Was a Classic 'Risk-Off' Day

      SPY/TLT ETF Ratio, Daily Change

      Bloomberg

      All readers will surely know by now that the reason for this can be summed up in one Greek letter: omicron. Thursday brought the first trickle of news stories that a new variant of Covid-19 had been identified in South Africa, while the following day brought confirmation that it had found its way into a number of European countries. There are plenty of other places to read up on this. These are the key questions as I see them, along with the state of our knowledge at present:

      Omicron is more infectious than previous variants. That means that, like the delta variant before it, it could have the potential to speed the course of the pandemic once more. Any given wave, like last summer in the U.S. and the U.K. or the one gathering force in continental Europe, will be that much worse. It gives a reason to believe that the pandemic will drag on longer than previously expected, and to fear that more restrictions will be necessary.

      There’s no evidence as yet that omicron is any more lethal than previous variants. There is even some anecdotal evidence, from a much-quoted South African doctor, that symptoms tend to be milder than in previous strains. But be cautioned that most of her patients were relatively young and healthy. It’s not clear whether it would have a more aggressive effect on people more at risk. 

      Omicron might well be resistant to current Covid vaccines, but it will take several days to be sure about this. The degree to which this variant has mutated, as many will have read, does suggest that it might well be able to infect the fully vaccinated. But for now, this is a theory.

      This didn’t happen in a vacuum. The most Covid-sensitive stocks had already been under pressure as cases refused to decline in the U.S. and a new wave took shape in Europe. Airlines and leisure stocks were already doing very badly before Friday, when they took the brunt of the omicron sell-off:

      U.S. tourism stocks and global airlines are back near 2020 lows

      If this variant does prove to be vaccine-resistant, the chances are that we face a long and angry winter as governments try to persuade people to restrict their movements yet again. For those prepared to take the vaccines, however, it looks like they may be ready in a matter of months. Investors have known for some time that the real potential game-changer would be the emergence of a vaccine-resistant strain, which explains the drastic market reaction. But Big Pharma seems confident that a new vaccine should be forthcoming quite quickly, and there is no sign that omicron is particularly dangerous (although a lot of weight seems to have been put on one anecdote from one doctor in South Africa). 

      As a result, the indications as I write are that investors have already decided that Friday’s risk-off day was overdone. Israel’s stock market, which was closed then but open on Sunday, reflects how sentiment moved over the weekend:

      Israel Sunday trading suggested some returning confidence

      The fact that the South African rand is also recovering, after a spectacular fall on Friday, also suggests that traders have decided that the risks raised by omicron have been adequately priced for now. Its rate against the Japanese yen, which had its best day since the spring shutdown of 2020 as people returned to it as a haven, has shifted spectacularly on the news:

      South Africa's currency showed signs of recovery in early trading

      Monday has started with very muted declines for Asian stocks, and bounces in U.S. futures and the oil price. Absent fresh bad news, it seems a fair bet that risk will be back on as the week starts, although it’s hard to see markets getting all the way back to their previous peak while important Omicron questions remain unanswered. 

      Omicro-economics

      What might matter more is the effect that the new variant has on monetary policy. Friday’s reaction was dramatic. If fed funds futures are to be believed, the market put its predicted second rate hike for next year in December rather than November, and now sees little chance of a third hike, even though this had been rated as a virtual certainty when traders left for Thanksgiving. The omicron news shifted monetary policy expectations to become, now, significantly easier than they were at the beginning of the week, before Jerome Powell’s re-nomination as chairman of the Federal Reserve was announced.

      Omicron > FOMC

      Friday's news brought predicted hikes lower than before Powell's renomination

      Bloomberg World Interest Rate Probabilities function

      If we take as a base case that this slows down re-opening as much as the delta variant, but no more, then that seems reasonable. The economy does get that much more vulnerable, growth is weakened, and it is harder to justify tighter monetary policy.

      But this points to the dangerous situation for the Fed. Wednesday’s raft of economic data had given Americans, and the central bank, much to be thankful for. Most strikingly, the number signing on for unemployment insurance hit its lowest since 1969. Whatever has been gluing up the jobs market, it now looks like things are moving.

      The fewest Americans claimed unemployment insurance since 1969

      Employment this strong gives ample political cover for the Fed to start raising rates. Indeed, with monetary policy so easy, it makes it hard not to start hiking. 

      Then there is the ongoing news about inflation. It continues to show pressure broadening and looking ever less transitory. Wednesday brought publication of the PCE deflator numbers for October, the Fed's favored inflation indicator. The numbers are slightly lower than for the CPI, but the direction of travel is identical: 

      On a core or headline basis, PCE inflation is at a three-decade high

      While this is disconcerting, the details are worse. Looking at the Dallas Fed’s “trimmed mean” data for the PCE, which exclude the components that have moved the most and least, and takes the average of those left, we see that this version of core inflation has risen over the last six months at the fastest rate in three decades. October’s rise was a little slower than September, but still more rapid than any other month in 30 years. It is not possible to dismiss this as a transitory effect of the pandemic on a few specific sectors:

      Core prices' rate of increase decreased slightly last month

      How does the prospect of further pandemic disruptions feed into the inflation picture, following the omicron news? It’s not encouraging. With social distancing making it harder to partake of services, consumer spending has funneled into goods, over-stretching supply chains. Goods inflation is running far head of inflation for services.

      Further pandemic delays and stoppages would likely translate into higher goods inflation, already at its highest in four decades. Research from the San Francisco Fed amplifies the message that inflation is still being driven primarily by those goods and services that are most sensitive to the pandemic. They divided the CPI and the PCE baskets into “Covid-sensitive” and “Covid-insensitive” indexes, with the former taken from those components whose prices or quantities moved most during the first months of the pandemic. It is the sectors that took the biggest shock in early 2020 that are still leading inflation upwards:

      San Francisco Fed shows covid-sensitive sectors are driving inflation

      On a CPI basis, the San Francisco Fed shows rising Covid-sensitive inflation

      Where does all this get us? Markets have marked down the chance of monetary tightening from the Fed, and another big pandemic wave would certainly make rate hikes very unpopular. But it looks ever more as though there is an inflation problem that another wave would exacerbate. It’s  harder to see how the Fed can resist tightening. 
       

      Where the Risks Are

      If the omicron news has changed the macro-environment, it also shows up in the oil price. Friday saw the most dramatic sell-off in crude oil in more than a year, apparently breaking the upward trend that’s persisted since last year’s Covid shutdown. Oil had looked overextended and had drifted down for a matter of weeks. But this was something else:

      Crude suffered its sharpest sell-off since the 2020 Covid shutdown

      This is good news for President Joe Biden and other Western leaders, for whom rises in the price of gasoline are far more politically salient than any other form of inflation. Drivers tend to buy gasoline frequently. Even when they don’t stop, they’re accustomed to see the price advertised in big numbers whenever they pass the service station. But even with a Monday morning bounce for oil in Asia, the issues for the OPEC+ oil producers, meeting Thursday, grow all the more complicated. Several countries have eased pressure on supply by releasing strategic reserves, while OPEC is boosting production. With a new variant to dampen demand for a while, there’s pressure for the oil exporters to agree on reducing production again. They have found this difficult at several points in the recent past.

      Sharp falls in the oil price generally portend trouble for emerging markets, even if they help to relieve inflationary pressure on the developed world. And indeed, emerging market currencies tumbled on Omicron Day to drop below their trough from the shutdown last spring:

      Emerging currencies have set their first low in 19 months

      If Omicron does mean further waves of the pandemic, it’s likely to cause the most damage in emerging markets, which generally have lower vaccination rates. That’s a problem, because the emerging world is bracing for a dose of austerity to pay for last year’s emergency measures, as this chart from the Institute of International Finance demonstrates:

      relates to Omicron’s Market Risk Is Already Looking Overdone

      There are further problems. The emerging world has already had to contend with higher yields and weakening currencies on a scale that hasn’t affected the developed countries, where it’s possible to print money and still enjoy low rates. This chart was produced by Robin Brooks of the IIF last week, before the omicron news, to make the point to modern monetary theorists that only countries with a long record of fiscal conservatism could print money at will without consequences. It also shows that EM could now face a severe problem:

      relates to Omicron’s Market Risk Is Already Looking Overdone

      Turkey obviously suffers from very specific issues of its own. But the sell-off of emerging currencies at the end of last week was broad-brushed. A stronger dollar, a lower oil price and a new omicron wave of the pandemic could make a lethal combination just at the point when emerging countries are least able to withstand it. While we await news from the scientists about just how vaccine-resistant and deadly this variant is, the risks to monitor concern oil and emerging markets.

      Survival Tips

      I’m hoping for a crowd-sourced survival tip. I’m planning a trip back to the U.K., and had the bold idea of landing and then heading straight for the birthday party of a good friend. Omicron has put a spanner in that idea. Under the U.K.’s new rules, anyone arriving must take a PCR test, and then “self-isolate” until the result arrives — which is generally about 24 to 36 hours. During that time, there is a fearsome list of rules to obey:

      relates to Omicron’s Market Risk Is Already Looking Overdone

      The difficulty I have is that all this ignores the fact that I’ll be starting in the arrivals lounge of a large international airport. Even if I get a test there (and the facilities are good for that), how do I then go anywhere else without encountering crowds of people? And as I don’t have a car waiting to drive off, how do I get anywhere without using a taxi or public transport? Going to the lengths of cutting out exercise, not letting anyone into the house, and not leaving to go shopping sounds reasonable in itself. But what on earth is the point if I’ve first mingled with the crowds at Heathrow and then made my way to my chosen location in a train, bus or taxi? 

      Airport terminals are some of the riskiest places for transmission. It's hard to see how self-isolation can possibly make up for the increased risk of contagion caused by my taking a plane, passing through a busy airport, and then traveling somewhere by land. The logic seems to be that if there is any point in travel restrictions at all, they need to be even more draconian (and hence damaging to morale, and to the economy). Does anybody know any way around this? What am I missing? 

      And if you’d like a song, in honor of the Beatles documentary, which is long but engrossing, here’s Get Back. Have a good week everyone. 
       

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        John Authers at jauthers@bloomberg.net

        To contact the editor responsible for this story:
        Patrick McDowell at pmcdowell10@bloomberg.net