**Mish: As Amazing As It Sounds, ECB President Christine Lagarde Is Making Some Sense**
Mish: As Amazing As It Sounds, ECB President Christine Lagarde Is Making Some Sense
_Authored by Mike Shedlock via MishTalk.com,_ (https://mishtalk.com/economics/as-amazing-as-it-sounds-ecb-president-christine-lagarde-is-making-some-sense)
Christine Lagarde Made 10 Key Points Today and I Agree With All of Them.
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_As amazing as it sounds, ECB President Christine Lagarde is making sense._
Central Banks in a Fragmenting World
Please consider a speech by Christine Lagarde, President of the ECB, on Central Banks in a Fragmenting World (https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34fbd6.en.html)
> _The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponization of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster._
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> _We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world._
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> _All this could have far-reaching implications across many domains of policymaking. And today in my remarks, I would like to explore what the implications might be for central banks._
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> _In short, we could see two profound effects on the policy environment for central banks: first, we may see more instability as global supply elasticity wanes; and second, we could see more multipolarity as geopolitical tensions continue to mount._
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> _Today the United States is completely dependent on imports for at least 14 critical minerals. And Europe depends on China for 98% of its rare earth supply. Supply disruptions on these fronts could affect critical sectors in the economy, such as the automobile industry and its transition to electric vehicle production._
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> _In response, governments are legislating to increase supply security, notably through the Inflation Reduction Act in the United States and the strategic autonomy agenda in Europe. But that could, in turn, accelerate fragmentation as firms also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global firms planning to regionalize their supply chain almost doubled – to around 45% – compared with a year earlier_
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> _This “new global map” – as I have called these changes elsewhere – is likely to have first-order implications for central banks._
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> _One recent study based on data since 1900 finds that geopolitical risks led to high inflation, lower economic activity and a fall in international trade. And ECB analysis suggests similar outcomes may be expected for the future. If global value chains fragment along geopolitical lines, the increase in the global level of consumer prices could range between around 5% in the short run and roughly 1% in the long run._
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> _These changes also suggest that a second shift in the central bank landscape is taking place: we may see the world becoming more multipolar._
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> _During the Pax Americana after 1945, the US dollar became firmly ensconced as the global reserve and transaction currency, and more recently, the euro has risen to second place. This had a range of − mostly beneficial − implications for central banks._
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> _But new trade patterns may have ramifications for payments and international currency reserves._
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> _In recent decades China has already increased over 130-fold its bilateral trade in goods with emerging markets and developing economies, with the country also becoming the world’s top exporter. And recent research indicates there is a significant correlation between a country’s trade with China and its holdings of renminbi as reserves. New trade patterns may also lead to new alliances. One study finds that alliances can increase the share of a currency in the partner’s reserve holdings by roughly 30 percentage points._
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> _All this could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks – be that for reasons of political preference, financial dependencies, or because of the use of financial sanctions in the past decade._
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> _Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing in…