Global Economic Crisis

The unfolding Global Economic Crisis has stricken most economies, large and small, with the bitter twins of high inflation and recession. This phenomenon of stagflation, amid the destabilizing war between Russia and Ukraine and broken supply chains resulting from both war and Covid restrictions, is spreading like wildfire. Record levels of inflation are occurring in virtually every developed economy, including the United States. However, it is in the United Kingdom that the most disastrous repercussions are unfolding.

After Boris Johnson was forced to resign as British prime minister, he was succeeded by Liz Truss. Her hand-picked Chancellor of the Exchequer, Kwasi Kwarteng, released a proposed budget that immediately sent the British pound plummeting, sovereign bond rates soaring and fear and loathing manifesting in all leading UK financial circles. This is amid annual inflation exceeding double digits and an ongoing retraction within the UK economy.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The key component of Kwarteng’s budget package was major tax cuts targeting high net-worth taxpayers, to be financed by substantial borrowing despite the British government already facing large budget deficits. The whole ill-conceived package was an example of political ideology triumphing over economic reality. The markets swiftly provided a painful response, making the proposed budget untenable.

Truss has now fired her financial minster, a desperate move to save her weeks-old prime minister tenure by making Kwarteng the scapegoat. Already there is talk of a palace coup to remove Truss by desperate members of her Conservative Party. All this is another example of incompetent politicians doing everything possible to make a very bad economic crisis into an unmitigated global catastrophe.

The U.S. Bureau of Labor Statistics reported that the CPI for August exceeded the consensus expectation, registering a figure of 8.3 %. Though slightly lower than the June figure of 9.1%. a dive into the details reveals disturbing trends.

The modest reduction in the CPI for August was almost entirely driven by a pullback in oil and gas prices, a phenomenon driven by market forces. However, other core components of the CPI accelerated their inflationary trend. Food prices registered a sharp rise of 11.4 %, the largest level of inflation in this critical category in 43 years.

The continued high level of inflation in the United States is being replicated globally. In the UK the official rate of inflation exceeded double digits and has only slightly receded to above 9% due to fuel price retrenchment, as in the U.S. Virtually every other economy on the globe is experiencing levels of price inflation not previously witnessed in decades.

The most recent data in the U.S. will compel the Federal Reserve to continue to significantly increase interest rates. Other central banks will follow in lockstep. All these moves will instill a fiscal drag on the global economy, further increasing the likelihood of a global recession. All trends remain on track for global stagflation and the worst world economic crisis since the 1930s.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Jerome Powell, Federal Reserve chairman and Fed officials unanimously agreed to hike rates by three quarters  of one percent (75 basis points), bringing rates to between 2.25 and 2.5 %. This is still very low considering the last report from the U.S. Labor Department, which tabulated inflation in the United States at 9.1%. The Fed in effect admitted this by indicating further hikes are likely.

Having missed  the train repeatedly by claiming inflation was only transitory, Powell and his minions are compelled to bring up rates in desperation as inflation domestically and internationally spirals almost out of control. This is where America’s central bank faces a conundrum. As weak economic data points to a recession in the U.S. economy, there is a growing chorus urging restraint by the Fed,  as higher rates will further  enable recessionary forces. Bu they are too late.

Yes, higher Fed rates will create a fiscal drag on the domestic economy. But having been so wrong in its previously unjustified lack of concern about inflation, failure to bring rates much higher will not prevent a recession; it will merely guarantee stagflation-a recession with high inflation.

For the Fed rate hikes to have any effect, they will need to go much higher, at the very least  in excess of 5 %. Unfortunately, current global inflationary pressures are not only derived by  demand . There is a supply shock, independent from demand forces and unimpeded by rate hikes enacted by central banks. The supply shock was initially brought on by Covid lookdowns, which created supply bottlenecks. Now, added to this is the Russia-Ukraine war and the resulting sanctions and blockades. These forces are unpredictable but will likely be enduring. This ensures that the coming recession will be  both severe and sustained, concomitant with elevated inflation. In  essence, a stagflationary depression is threatening the global economy, and all central banks, including the Federal Reserve, can do no more than nibble at the edges.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The U.S. Labor Department   released its latest CPI  data On July 13, indicating that in the previous month inflation in the United States had surged to 9.1 %. This is the highest rate for inflation in the U.S. in more than four decades and harkens back to the stagflation that ravaged the American and global economy during the presidency of Jimmy Carter.

The elevated rate of inflation defied the prediction of many economists who have largely engaged in wishful thinking rather than macroeconomic analysis. With inflation not only remaining high but continuing to accelerate, it is very likely that inflation the United States is about to enter double-digit territory, if it has not already done so.

It is very likely that organized labor will soon make demands during collective bargaining for wage increases  vastly higher than what has occurred in several decades. That in turn will unleash powerful new inflationary pressure, adding to what is already impacting price instability, including supply chain bottlenecks aggravated by Covid-induced lockdowns and geopolitical tensions.

There are some economists and investors who have been hoping  that the Federal Reserve would defy economic logic and greatly moderate its planned rate increases. However, with inflation surging at unprecedented rates, and the sovereign powerless to arrest its momentum with its feeble fiscal interventions, it is almost certain that the Fed will have no choice but to rapidly raise rates, abandoning once and for all it s near zero rate policy. The next rate increase may very well be 75 basis points.

The latest data and the likely policy response from the Federal Reserve further solidifies the likelihood of prolonged global economic stagflation, and more likely than not, a global economic depression.

The U.S. Federal Reserve  on June 15 upped its key interest rate by three quarters of a percent, its largest increase since 1994. When Fed chairman Jerome Powell  announced the policy decision, he had a look of panic  as he boasted that America’s central bank remained committed to its historical mission of price stability. Yet only a short time ago this same Powell boasted that the emergence of high inflation in the U.S. economy was merely transitory.

Powell’s misstep replicated an earlier misread of economic trends by a Fed chairman. In the early stages of the 2007-09 Global Financial Crisis that nearly took down the global economy, then Fed chairman Ben Bernanke boasted that there was no prospect of a recession. How wrong he was.

When inflationary trends began spiraling out of control, leading economist Mohamed El-Erian warned that inflation was not transitory, and unless the Federal Reserve and other major central banks rapidly phased out their Covid-induced loose monetary policies including essentially zero interest rates, inflation would spiral, meaning future efforts to control it would likely lead to a far worse economic recession.’

Despite Powell’s feeble attempts to reassure markets and consumers, the rate increase of 75 basis points came on the wake of Labor Department data indicating that inflation in the U.S. stood at 8.6 % and was accelerating. Only far higher rate increases will slow its momentum, and with supply chain bottlenecks  complicated by geopolitical tensions including a full-scale war in Eastern Europe, nothing short of a severe recession bordering on a depression will dampen economic activity to a level that arrests the powerful inflationary forces now ravaging the global economy. These forces have been nourished by the Fed’s  policies for years, yet now Powell is attempting  to convince the world that this same Federal Reserve will engineer and end to inflation with a soft landing, avoiding a long and severe recession. At this point, the Fed lacks any credibility  to sustain such reassurance.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

As governments  globally boasted of their speedy transition to a “Green” economy, in the process doing everything possible to discourage future oil exploration and extraction, they suddenly were confronted by a painful realization. The economically developed nations in the world are still highly dependent on fossil fuels, and will likely be for several decades to come. That, and the Covid-induced supply chain disruptions coupled with  geopolitical shocks, in particular the Russian invasion of Ukraine, have created a perfect storm. Every element leading to elevated oil prices is in play, an economic torrent driving up consumer prices for gas to unprecedented levels.

Just over a year ago, in May 2021, U.S. crude oil was priced at under seventy dollars per barrel. Only one year later, that price exceed in $113.00, and has continued to accelerate into June.  This has had major inflationary impacts throughout the global economy. Virtually every form of major  economic activity, from manufacturing to land and air travel and maritime shipping of exports and imports, is reliant on oil. Renewable energy is but a small fraction of the energy consumption required for sustaining global economic activity. To give but one example, food prices, already experiencing high price increases due to supply disruptions, greatly exacerbated  by the war in Ukraine, will be further hammed by  energy price inflation. Agriculture and food processing , along with its transpiration to market, is a highly industrialized process  involving staggering levels of carbon energy consumption.

The oil price spikes will create a tsunami of inflationary pressures. The immediate impact most visible to consumers, however, will be at the gas pump. No other economy in the world is as depended on cheap gasoline  as is the United States. One year ago the average price of a gallon of gas in the U.S. stood at just over $3.00.A year later that average is just under $5.00.In California the average cost of a gallon of gas exceeds six dollars.

In response to the exploding cost of oil, the Biden administration has attempted band aid solution, such as releasing some of its strategic petroleum reserve  into the market. This has only brought about a marginal and brief amelioration in the cost of oil. In effect, the U.S. and the other major  energy consumers have no policy prescriptions. There remains only one force that will ultimately retard price inflation in the carbon  fuel sector: demand destruction resulting from a severe global recession.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Earlier this week the Labor Department released statistics on the CPI (consumer price index) for the period March 2021 through March 2022. The news was dismal,; the CPI data revealed that inflation in the United States had reached 8.5 percent. This is the highest level of CPI growth in the U.S. over a one year period registered since December 1981.

As bad as the official figures are, the reality is probably much worse. Typically, American government statistics reflecting inflation are lagging indicators. What is clear is that inflation in the U.S., as in most of the world, is accelerating at a quickening pace. It probably has reached double digits in the U.S., with every indication that it will continue to increase, probably well into double digit territory.

As to be expected, the Biden administration is blaming the Russia-Ukraine war for spiraling inflation. No doubt, Russia’s invasion of Ukraine has had a major negative impact on price stability. However, contrary to the spin of President Biden and his officials, the primary driver of the worst inflation spiral in the U.S. in more than 40 years has been policy missteps  of both a fiscal and monetary nature.

On the fiscal side the U.S. government responded to the Covid pandemic with levels of deficit spending that, in real terms, exceeded the debt spending required to fight World War II. In addition, government mandated lockdowns and restrictions on economic activity, both in the United States and worldwide, disrupted  supply chains. Added to all this has been the non-stop money printing by the Federal Reserve. In defiance of economic logic, the Fed unleashed an unprecedented floodtide of liquidity, while publicly claiming that the resulting inflationary upsurge was merely “transitory.”

The accumulation of policy missteps by sovereigns and central banks, especially as had occurred in the United States, has created a vicious negative feedback cycle. On the one hand, inflations is at its worst in more than 40 years, and accelerating. On the other hand, labor will demand massive wage increases to match the CPI , which will in turn add further pressure on the inflationary trend. Only recently has the Federal Reserve begun to comprehend its massive policy errors, and is beginning to play catch-up. With interest rates set to rise sharply over the next several months, policymakers have crafted the perfect storm: high inflation and a severe recession, leading to a likely stagflationary depression.

The world’s foremost economist when it comes to projecting negative economic phenomenon, Nouriel Roubini, recently posted an article on Project Syndicate with a dire warning:

It is tempting to think that the war in Ukraine will have only a minor economic and financial impact globally, given that Russia represents merely 3% of the world economy. But policymakers and financial analysts need to avoid such wishful thinking.

All the negative inflationary trends already baked into the cake for 2022, and long dismissed by the U.S. Federal Reserve, will now be further accelerated and become more broad-based. The sanctions being imposed on Russia will not only damage Putin’s economy but also further augment inflationary pressures in the global economy. Furthermore, Roubini warns, Russia will inflict its own asymmetrical retaliatory measures, adding to the overall pain in major economies.

The cumulative effect of the measures enacted in the wake of Russia’s invasion of Ukraine will be massive stagflationary trends-high inflation combined with low or negative economic growth. But with central banks already having loosened their monetary policies for far too long, their ability to engage in damage control is limited, Roubini  warned. Based on recent policy mistakes, Roubini believes the Federal Reserve will likely “fudge” rate hikes to avoid creating a fiscal drag that heightens recessionary forces. But energy prices will continue to spike. Inadequate measures by central banks will only augment inflationary expectations. Attempts to increase alternative supplies of oil with a nuclear deal with Iran are likely to fail, resulting in energy hoarding.

It is not only central banks that are in a bind, according to Nouriel Roubini. The vast deficit spending unleashed by sovereigns to counter the negative shock from Covid have led to soaring public debt levels, leaving little fiscal ammunition to confront the economic consequences of Putin’s war on Ukraine. Furthermore, Professor Roubini points out that the economic crisis generated by Putin’s attack on Ukraine has led to a negative supply shock, fundamentally different from the demand shock generated by the credit crisis that occurred in 2007-09. He warns that fiscal stimulus is the wrong response to the current crisis, and will only accelerate already high inflationary expectations.

Nouriel Roubini offers the following sobering conclusion:

The global impact of Putin’s war will be channeled through oil and natural gas, but it will not stop there. The knock-on effects will strike a massive blow to global confidence at a time when the fragile recovery from the pandemic was already entering a period of deeper uncertainty and rising inflationary pressures. The knock-on effects of the Ukraine crisis – and from the broader geopolitical depression it augurs – will be anything but transitory.

My own assessment; we are now in a deep global economic crisis that will be enduring, likely for the remainder of the decade. It will be the Great Depression 2.0.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Now that the U.S. Federal Reserve and other central banks have been finally forced by reality to abandon the fiction that inflation was a transitory phenomenon, they have hinted at upcoming interest rate rises  during the course of 2022. However, having been so wrong in policy measures thus far, it is highly likely that the Fed will be equally error-prone in the coming months. In the meantime, other factors are at play, beyond the grasp of any central bank’s efforts.

Instability is a toxic brew for economics, and the first weeks of 2022 already point to a year of geopolitical disarray. The Biden administration has gone public with warnings that Russia is about to invade Ukraine, stampeding its NATO allies into joining the anti-Putin hysteria. Even if the prediction of a Russian invasion should prove false, the loud manner that Washington has dealt with the issue assures greatly heightened tension in Europe, creating new strains on the world’s economic order. This is already reflected in the continuing rise in energy prices, including oil and natural gas, with the latter being a manifestation of European dependency on Russian energy exports. Added to this are the growing signs that the negotiations over Iran’s nuclear program are not going well. Should they  collapse, this will create the growing danger of war in the Persian Gulf region, and the possible closure of the Straits of Hormuz, through which 30 percent of oil exports worldwide traverse. That alone would conceivably double or triple oil prices, virtually overnight.

Ukraine and Iran are not the only flashpoints on the horizon. North Korea continues its belligerent weapons testing. It is not inconceivable that it will conduct another nuclear weapons test during the course of 2022. In the meantime, there are growing strains between China and the U.S. over Taiwan.

While the geopolitical stability of the world continues to erode, the Covid pandemic is entering its third year, with no signs that its debilitating impact on global supply chains and normative economic activity will be ameliorated in the near-term.

In the meantime, opaque crypto-currencies have become major factors in the world financial order, posing dangers similar to that of derivatives during the 2007-09 Global Financial Crisis, but to a much higher degree.

With all the warning signals indicated above, this is the time that the Federal Reserve will have to begin lifting its near zero interest rates and end its lavish quantitative easing. The odds are that these policy measures will prove insufficient in arresting high inflation increasingly being nourished by factors unrelated to sheer monetary policy. What is more likely is that the Fed will stumble and likely precipitate a collapse of the asset bubbles it has created in the equities and real estate markets. All these factors point to not only a severe global recession, but something much worse; depression 1930s style.

The U.S  Labor Department released its CPI data for December 2021. It shows that, compared with the CPI for December 2020, the past year has seen an annual inflation rate of 7 %. Compared with the prior month, the CPI advanced a full half of a percent.

The official inflation  numbers make it clear that the Federal Reserve’s often repeated claim that inflation was “transitory” was a myth. If anything, inflation in the United States is accelerating. Furthermore, many economists view the official CPI data as an undercount. Likely, true inflation in the U.S. has reached double digits.

The reasons for this wave of inflation , unprecedented in the U.S. economy since the 1970s, I have commented on before in previous blog pieces. The important question now is what will the Fed, as well as other leading central banks in major economies, do in response to a clearly sustained wave of major price inflation.

Recently, even the Fed has abandoned its moniker that inflation was a transitory phenomenon . The Federal Reserve is now openly mulling monetary tightening in 2022, with intimations of 4 interest rate increases during the course of the year. However, the Fed and other central banks have been so muddled in their policy responses to date, it is likely that the steps expected will be ineffective. Should inflation further accelerate, compelling a more severe monetary retraction, the whole edifice of major equities and real estate valuation expansion built on cheap money will collapse. This makes a severe recession , and even a depression, a more likely near-term economic outcome.

Sheldon Filger-blogger for GlobalEconomicCrisis.com