Global Economic Crisis

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