Global Economic Crisis

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.