All actors and stakeholders in the international economic system are focused on the Russian-Ukrainian war, the worsening global inflation trend and the uncertainty regarding growth expectations. As the two ‘black swans’, the global coronavirus pandemic and the Russian-Ukrainian war, have heightened concerns over global food, energy and supply chain security, the general expectation in early March was that the major economies would resume monetary expansion. and the fiscal policy program they set for a certain period of time. The term “black swan” is defined as an event or process that causes irreversible and radical changes in global economics and politics.
In fact, it seemed logical to favor and maintain expansionary economic policies in order to offset the economic contraction and rising unemployment triggered by the pandemic, which affected 90% of major economies, as soon as possible. However, within a few weeks towards the end of March, concerns about the global inflation bubble escalated so quickly. In April, the US Federal Reserve (Fed) rhetoric prioritizing inflation risk intensified and from May it was now the only one for the Fed. All markets have accepted that the priority is inflation.
In other words, despite all the uncertainties caused by the two black swans, the positive effect of expansionary policies and the two-year economic contraction and rising unemployment, and without waiting for positive growth and the recovery of jobs are part of a permanent trend, the Fed has chosen a new path that could face the risk of recession. This new path risks causing a severe recession and increasing unemployment in the US economy, which will have repercussions for the upcoming congressional elections in November. On the other hand, if China’s heavy quarantine against the pandemic continues, a recession will also be seen in the Chinese economy. This means that the recession of the two main world economies will once again deeply affect global growth.
Public support that can curb the negative impacts of the two black swans can bring the fiscal deficit to a risky level. To avoid this, the major economies need higher tax revenues, and therefore reasonable positive growth and lower unemployment. For this reason, the Fed’s new trajectory, which prioritizes inflation and monetary policy tightening, also jeopardizes the public support that will eliminate the negative effects of the two black swans. Falling tax revenues and rising bond borrowing costs, which will be needed to finance public support, point to the risk that banks will direct their resources to public borrowing rather than the real sector. It also points to the risk of returning to the world of the 1990s with the effect of exclusion.
The new path
Well, what about investments that target global climate change and therefore carbon reduction and prioritize green energy transformation? In other words, the Fed’s new trajectory will not only face the real sector crowding out effect on financial markets. At the same time, it will jeopardize the delay of projects aimed at meeting climate change objectives, the increase in global poverty which triggers global migration and the management of the spiral of global debt which has already turned into a $300 trillion based vortex.
It is at this point that we move away from the preference of orthodox neoliberal economists to prioritize unconditional inflation. Between 1980 and 2000, orthodox neoliberal choices of monetary and fiscal tightening meant a risk of growth and job losses only for the countries that chose it. However, the multilevel economic relationships that the international economic system has revealed today, which are sufficiently intertwined, multiply the negative effects of the Fed’s preferences for the US economy on the global economic system and make it even more unmanageable. While the two black swans have already caused great global uncertainty, the further increase in global borrowing costs will also lead to different outcomes in terms of poverty, regional instability, migration and social peace in terms of the economy and of global politics. Let’s hope the Fed is aware of the risk posed by the deepening global recession.