The global inflation rate stands at 7.8% per annum in 2022, the highest in the last 10 years. But the important thing is to establish it underlying or structural inflation, without food or energy (“core”), will reach 5% per year in 2023, which is double the level reached in the pre-pandemic phase (last quarter of 2020). The core level is the direct result of the war in Ukraine and the sanctions imposed on Russia by the US and the European Union.
The Federal Reserve’s objective is to set the inflation rate in a guideline of 2% per annum; and this means that the contraction cycle Jay Powell initiated with 3 hikes of 75 basis points in the past month and a half should be continued for at least another 2 years.
The Federal Reserve’s latest interest rate hike brought it to a 3% / 3.25% per annum level, when it was zero or near zero (0) at the beginning of the year; but still this it would be insufficient to reduce the inflationary level of the United States, which in the last 3 months has risen to 8% / 9% per year, and now it is necessary to limit it to 2% per year.
This ensures the US recession, which has already occurred for 2 consecutive quarters, with a decrease in production of 1.6% in the first 6 months of 2022; and this would seem to extend to 2023/2024.
This it implies a decline in world growth to 0.5% in 2023, which is less than the population increase, and is therefore equivalent to a significant recession of the global system with “devastating” consequences. according to World Bank (WB) estimates.
So far, the Fed’s policy has been a series of aggressive interest rate hikes; and as usual, it was followed by the Central Banks of Europe and the United Kingdom, with the only goal is to drastically reduce demandand thus, through the recession, they dominate the highest inflation rate of the last 40 years.
The World Bank has observed that this policy of advanced countries is purely negative, and that it leaves bottlenecks in the world economy that limit production, and which are a direct consequence of the war in Ukraine.
The World Bank adds this policy would be doubly harmful to emerging and developing countrieswhich must add to the approaching world recession the massive flight of capital (in dollars) that they have begun to suffer.
This happens because, as in all world crises, there is a massive shift in world investment to the United States., which resulted in the emergence of a “super dollar”, which is deceptively regarded as a devaluation of all currencies in the global system. The value of the dollar has increased by more than 20% in the past 8 months.
That is why the World Bank insists on this the real answer to inflationary pressures is not to cut demand, but to increase production through a systematic increase in the investment rate. This is – states the World Bank – “… the only one capable of increasing productivity and capital formation, which are critical and decisive factors for economic growth and poverty reduction”.
This is not what is happening, but quite the opposite, because both advanced and emerging countries are betting on systematic interest rate hikes as the only way to fight inflation, and have left the bright side aside – not “Malthusian”. ”- of capitalism that it is the commitment to investment, and therefore to innovationespecially in crisis situations.
The war in Ukraine is an extraordinarily destructive factor for the rise of the world economy: it is equivalent to a systematic increase in interest rates carried out by Central Banks, only exponentially; and the paradox is that this happens when it is an exclusively geopolitical phenomenon, totally unrelated to the accumulation process of global capitalism.
The conclusion that can be drawn is that a political solution to the war in Ukraine is required, which puts an end to the conflict as soon as possible through an agreement between the parties, which are essentially US and NATO on the one hand and Russia on the other, from other, with the lifting of all sanctions imposed on Russia by the US and Europe.
The result of what today appears to be the reign of utopia would be the end of the world crisis in a period ranging from 6 months to a year.
This happens when the situation is getting worse, especially in Europe, as evidenced by the fact that the euro fell below the value of the dollar in the first two weeks of September, reaching US $ 0.97. Such a phenomenon has never occurred since the emergence of the single currency in 2001; and this was accompanied when the Dax-40 index, of the main German companies, fell by 14% in just two days.
At the same time, the European Central Bank (ECB) raised its interest rates by 125 basis points to 0.75%, in a clearly upward path; this leads Deutsche Bank to estimate it the euro zone will contract 3% or more between the third quarter of this year and the second quarter of 2025.
These are the causes of the approaching global recession in 2023 and 2024.
Source: Clarin
