After trade wars and the pandemic depression, the West’s aggressive sanctions and US rate hikes will derail economic prospects worldwide. The devastation has only just begun.
PRIOR to the Ukraine crisis, the Biden administration promised targeted sanctions that would inflict pain on Russia. However, Russia’s broader economy, its people and the world economy would not be harmed. Yet, that’s precisely what has happened.
Ukraine is the means. The maximum sanctions were designed to default the Russian economy (see my “The avoidable Ukrainian crisis, the unavoidable global hit,” TMT, March 14, 2022). US allies will take a severe hit in Europe, but Asia will not remain immune.
The world economy will shoulder the collateral damage. Developing economies will suffer the most. The recent shocks are a prelude to the global tsunamis to come.
Energy and food shocks
Commodities reached a high of 4,160 in early March and have soared 42 percent since the beginning of the year. Food prices have climbed to an all-time high, nearly 21 percent above their level a year ago. The United Nations had warned of a meltdown of the world’s food system. At the same time, energy prices have shot up in global markets.
Crude oil climbed to a high of $125 in early March and has increased to $114 per barrel, or almost 50 percent since the beginning of the year. In Europe, the most exposed region to Russian energy, natural gas quintupled to a high of over $250 and is hovering around $108 (99 euros). But these data are predicated on the assumption that energy security will improve, another naïve assumption
US: Slowing growth, stagflation, rate hikes
In 2021, US real GDP (gross domestic product) increased 5.5 percent, the fastest since 1984 as the economy continued to recover from the adverse pandemic effects. Wages grew at the fastest pace in decades, but prices increased even more, so the net effect was negative.
In 2021, most GDP expansion was accounted for by increased inventory investment and service spending. In the past two years, the pandemic has lowered the economic output potential. During the ongoing year, GDP growth will slow because the level of fiscal support is smaller and the economy is closer to maximum employment.
Worse, inflation has proved stickier than anticipated because the Federal Reserve began to cut rates belatedly in March 2020, ignoring the World Health Organization’s early warnings. The second mistake ensued after mid-year 2021, when the Fed left the ultra-low rates intact despite rising inflation. By last December, the galloping inflation had soared to 7 percent, the fastest since 1982. Now America was coping with low interest rates plus high inflation: self-induced stagflation
In addition to rate hikes, the Fed will also start reducing its balance sheet, perhaps already in May, and those reductions could happen twice as fast as the last time.
The painful consequences were predicted by Thomas Koenig, a former member of the Fed’s Committee, years ago. But they were ignored.
US interest payments: A time bomb
After trade wars, the pandemic depression, aggressive sanctions and rate hikes, the Biden administration has dramatically accelerated debt-taking to pay for its multitrillion-dollar infrastructure initiative while spending ever more in the post-9/11 wars.
Concern in the markets about a US recession is growing as soaring commodity prices, reduced fiscal spending and rising interest costs risk economic expansion.
Since December 2020, the White House has said that aggressive debt-taking is tolerable because the burden of servicing it has fallen. But the guidance was naïve (see my “Contradictions of the ‘Biden doctrine,'” TMT, Oct. 25, 2021).
Here’s why: Net interest payments are becoming the fastest-growing element of the US federal budget. That’s an economic time bomb.
In a decade, interest costs are set to exceed 12 percent of the entire federal budget, while almost tripling to $910 billion (Figure 3a). By 2050, the sum total of net interest costs is likely to exceed $60 trillion as interest payments will take up almost half of all federal revenues
Concern in the markets about a US recession is growing as soaring commodity prices, reduced fiscal spending and rising interest costs risk economic expansion.
In the West, the Russian economic sanctions are portrayed as a solution to the Ukraine crisis with minimal harm to the world economy.
In reality, they will globalize and thus significantly worsen the adverse impact of a regional war, which itself was avoidable and unwarranted and avoidable.
These negative spillovers have potential to undermine global prospects in the short term while contributing to untenable global risks over time.
So writes Dr. Dan Steinbock in the Manila Times.
The sanctions on Russia announced by the US and NATO are supposed to bring Russia to its knees and oust Putin but it is not as simple as that because Europe is dependent on Russia for oil and gas supply. It cannot happen that Europe will just stop buying.
Putin has set a March 31 deadline for European oil and gas purchases to be paid in rubles. The ruble which was deemed worthless about two weeks ago, has now regained value.
We now face the prospect of a looming global economic crisis not only due to the Russia-Ukraine conflict but also because of the state of the US economy. Record budget and trade deficits have set record debt level. Even before the conflict in Europe began, inflation was already creeping up.
The global economic recovery from the pandemic is now threatened by inflation as a result of the spike in energy and commodity prices caused by the sanctions imposed on Russia. It does not help that the US appears to be headed for another era of stagflation aggravated by the actions it has undertaken against Russia.
Leni Robredo has been vocal about how the Philippines should throw its support behind Ukraine. It is not as simple as that. If she actually thought of the repercussions first before opening her mouth, she would have realized that it is best to remain neutral. The Philippines has made its stand with other countries in the UN pushing for a diplomatic solution.
Filipinos are bearing the brunt of the increase in pump prices of gas and diesel which translates into higher prices of basic commodities and utilities. If she had a good sense of history, she would realize that this is what we faced in 1973 which led President Marcos to task Geronimo Velasco with the establishment of the energy security infrastructure of the country.
We no longer have energy security as the infrastructure has been privatized. Every asset has been sold off and we are again at the mercy of oligarchs in control of power generation and distribution.
We also do not have food security because of the lack of a focused strategy in agriculture. Our farmers are not aware of the latest technology and we also have to contend with smuggling and the underdeveloped fishing industry we have which makes it difficult to compete with the Chinese and Taiwanese fishing boats which often operate in our territorial waters.
We need to amend the Constitution in order to change the political structure which is one of the main reasons why we have not been as progressive as our Asian neighbors. A federal parliamentary system would be able to unlock the country’s full potential and spur regional development. If we want our children’s future to be bright, this is a must.
The Philippines should have a truly independent foreign policy and not one which is aligned with US and European interests as what will happen if Robredo becomes President. We have seen how quick she is when it comes to siding with what the US position is when it comes to China. We cannot afford to have a belligerent stand against China again similar to during the Aquino administration since it is the dominant economic power in the region. We need to be a friend to all and an enemy to no one. We also need to be conscious of the changing world order and should be as pragmatic as possible in our views.
We should formulate a long-term national development strategy which will have the goal of becoming an industrialized country. This is the only way we can stop exporting labor and ensure that our countrymen have jobs and contribute to the economic development of the country.
Bottomline, Leni Robredo is not a visionary nor does she have leadership. Elect her as President and we go back to the dark days when government could not get anything to work for us.
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