August 9, 2022

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The US selfish war on inflation will push the world into recession | Philip Inman

Later in July US interest rates It is expected to jump for the second time this year, and that will eliminate any chance of a global recovery.

The Fed can Pushed its base price up a full percentage pointto end 15 years of ultra-cheap money, with the goal of boosting growth.

This jump, between 2.5% and 2.75%, would raise the cost of borrowing money in the US to more than double the Bank of England’s 1.25% cost. However, the Fed can take a break as it considers higher rates.

This column, however, is not about the United States. She is concerned with the terrible effect on Britain and countries around the world of America’s selfish disregard when it decides to tackle high inflation with rising borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation Until she is “defeated”, whatever happens.

High interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their currency and buy dollars, which causes the price of the dollar to rise.

In July, the value of the US dollar rose against a basket of six major currencies to a 20-year high. euro fell below parity With the dollar in the past few days. The pound, which has fallen more than 10% this year to below $1.20, is losing value with each passing week.

In Japan, the central bank came under tremendous pressure to act after the yen fell to its lowest level against the dollar since 1998.

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There are two important side effects for those of us who live and work outside the United States.

The first is that dollar-priced commodities and raw materials are much more expensive. Most commodities are priced in dollars, including oil.

It also becomes more expensive to borrow in dollars. And while getting a loan from a US bank is more than the average British household, companies do it all the time, especially those in emerging economies, where there may be a shortage of money in their backyard.

Catherine Mann, a recent interest rate preparer at the Bank of England, said the main driver behind her desire for significant increases in UK lending rates was her fear that The widening gap with the dollar was causing import prices to rise. Higher import prices mean higher inflation.

If only she could convince her colleagues on the Bank’s Monetary Policy Committee that devaluation of the pound was a serious problem, they might raise the Bank’s key rate in line with the Fed rate increases. After the Fed makes its move, more may join in.

Until January of this year, rising inflation in Britain was on track to be short-lived. Now it appears that Russia’s invasion of Ukraine and the Biden administration’s overburdening of off-target grants during the pandemic, which has driven up prices in America, will keep UK inflation high next year.

Those governments that borrowed in dollars face a double whammy. Not only would they need to raise domestic interest rates to reduce the impact of higher import prices, they would also face a huge jump in interest payments on their dollar loans.

Emerging markets and much of the developing world will collapse when these additional costs are combined with the loss of tourism due to the Covid pandemic. Sri Lanka is already bankrupt and many others could follow.

Over the past three decades, Western banks have marketed low-cost loans throughout the developing world as a path to financial freedom.

The Zambian government borrowed heavily before the pandemic to become self-sufficient in electricity. It’s a commendable goal, but it left the Central African country with a debt-to-national-income ratio (GDP) much like France – around 110%.

Zambia’s problem is not the same for France, which pays an interest rate of 1.8% to finance its debt, measured by the yield on its 10-year bonds. The Zambian 10-year bond has a rate of 27%. Now, Zambia, like France and many other countries, simply have to borrow to live. Investing is borrowing more.

There is no indication that the United States will change course. Joe Biden is in a panic over the midterm elections, when fears of spiraling inflation are in the Republican favour. This panic spilled over to the Federal Reserve, which adopted hysterical language to convince consumers and businesses that higher rates are on track and curb their spending accordingly.

The Fed knows that inflation is a problem born of a lack of supply that only governments can remedy. But that doesn’t seem to stop him from pushing a file US economyAnd everyone is stagnating.