Washington’s imprudent financial policies risk stagflation
Skyrocketing price rises in the US will force the Federal Reserve to resort to swift policy tightening in the coming weeks, which risks substantially cooling the equity market, inhibiting corporate investment, shortcutting consumption and causing another bout of economic recession in the country.
As many economists in the US are increasingly concerned now, the dual threat of stagnant growth and persistent surging inflation will lead to stagflation – a nightmarish vision of the future facing the world’s largest economy.
The Ukraine- Russian military conflict, which the politicians in Washington fomented in the first place as they refused to call an end to NATO’s eastward expansion to the doorstep of Russia, and now they want to prolong to make Ukraine another Afghanistanstyle morass and fundamentally weaken Russia, will continue to negatively impact the US economy, as prices of energy and raw materials are unlikely to ease any time soon.
During the first three months of 2022, the US economy, under broad expectations, suddenly slowed down, with its GDP contracting by annualized 1.4 percent.
Hamstrung by withering consumption as US consumers fret about forbidding prices from daily groceries, big- ticket commodities to service items, coupled with the country’s ever- growing foreign trade deficit, the US is likely to see a consecutive GDP downturn from April to June.
The two administrations of Donald
Trump and Joe Biden are to blame for the hyper- inflation which hit 8.5 percent in March. Following the onset of the pandemic, the two US administrations hastily opened the nation’s coffers, dispersing unprecedented sums of cash to stunt damage caused by the coronavirus on the economy. Biden’s $ 1.9 trillion massive fiscal stimulus plan in early 2021 triggered the inflation to raise its ugly head.
And, the US central bank has been firing up the flame of inflation because the Fed, steered by the dovish Jerome Powell, has deviated from its usual policy prudence and lifted the sluice to flood the US financial system with historical liquidity.
Until now, the Fed has not really stopped purchasing US government bonds and corporate securities, as the Fed policymakers like Powell are reluctant to give up their most effective measure to pump liquidity to buoy up the federal government and American households – something they learned from the 2008- 09 financial crisis.
However, it is dangerous for a central bank of a large economy, be it the US or China, to keep the benchmark interest rate as around zero for too long. In that way, inflation is inevitable. For the past 13 years after the US- subprime induced global financial crisis, the Federal Reserve has mostly maintained the rates at 0- 0.25 percent, instead of the broadly recommended neutral rate level of between 2- 2.5 percent, which has been the unshakable stance of China’s central bank.
A majority of the world’s central banks tilted to copy the US Fed’s policy move, by drastically cutting rates to around zero, including the European Central Bank ( ECB), the Bank of England and the Bank of Japan. Naturally, these countries cannot escape the assault of inflated prices now – as the EU bloc saw inflation rise to 7.5 percent in April.
China is exceptional, which has successfully kept inflation below two percent for the past 24 months, thanks to the prudent monetary policy adopted by the People’s Bank of China.
And one more economic downside factor for the Biden administration: with the yield on the Treasury bonds rapidly climbing up, the US government will have to pay more for the interest due on its huge debts, which is estimated at roughly $ 30 trillion. Before long, the Treasury Department will find its ability to pay back to its creditors is weakened, forcing it to sell more notes at higher rates, until a tipping point is reached.