Economics has been called the dismal science and 2023 will justify that title. We are at the mercy of two catastrophes beyond our control. The first is the COVID-19 pandemic, which continues to threaten us with new, deadly, infectious or vaccine-resistant forms. The epidemic has been poorly managed by China, mainly due to its failure to vaccinate its citizens with the most effective mRNA (Western-made) vaccines.
The second disaster is Russia’s aggressive war in Ukraine. The conflict shows no end in sight and may escalate or have larger ripple effects. Either way, more disruptions to energy and food prices are almost certain. And as if these problems weren’t troubling enough, there is every reason to fear that policymakers’ response will make an already bad situation worse.
More importantly, the US Federal Reserve may raise interest rates too much, too quickly. Inflation today is largely driven by supply shortages which, in part, are already in the process of being resolved. Therefore, raising interest rates can be counterproductive. It no longer produces food, oil, or gas, but it will make it difficult to muster investments that would help alleviate supply shortages.
Currency tightening may also lead to a global slowdown. Indeed, this outcome is so predictable that some commentators, having become convinced that fighting inflation requires economic pain, have already cheered for a recession. They argue that the faster and deeper the better. They didn’t seem to think that the cure could be worse than the disease.
The global tremors from Fed tightening will already be felt in the winter. The United States is engaged in a 21st century protectionist “save yourself who can” type. While a strong dollar calms inflation in the United States, it does so by weakening other currencies and increasing inflation elsewhere. To mitigate these currency effects, even countries with weak economies are forced to raise interest rates, further weakening their economies. High interest rates, assessed currencies and the global slowdown have already pushed scores of countries to the brink of bankruptcy.
“The United States is engaged in the 21st century ‘save yourself’ protectionist policy.”
High interest rates and energy prices will also put many companies out of business. There have already been some dramatic examples of this, as in the case of the now nationalized German facilities Uniper. Even if companies do not seek bankruptcy protection, businesses and households will feel the pressure of tightening financial and credit conditions. Not surprisingly, 14 years of ultra-low interest rates have left many countries, businesses, and households heavily indebted.
The dramatic changes in interest rates and exchange rates over the past year point to multiple hidden dangers, as evidenced by the impending collapse of British pension funds in late September and early October. The mismatch between maturity and exchange rate is a hallmark of poorly regulated economies, and it has become more prevalent with the advent of opaque derivatives.
Naturally, these economic hardships will fall harder on the most vulnerable countries, providing even more fertile ground for populist demagogues to sow the seeds of discontent. There was a universal sigh of relief when Luiz Inácio Lula da Silva Jair defeated Bolsonaro in the Brazilian presidential election, but let’s not forget that Bolsonaro won nearly 50% of the vote and still controls the Brazilian Congress.
Today, across all dimensions, including the economy, the greatest threat to well-being is political. More than half of the world’s population lives under authoritarian regimes. Even in the US, one of the two major parties has become a cult of personality that increasingly rejects democracy and continues to lie about the results of the 2020 election. The method of work It is to attack the press, science and higher education institutions, while injecting as much misinformation as possible into society.
The goal, it seems, is to reverse much of the progress made in the past 250 years. Gone is the optimism that prevailed at the end of the Cold War, when Francis Fukuyama proclaimed the “end of history”, by which he meant the disappearance of any serious competitor to the liberal democratic model.
To be sure, there is still a positive agenda that can prevent a descent into gravity and despair, but the political polarization and impasse in many countries have made this agenda out of reach. With political systems that worked better, we could have moved more quickly to increase production and supply, easing the inflationary pressures our economies are now facing. After half a century of telling farmers not to produce as much as they could, both Europe and the United States could have asked them to produce more. The United States could have introduced day nurseries so more women could enter the workforce, alleviating alleged labor shortages, and Europe could have acted more quickly to fix energy markets and avert energy and electricity price hikes.
Countries around the world could have taxed windfall profits in ways that actually encourage investment and moderate prices, using resources to protect vulnerable groups and making public investments in economic resilience. As an international community, we could have adopted a COVID-19 intellectual property waiver, thereby reducing the size of our data racism of the vaccine and the resentment it fuels, as well as mitigating the risk of dangerous new mutations.
In general, an optimist would say that our glass is about one-eighth full. Some countries have made some progress on this agenda, and we should be grateful for that, but nearly 80 years after Friedrich von Hayek wrote The path of slaveryWe still live with the legacy of the extremist politics he and Milton Friedman popularized. These ideas set us on a really dangerous path: the path to a 21st century version of fascism.
Joseph E StiglitzNobel laureate in economics, professor at Columbia University and member of the Independent Commission on International Corporate Tax Reform.
© Project Syndicate, 2022.
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