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Wednesday, June 7, 2023

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A Global Recession Is Coming?

The Russia-Ukraine crisis stoked global inflation. Russia not only produces oil and natural gas, but also grain and commodities such as nickel and copper. There is no alternative supplier that can step in to fill the void.

Rising inflation spelled the end of the low-interest Goldilocks economy that began in 1991. Then, the Soviet Union collapsed. In 1992, Deng Xiaoping’s trip to Nanxun, a historic trip to South China, put China firmly on the road of market-oriented reform. As a result, China has become the factory of the world. The entry of hundreds of millions of workers from former communist and socialist economies has held back labor costs. Inflation fell sharply and low interest rates prevailed. Central banks have failed to calibrate this sea change in the new inflationary reality.

After the 2007-08 financial crisis, the central bank not only cut interest rates, but also implemented quantitative easing. This policy is a modern way of printing money. This monetary easing unleashed liquidity in the economy, leading to asset market bubbles. This has parallels with the discovery of silver by Spain and Portugal in modern Latin America, a third of which made its way to China and led to the collapse of the Ming Dynasty.

The La La Land era of low inflation and low interest rates is over. The collapse of the Soviet Union in 1991 created a benign supply-side shock. Russia’s invasion of Ukraine in 2022 created a vicious supply shock. Now interest rates have to go up to keep the price of milk, bread, eggs and butter in check (if you can afford it). However, rising interest rates will make life difficult for businesses and households with mortgages.

Debt becomes more expensive and harder to pay off. Indebted households, companies and countries will now struggle. In the age of COVID, fiscal slack, where spending exceeds income, has led to a sharp rise in debt. Repaying those debts has become more difficult.

On June 28, the World Bank observed that 58% of the world’s poorest countries are in debt distress. The danger is also spreading to some middle-income countries. In the words of the World Bank: “High inflation, rising interest rates, and slowing growth set the stage for financial crises of the kind that hit a range of developing economies in the early 1980s.”

The downturn in the Chinese economy has reduced Chinese demand for goods from suppliers in places such as Latin America and Africa. These economies are now having to pay higher bills, while many face a profitability crisis. Their current account deficits are rising, and so is their debt. Argentina, Türkiye and other countries. Ghana and Sri Lanka are known as submerged economies.

Rising inflation, interest rates and debt are putting enormous pressure on the global economy. After the heady days of fiscal loosening and quantitative easing, a protracted global recession and a decade of low growth, if not stagnation, looms. Chickens have come home to roost.

The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Fair Observer.

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