We have elevated inflation, we have a continuing war in the Ukraine, we have rising tensions between the United States and China, we stand near the edge of another possible banking crisis, extreme climate events are becoming more frequent, and the world is staring at another recession. Thank God there isn’t another pandemic about to be released because it’s hard to keep track of the various crises that the world is facing at one go just now. Is this the new normal? Are we just blinkered to all the cumulative build-up that could come tumbling down suddenly? Have the chickens we’ve not dealt with finally come home to roost?
Inflation is the most persistent and the most pervasive problem we face; most of the globe has been caught up with it either directly or because of the fallout of that problem. That is, spiralling prices have been a global primary issue for almost everyone and the resulting actions- rapid hikes in interest rates by most central banks, are impacting even regions not affected by inflation (China and Japan, for example). Central Banks have been wrong about this crisis from start to (not yet) finish(ed). They have misdiagnosed the cause and applied the wrong medicine. They have attacked high demand and- in the US, too high levels of employment (!) and attacked it with interest rates; that too- after insisting inflation was all temporary (but arising out of supply disruptions during the pandemic lockdowns). This is not new ground, but the current set of rate hikes a week ago by the ECB and the Federal Reserve show that they have not imbibed the lesson. To be fair to them, though, they are not able to tackle the root causes- including record corporate profits, war induced price disruptions and bad policy choices (Brexit for example) which are fuelling inflation, as those aren’t within their area of responsibility.
To make matters worse, they’re again flushing the banks with liquidity to make sure that more banks don’t go under. Rumours about Deutsche Bank being vulnerable would threaten to make this a repeat of 2008 if it were not for the extra capitalisation that all the large banks have been forced to maintain- the Bank of England reckon UK banks have core capital ratios three times higher than in 2008. Banking crises are now becoming such a regular periodical event that many are beginning to question the inherent stability of banks as an institution. Scrutiny is even greater because- after each crisis, no one is held accountable, banks again expect to get bailed out and they again return to the trough for cheap, plentiful funding to create asset bubbles while lobbying for relaxed regulatory norms. This socialisation of losses and privatisation of gains game is creating public anger and may lead to radical reforms in banking. At the very least, it is proving that banks have become unstable at higher rates of interest because they have geared their businesses to speculative capital gains rather than interest rate spreads.
One of the possible fallouts from this potential banking crisis in the making is the increased possibility of a credit crunch to normal households and businesses. The increased risk of a ‘systemic credit event’- as Federal Reserve Chairman Jerome Powell terms it, then raises the likelihood of a recession in the US and UK due to tightness in bond markets. As it is, the raising of rates in the aftermath of the SVB meltdown by the Federal Reserve, means that the central banks are aware of the risk but are persisting in keeping their foot on the economic brakes. It could even be argued that it works in their favour since they do want to engineer a slowdown to help cool inflationary pressure. But is this a wise course of action in the current circumstances? An economic slowdown will only make more banks vulnerable to collapse; this could enter a vicious cycle of slowdown, bank collapses, credit crunch, further slowdown and so on.
The current war in the Ukraine can- arguably, be considered a proxy war between the United States and Russia- with the Ukraine as Pakistan’s equivalent of the mujahedeen- used with plausible deniability of direct involvement. It is not directly linked to the chain of economic events outlined above except as a trigger for global inflation. Though the worst of its impact on global energy prices has vanished altogether- with both oil and gas prices at pre-war levels, and even prices of wheat prices also below pre-war levels, the only real threat the war poses now is the likelihood of it escalating (one nuclear weapon would do the trick) and reversing the effective ‘localisation’ of the damage zone. What had affected prices from Belgium to Indonesia is now contained to Europe. Interest in the war is already reaching fatigue levels across the western world, but the US is opposed to a Chinese brokered peace agreement. Why?
A lot of that has to do with the current levels of US-Chinese antipathy to each other. This has been an escalating them from the time of the Trump administration when the US raised security concerns as an excuse to prevent Chinese firms enter certain technologically sensitive areas. The US is now making explicit security guarantees to Taiwanese sovereignty- a direct slap in the face to China. Does this arise from a genuine concern for Taiwanese freedom or are the similarities to Ukraine too obvious? There too, the US held out the promise of protection against Russian aggression but to what avail? The cynical view is that the US deliberately provoked war to bleed Russia and provide business to its arms manufacturers. Are they hoping to repeat themselves through Taiwan? A longer-term scenario then is that the United States wants to maintain the unipolar hegemon role and will cut down any likely competitors. Watch out world.
There are several crises- financial, economic, and geopolitical, all playing out simultaneously. They are all interlinked causally which makes them hard to disentangle. It’s probably a small mercy that another pandemic hasn’t erupted again in the meanwhile. And then there is the matter of the biggest chicken that’s coming home to roost: manmade climate change- coming to a planet near you.