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Forthcoming world recession as global externality
It is safe to say that today’s US Inflation Targeting Framework (ITF) regime is the moral equivalent of US gold reserves in the past.
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On par: A US$100 bill lies on top of euro bills in Bogota on July 12, the day the euro struck parity with the dollar for the first time in nearly 20 years. (AFP/Daniel Munoz)
T
he world economy is heading into a dark cloud, while some countries may already be there as we speak. The World Bank, International Monetary Fund and many other prominent financial institutions have issued that caveat. As if the undoing of years of progress due to COVID-19 was not enough, another rough path is awaiting.
If there is something that a domestic economy would be reluctant to catch from other systems, it would be risks. Like the coronavirus, no one would be rationally willing to expose themselves to their infected fellow.
When an economy experiences turbulence, would other countries empathically want to join? The simple answer is, no! They would rationally defend themselves like we rationally wear a mask in order not to catch COVID-19 or some instead refrain from mobility. Whether the exposure is unavoidable is a different question.
What is possibly the problem? As I mentioned earlier, first, COVID-19 pushed the world to take a step backward. While the undergoing economic recovery might still carry scarring effects, the second force struck, i.e., the Russia-Ukraine war. The war set off a global supply disruption and brought pressure on energy and food prices, roughly for the rest of the world.
As easy as we blame the war (of course, there is no justification for a war), it is also easy to point the finger at the hawkish Jerome “Jay” Powell, who aggressively raised the United States Federal Reserve Fund Rate to weather the US inflation.
But we may hold that thought when we acknowledge inflation as a macro phenomenon, a recursive collective action problem that can’t be resolved by itself. Monetarist advocates would loudly say that the central bank, as a “market contrarian,” the “stability guarantor” always stays in an unpleasant position to lean against the wind. It is a textbook case.
Let alone climate change and inequality that put the world at risk, there are three significant factors for the near-future global economic storm: C0VID-19, the war in Ukraine and US inflation. As we advance, I will emphasize why US inflation matters.
