Return of Pre-World War I Chaos, Recession, and Rebuilding of International Order
This year, the world supply chain disruptions caused by the Russia-Ukraine war and China’s extreme pandemic prevention measures have exacerbated the global energy and food crisis. International crude oil prices have remained above $100 for a long time. High inflation in the United States and EU has broken decades of records. And whether the Fed’s hawkish interest rate hikes will trigger a global economic recession has become a major concern.
High Inflation Triggers Large-Scale Interest Rate Hikes; Will the US Face a Volcker Moment?
According to data released by the U.S. Department of Labor on June 10, the U.S. consumer price index (CPI) increased 8.6 percent in May, up from 8.3 percent in April, and continued to reach its highest level in 40 years. According to Eurostat data released on June 17, inflation in the Eurozone rose to 8.1 percent in May, surpassing the 7.4 percent increase in April and setting a record for the highest inflation since the introduction of the common currency as the currency of account in 1999.
In addition, according to AAA, the average U.S. gasoline price rose to $5.004 per gallon on June 11, breaking the $5 mark for the first time in history. Analysts predict that U.S. gas prices are likely to remain high. JPMorgan Chase predicted last month that U.S. retail gasoline prices could rise to $6.20 per gallon by around August.
To curb high inflation, Federal Reserve officials agreed to raise interest rates by 0.75 percentage points at the end of a two-day policy meeting on June 15, bringing the federal prime rate to a range of 1.5 percent to 1.75 percent, the largest single rate increase since November 1994. All 18 Fed officials at the meeting expect the Fed to raise rates to at least 3 percent this year, and at least half of them predict the federal funds rate may need to rise to around 3.375 percent.
On June 20, economists at investment bank Nomura Securities warned that the U.S. economy is likely to fall into recession this year as the Fed tightens monetary policy to cool decades of high inflation. Nomura Securities economists Aichi Amemiya and Robert Dent said in a report that the U.S. GDP will start shrinking in the fourth quarter of this year, followed by another six quarters of negative growth. Nomura Securities expects the U.S. GDP to grow by just 1.8 percent in 2022 and then shrink by 1 percent in 2023. In addition, they predict the U.S. unemployment rate will jump to more than 5 percent by the end of 2023 from the current 3.6 percent, and to nearly 6 percent by 2024.
On June 22, Fed Chairman Jerome Powell said the Fed is still determined to continue to raise interest rates to cool down the heated inflation, but Powell also acknowledged the possibility of a recession. The Fed’s successive hawkish declarations and claims of anti-inflationary efforts have kept market fears alive, and economists and analysts are privately discussing: After forty years, is the Volcker Moment about to arrive again?
The so-called Volcker moment refers to 1980, when then-Federal Reserve Chairman Paul Volcker, with the support of President Reagan, raised the federal prime rate to 20 percent to combat the inflation rate of more than 10 percent. Although it did solve the high inflation crisis in the United States, it also directly led to the recession in the 1980s. This extreme interest rate policy lasted for about two years, and this period is known as the Volcker Moment.
Brian McCarthy, chief strategist at Macrolens, a macroeconomic think tank, recently said on NTD’s Pinnacle View that Powell and Volcker were in completely different situations. Volcker was dealing with almost what we often see in Turkey or Argentina: a decade of poor monetary management and supply, combined with tax increases caused by tax brackets that did not follow prices. Under these circumstances, strong action is needed to restore market confidence. That’s why in 1981, Volcker raised interest rates to 20 percent. McCarthy said we had a terrible recession, and although the process was painful, at least Volcker was able to rebuild confidence in the dollar.
However, McCarthy also said that the reason for the current inflation is the government’s budget overspending, including its response to the pandemic and printing a lot of money, so the Fed’s current policy response is not an overreaction. McCarthy said there is no need to reduce inflation from 8 percent to less than 5 percent. We should wait a few years and let the mistake pass through the economic system instead of taking the Volcker approach, which led to a hard landing and a depression.
Tian Xie, a marketing professor at the Aiken School of Business at the University of South Carolina, said that the government’s overspending, green energy policies, and the disruption of the international supply chain are the main causes of inflation in the United States. Xie said that the new energy policy and the so-called more equitable social policy have made a huge negative impact on the United States and the world. The simplest example is Germany; to achieve the so-called green energy policy unilaterally and quickly, they suddenly shut down many of their nuclear power stations and then immediately fell into an energy crisis. It must rely more on oil and natural gas from Russia. Xie said that after the outbreak of the Russia-Ukraine war, Germany had to violate the EU sanctions against Russia and continue to buy Russian oil and gas resources, which brought a huge impact on Germany and international politics. The new energy policy and the so-called more equitable society are the most important reason the United States is dealing with inflation and economic chaos today and may even lead to a recession.
Xie said that the current inflation in the United States has not yet caught up with the level of the oil crisis in the 1970s, but it is approaching the level of 10 percent before World War II. U.S. GDP declined by 1.5 percent in the first quarter, and statistics for the second quarter are critical. If the second quarter also declines, then the United States will officially enter a recession.
Russia-Ukraine War: Reorganization of International Order and the Resurfacing of Pre-World War I Chaos
In addition to fears of high inflation leading to recession, this year has also seen a huge upheaval in the international political order. The Russian invasion of Ukraine on Feb. 24 broke the post-Cold War international system of respect for national territorial sovereignty, and the world landscape is fragmenting and regrouping. The Chinese Communist Party is trying to seize this chaotic situation to increase its military commitment, likely looking to take military action in the Taiwan Strait.
In this regard, Shan Shi, senior editor and chief writer of The Epoch Times, told Pinnacle View that we are facing a situation more dangerous than 40 years ago. We can even say that now the United States and the world are facing a situation like at the end of the Victorian era in Britain a hundred years ago. Shi said Britain was the global power and used the British pound to control international finance. Britain had force, the pound, its political influence, and colonies around the globe. When the Victorian era ended, other countries in Europe, like Germany and Russia, rose. Disputes between European powers were enormous, and after entering the 20th century, those conflicts caused World War I and World War II.
Shi pointed out that now the United States is facing the same problem. The United States has massive military power. The U.S. dollar is the currency of the global financial settlement system, which the current globalization process is highly dependent on. The U.S. government now issues a lot of money to cope with this pandemic, which is allowing the dollar to depreciate. If something is wrong with the dollar system and it is no longer trusted globally, what problems will it create? Is it reaching a turning point now?
Shi mentioned that the Russia-Ukraine war is something that has never happened since World War II. Although there had been invasions of other countries in the past, it was usually to fight other governments or take benefits, rather than changing the territory. Shi said Russia has used force to change the border of Ukraine and sent other countries in the world a clear signal that the rules have changed. How would other countries deal with it? How should other countries deal with it? No international rules can protect you, and you can only protect yourself. Shi said this will cause a significant increase in military spending, and military spending is government spending, which will worsen the problem of inflation, because all government spending is done in sovereign currency, and if the global supply chain has issues, it will cause a problem. Shi pointed out that what we are facing now is more complex than in the 1970s and ’80s, and the scale is also larger.
Pinnacle View, a new TV program launched at the end of 2021 by New Tang Dynasty and The Epoch Times, is a high-end TV forum based on events surrounding China. The program gathers elites from around the world and from all walks of life, focuses on hot issues, analyzes the world’s major trends, and provides viewers with in-depth observations on current events and historical facts.
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