US money printing policy is a source of global financial distress

Illustration: Chen Xia/Global Times

There are now clearer signs that persistently high inflation persists in large parts of the world and could last until the end of this year or even longer, eroding the living standards of billions of families in middle and low income. People often worry and worry about soaring prices for many commodities, groceries, and services, but they rarely seek answers as to what is causing the sharp rise in prices.

In most cases, inflation is self-correcting, which means that price fluctuations in one segment, such as crude oil or grains, will not spill over to other sectors and form broader inflation trends.

But the current cycle of global inflation is something different – ​​it started in the US in the first half of 2021, triggered by the Biden administration’s $1.7 trillion outsized fiscal spending plan, compounded by the quantitative easing monetary policy of the Federal Reserve, and brought to and infected the other economies of the world via the dollar-dominated global trade and financial settlement regime.

If economists looked back on this century, they would discover an antecedent of this kind of financial distress on a global level.

About 14 years ago, former Fed Chairman Alan Greenspan’s highly irresponsible low interest rate policy triggered the collapse of subprime lending in the United States and led to the global financial crisis. of 2008-2009, which imploded capital markets across continents, destroyed trillions of family savings and drove many major economies into the abyss.

However, policymakers in the United States rarely learn “bloody” lessons from the past, as they always like to indulge in exuberance – creating financial market bubbles with ultra-low interest rates, as well as trillions of money dollars printed.

As the most important central bank in the world, the Federal Reserve should have adopted a very cautious set of policy guidelines to manage the sustainability of the dollar, so that it does not cause earthquakes and send waves. shock or trigger tsunamis to flood other economies that are closely tied to the United States.

The fact is that the Fed has continued to press the accelerator pedal over the past few years by sticking to the near-zero rate policy, hoping to bring about a rapid economic recovery in the United States. United after the COVID19 pandemic. The central bank also bought a wide range of Treasuries and other securities-backed assets, injecting extraordinary amounts of liquidity into financial markets, which left a large imprint on the balance sheet of the Fed – which has exploded to $9 trillion from less than $5 trillion. five years ago.

As a result, inflation in the United States began to rear its ugly head at the start of 2021 as Biden pushed Congress to approve his giant fiscal stimulus packages one after another. Since then, the price hike has been inflamed by his administration. Last month, US inflation hit a new four-decade high of 8.5% from the same month a year ago. And, the country’s price rise has been relentless, with six straight months of inflation above 6%, well above the Fed’s average target of 2%.

To make matters worse, the Producer Price Index or PPI, which measures the prices of material supplies at factory gates, climbed 11.2% last month, the fastest pace in 12 years, according to the US Department of Labor. The surge in the PPI has dented hopes that inflation peaked in March, as PPI inflation will feed through to broader consumer market inflation one to two months later. .

Exactly like the financial tsunami of 2008, the inflation spurt also started in the United States and then spread to other parts of the globe, with the US dollar, the world’s most important reserve currency, acting as the main medium of exchange. Average inflation in European Union Member States reached 7.5% in March, compared to 5.9% in February. Today, nearly every developed economy and emerging market in the world faces the onslaught of severe and prolonged inflation, from Mexico and Brazil in Latin America to South Korea, Singapore and Australia in Asia. -Peaceful. Inflation is now above 5% in about 58% of all advanced economies.

Incomplete statistics have shown that up to 70% of countries and regions in the world are currently experiencing inflation, the prices of food, energy, rent, used cars, air flights, hotel rooms, etc. hotel and other services all increasing rampantly. As a result, the livelihoods of billions of people have become more difficult.

And, there are other man-made factors that have contributed to global inflation, and they also originated in the United States.

The U.S. government’s attempt to contain China’s economic growth by imposing steep tariffs on $360 billion Chinese goods, and tight restrictions from Washington to curb semiconductor production in China have resulted in rising commodity prices, while causing severe disruption to the global supply chain. . Bottlenecks in semiconductor supply have multiplied as they occur in items at the start of production lines, as industrial microchips are needed to produce many other consumer goods .

And ironically, the current cycle of high and rising inflation has increased pressure on the US Federal Reserve to continue raising interest rates in 2022 to dampen persistent price increases. The Fed is expected to raise rates by half a percentage point in May. The prospect of a rate hike of 200 basis points or more in the United States has already spooked other economies, as the sudden tightening of Fed financial policy will inevitably attract global capital to the United States. As a result, many developing economies will be severely affected.

But many governments can’t do anything. Due to the dominance of the dollar in the global financial system, many countries will have to follow the paradigm of the United States, with their economies still oscillating between a cycle of boom and bust created by Washington.

The author is an editor at the Global Times.

Sarah J. Greer