Why is the US the source of world economic turmoil? In-depth analysis →
Guo Yan, Economic Daily 2022-06-27 10:07
In today's world, the changes of the times and the epidemic of the century are overlapping with each other, entering a new period of turbulence and change. At this new crossroads, the question of the times, "What is happening to the world and what are we going to do about it", is a question that the whole world is pondering.
To solve the many problems of the world economy, the international community needs to strengthen solidarity and cooperation more urgently than ever before, and the major powers in particular need to assume their due responsibilities. As a superpower, the United States should have joined hands with the international community to shoulder the responsibility of safeguarding common global interests, promoting world economic recovery and creating a common future for humanity. However, over the years, especially since the outbreak of the epidemic, the United States has failed to govern internally, leading to a concentrated outbreak of deep-rooted domestic economic and social problems; it has ignored its international responsibilities externally, allowing its macro policies to cause negative spillover effects and indulging in selfish interests to create turmoil around the world, becoming a source of destabilization and order in the world economy and creating world economic turmoil.
Inflation is high and it is difficult to contain
At present, the United States is facing the most severe inflation in 40 years, shrouded in the shadow of stagflation.
Since last year, prices in the United States have continued to climb, and the inflationary trend is difficult to contain. In May this year, the US Consumer Price Index (CPI) rose by 8.6% year-on-year, the highest rate since December 1981. A poll jointly sponsored by The Washington Post and ABC in late April showed that as many as 94% of Americans were concerned about inflation, with 44% of them feeling very frustrated. US President Joe Biden called inflation "unacceptably high".
While prices are high, economic growth has declined significantly. According to the US Department of Commerce, gross domestic product (GDP) fell by 1.5% in the first quarter on an annualised basis. This is the first time since the second quarter of 2020 that the US economy has contracted, and is far from the "moderate growth" expected by the market.
After the outbreak of the epidemic in the United States, the Federal Reserve quickly implemented zero interest rates plus unlimited quantitative easing. 4 massive spending bills were introduced in 2 years to stimulate the economy, with a total scale of US$6.3 trillion, a historically unprecedented level of effort and frequency. Former U.S. Treasury Secretary Summers wrote in February 2021 that the massive fiscal stimulus in the U.S. could trigger "inflationary pressures not seen in a generation" and that fiscal and monetary policies needed to be adjusted quickly to address them.
The rapid policy adjustments have not yet been implemented and inflationary momentum is already difficult to contain.
In May 2021, the Federal Reserve continued to signal that inflation was temporary, claiming that prices were high because of poor supply chains and that inflation would be solved once labour supply and other issues were addressed. However, the economy works in its own way and does not follow the wishful thinking of the US monetary authorities. Inflation has intensified to a 40-year high and the Federal Reserve balance sheet is at an all-time high.
Interest rate hikes, and even more aggressive contraction of monetary policy, became the Fed's customary choice.
On March 16 this year, the Federal Reserve announced a 25 basis point increase in the target range for the federal funds rate, officially opening the monetary tightening cycle. on May 4, the Federal Reserve announced a 50 basis point increase in interest rates, and on June 15 announced another 75 basis point increase in interest rates, from June 1 to reduce the size of the balance sheet of nearly $ 9 trillion, in order to "take swift action to bring inflation back down ".
The market generally believes that the current tightening is far from sufficient to make inflation materially subdue. However, the United States has very limited policy space. Economic growth momentum is becoming less and less, and a sharp and aggressive interest rate hike is tantamount to adding insult to injury for an economy whose prospects are already uncertain. The day after the Fed announced the rate hike on May 4, the Nasdaq took a sharp drop of nearly 5% to show the attitude of the capital markets.
All these signals have started a widespread concern in the market that the US is likely to repeat the stagflationary predicament of the 1970s. At that time, the US was experiencing the economic phenomenon of high inflation, high unemployment and low economic growth side by side. According to Maurice Obersfald, former chief economist of the International Monetary Fund: the longer this sustained shock lasts, the more likely it is that we will experience 'something like what we experienced in the 1970s'. Some analysts even suggest that the US economy is facing a predicament that is more than it ever was 50 years ago.
Pessimism is spreading. A number of research institutions have recently lowered their growth expectations for the US economy and warned of a possible recession in the next year or two. Goldman Sachs Group has lowered its growth forecast for the US economy this year from 2.6% to 2.4% and next year from 2.2% to 1.6%, giving a 30% probability of recession within a year or two. Wells Fargo Investment Institute lowered this year's U.S. economic growth forecast from 2.2% to 1.5%, next year's growth forecast from 0.4% to negative 0.5%, and said the U.S. economy is entering a downward cycle, it will be difficult to avoid some degree of recession.
A persistent and chronic problem that is hard to return to
Three feet of ice is not a day's cold. The current U.S. economic predicament stems from a long history of chronic U.S. economic problems. The epidemic and the Ukraine crisis are merely "catalysts" for the accelerated outbreak of structural and systemic problems in the US economy.
After the 1960s, the US made major adjustments to its domestic industrial structure. Traditional industries such as steel and textiles were gradually transferred abroad, and capital and technology-intensive industries such as integrated circuits, precision machinery and fine chemicals were vigorously developed, and their technological advantages were used to gradually form a consumer-based economy with a predominantly service sector, low savings and high consumption.
After the establishment of the "petrodollar" system in 1974, the liquidity of the international monetary system was basically borne by the US dollar, creating a situation in which domestic aggregate demand exceeded aggregate supply and the US continued to use the dollar's international "hard currency" status to compensate for its lack of domestic production. In order to maximise profits, US multinationals have moved more and more industries to developing countries, reducing costs, expanding markets and increasing the profitability of capital through industrial relocation. At the same time, consumer spending has always accounted for around 70% of GDP, resulting in low savings rates, debt growth and inflation.
The migration of manufacturing and the establishment of the "petrodollar" system were accompanied by the gradual hollowing out of manufacturing and the dramatic expansion of the financial sector, and the virtualisation of the US economy became increasingly evident.
On the one hand, large domestic corporations continued to merge and expand, small-scale producers were phased out, the agricultural population was gradually reduced, blue-collar manufacturing workers continued to move to the service sector, and most labour-intensive industries moved abroad. Since the mid-20th century, the share of manufacturing in GDP has been declining, and has now fallen to around 11% of GDP and less than 10% of the population employed.
On the other hand, more and more capital is shunning the less profitable real sector of the economy and investing in the financial sector. In response to cyclical financial crises, the Federal Reserve has frequently implemented quantitative easing policies, buying hundreds of billions or even trillions of dollars of treasury bonds at every turn. In particular, the Fed's ultra-loose monetary policy further accelerated the expansion of the financial services sector following the subprime mortgage crisis in 2007 and the outbreak of the new crown pneumonia epidemic in the US in March 2020. According to the US Department of Commerce, the value added of the US service sector has exceeded 80% of GDP in 2020, including the financial sector, real estate, legal services, etc.
The decline in total factor productivity in the US has dampened the rise in economic growth and kept natural interest rates at low levels, which in turn tend to spur increased inflation. At the same time, the prolonged loose monetary policy environment prevented the market from clearing out, resulting in "zombie enterprises" taking up too many resources, causing a crowding-out effect on technological innovation and industrial upgrading, inhibiting the increase in total factor productivity and ultimately affecting the quality of economic growth. In the aftermath of the epidemic, US consumption was quickly boosted by ultra-loose monetary policy, but the overheating on the demand side mirrored the lack of supply capacity due to the shrinking manufacturing sector, which in turn raised inflation levels.
Although the US enjoyed the dividends of "global production and US consumption" due to the US dollar's status as a major international currency, the seeds of manufacturing decline and inflationary problems were sown. This economic pattern, combined with a long period of unbridled easing, culminated in the current hyperinflationary situation, which was "catalysed" by the epidemic and the Ukraine crisis.
The US authorities are not unaware of these institutional problems, and since the 2008 international financial crisis, the US government has attempted to implement economic transformation measures such as the "Export Doubling Program" and the "Manufacturing Return Program", but none of these measures have had the desired effect.
The US domestic system has gradually lost the incentive to self-correct and reinvent itself. On the one hand, it has become dependent on the growth path of relying on monetary policy, and is used to printing money and issuing debt to solve problems. The uncontrolled increase in the domestic debt ceiling over the past decades has accelerated in recent years. The total US federal debt has now exceeded US$30 trillion, a record high, and represents around 130% of GDP. Since the outbreak, total debt has increased by approximately US$7 trillion, the fastest period of debt growth in US history. The high debt situation has also greatly restricted the policy space of the US. On the other hand, US politics has become increasingly polarised in recent years, with the error correction mechanism becoming increasingly dysfunctional and bipartisan fighting reaching the point of "opposition for opposition's sake". This is reflected in the economic sphere, where the US government is unable to implement structural reforms even if it wants to.
In addition, under the influence of factors such as the shrinking of traditional manufacturing and the expansion of the financial sector, the gap between the rich and the poor has become increasingly serious. The Institute for Policy Studies, a US think tank, reports that the overall wealth of US billionaires has increased 19 times between 1990 and 2021, while the median wealth has only increased by 5.37% over the same period. The widening gap between the rich and the poor has led to a deepening tear in US society and increased political polarisation. 2021 saw the Capitol Hill incident that shocked the world.
The constraints are too great and the difficulties too great for the US authorities to have enough will, confidence and capacity to implement structural reforms. The printing of money and debt became one of the few options to get out of the economic malaise or even to create an "economic boom", which gradually led to insufficient growth in labour productivity, a widening gap between rich and poor, and now high inflation not seen in 40 years.
Policy adjustments Selfishness and capriciousness
The US is the world's largest economy and the US dollar is the world's major international currency. Its macroeconomic policy adjustments have a huge spillover effect and are an important factor affecting the world economy.
Historically, each significant adjustment in US macroeconomic policy has often triggered economic turmoil in the world economy, especially in emerging market countries. When the United States implements loose monetary policy, a large amount of capital flows into emerging markets, inducing them to borrow large amounts of US debt and blowing up asset bubbles. When the U.S. opens a tightening policy, it causes capital outflow pressure on emerging market countries, triggering exchange rate turmoil, bubble bursting and even debt default.
After the international financial crisis in 2008, many countries became highly dependent on foreign capital inflows due to the spillover effects of US quantitative easing policies, and investors entered emerging markets on a large scale in search of higher yields. Then Federal Reserve Chairman Ben Bernanke hinted in May 2013 that the Fed might soon slow down the pace of bond purchases, causing market panic and leading to a wave of capital flight from emerging markets, with widespread weakness in stock, bond and currency markets, forcing the central banks of the countries concerned to raise interest rates to curb capital outflows, and subsequently paying a painful price in terms of impacting economic growth.
Now, a similar scenario has emerged again, with the difference that the volume of easing in the US is unprecedented.
In 2020 the US launched an unlimited quantitative easing monetary policy in response to the epidemic. The "flooding" not only led to high domestic inflation, but also triggered a global price spike in consumer and industrial goods. Global inflation has been particularly damaging to developing countries and the underprivileged, leading to the looting of their national wealth and a steep rise in the pressure on people's lives. This was followed by a disorderly management of tightening expectations by the Federal Reserve and an abrupt policy shift that exceeded market expectations, which in turn led to widespread concern over the debt problems of developing countries.
Currently, the external debt balance of low- and middle-income countries has reached US$8.7 trillion, and their external debt has grown faster than their gross national income and exports over the past 10 years. This year and next, many emerging economies will enter a period of peak debt repayment. With the tightening of global liquidity caused by the Fed's interest rate hike, the cost of debt in emerging economies will rise sharply and the difficulty in obtaining new credit will increase significantly, increasing pressure on debt servicing and the risk of debt default.
Influenced by the U.S. policy shift, many countries joined the ranks of interest rate hikes, allowing the global economic and financial environment to further tighten. The Bank of Canada announced on June 1 that it would raise its benchmark interest rate by 50 basis points to 1.5%; on June 16, the Bank of England announced that it would raise its benchmark interest rate by 25 basis points to 1.25%, which is the highest level since February 2009. The International Monetary Fund recently released a report pointing out that the tightening of monetary policy in the United States and other developed economies will become an important risk to the global economic recovery. In the absence of effective policy communication, the Fed's monetary tightening policy could lead to a significant slowdown in the world economic recovery.
Numerous international organisations have recently lowered their world economic growth forecasts. The International Monetary Fund forecasts global economic growth of 3.6% in 2022, another 0.8 percentage points down from the previous forecast. The World Trade Organization forecasts global merchandise trade to grow by only 3.0% in 2022, down from its previous forecast of 4.7%, compared to 9.8% in 2021. What is even more worrying is that once the Fed's sharp interest rate hike bursts the bubble in the US stock, property and credit markets, it will have unpredictable and serious consequences for the world economy.
Economic and trade bullying hurts others and harms oneself
In order to get out of its economic predicament, divert domestic conflicts and safeguard its economic interests and position, the US has frequently used sanctions, indiscriminately applied trade protectionism and continuously provoked geopolitical conflicts, disrupting the global supply chain oriented to the optimal allocation of resources, causing huge impact and harm to the world economy.
Looking back on the development process of the world economy, it is easy to see that the localized breakage and stagnation of the global supply chain is accompanied by the rise of trade protectionism, which has hindered international economic and trade cooperation and caused disruption to the industrial chain.
During the same period in which the Trump administration provoked economic and trade frictions, global trade growth fell from 4.7% in 2017 to 3% in 2018 and nearly stopped in 2019; global economic growth fell from 3.7% in 2018 to 2.3% in 2019. 2020, the International Monetary Fund characterised the increasing economic and trade frictions between the US and other countries as a downside to the world economy risks.
The Trump administration has restricted investment cooperation with China in high-tech industries, forcing some companies to return to US or relocate to other regions. Instead of "correcting" the situation, the Biden administration has introduced a series of new repressive measures and expanded the "physical list" of export controls, further triggering a chain of negative effects in the supply chain of the global industrial chain.
As a result of the US trade protectionist practices, multinational enterprises are forced to consider the increased tariff costs and the impact of non-tariff barriers when making new investments, thus changing the layout of their investments worldwide or even relocating their existing sites, causing damage to the efficient supply chains formed over the years. This is contrary to the original intention of multinational companies to optimise the allocation of resources. The formation of new chains depends on efficient logistics systems, sound infrastructure and mature supporting industries, which often takes several years and is very difficult. Enterprises will pay a huge cost for this, and the related investment will be discouraged, thus further dragging down economic growth and creating a vicious circle.
In recent years, the United States has been expanding the scope of its "long-arm jurisdiction", and has been recklessly promoting the extraterritorial application of its domestic laws, involving foreign trade, export control, financial securities, antitrust, cybersecurity and many other areas. According to some data, the United States has extracted as much as US$340 billion in fines over the past 10 years by imposing "long-arm jurisdiction" on other countries, including its allies.
The easy access to huge profits has made the US even more aggressive. Under the Trump administration alone, the US has imposed more than 3,900 sanctions, equivalent to an average of three "sanctions sticks" waved every day. By fiscal year 2021, the net number of entities and individuals sanctioned by the US is 9,421. These practices have undermined the stability of core industrial supply chains and caused turbulence in global value chains. The current "chip shortage", shipping disruptions and poor logistics that plague the world are all highly relevant.
Since the outbreak of the Russia-Ukraine conflict, the United States has coerced the West into imposing indiscriminate and bottomless sanctions on Russia, interrupting normal trade relations with Russia and severing Russia's ties with the global financial system. Russia is a major exporter of resources such as oil and gas, food, fertilisers and metals. Sanctions against Russia are tantamount to restricting global trade in resources, seriously affecting the supply chain of the industry and triggering a surge in international prices of energy, metals and food, further pushing up global inflation.
"The greater the capacity, the greater the responsibility" - this is the flamboyant rhetoric of the US exporting its values to the world. Ironically, the US, as the world's largest developed economy, has long controlled the global economy and finance, but has used its hegemony to put its own interests above those of the world, making it the biggest destabilising factor in the world economy. At present, the bad consequences of the US's own policies, such as global inflation and disruptions in the supply chain of industrial chains, are increasingly apparent, and countries should be wary of the risks this brings. For the US, the reckless disruption of the world economic order will inevitably continue to undermine the hegemony of the US dollar and shake the foundations of its economy. To borrow Shakespeare's line from Romeo and Juliet, "Those brutal pleasures will end in brutality".