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**SEPTEMBER 19, 2022**
Kuttner on TAP
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**** A Global Recession Induced by Central Bankers
Tight money spreads from Washington to Frankfurt to the Global South,
needlessly increasing hardship.
A dangerous contagion is spreading from the U.S. Federal Reserve to the
European Central Bank and the rest of the world. The Fed has been
raising interest rates, three-quarters of a point at a time. It is
likely to do so again at the next meeting of the Federal Open Market
Committee on Tuesday and Wednesday.
All this depresses economic activity, which is precisely the Fed's
intention. As an even more dangerous side effect, the higher U.S. rates
have pushed the dollar to its highest exchange value against other
currencies in decades, as investors move their money into dollar assets.
This, in turn, has a domino effect. On September 8, the European Central
Bank raised euro interest rates by three quarters of a point, to protect
the value of the euro, which had fallen to a bit less than a dollar. It
didn't work. The euro rallied for a few days and then settled back
down to right around a dollar.
The rate hikes will damage the U.S. economy, but will do even more to
harm the European economy, which is in worse shape to begin with.
Unemployment is above 6 percent compared to under 4 percent in the U.S.,
and Europe faces a crisis of rising energy costs and fuel shortages.
Even more than in the U.S., Europe is not facing a general inflation
that would justify rate hikes, but rather price increases concentrated
on one sector due to Putin's natural gas boycott. The ECB policy makes
no economic sense.
Europe has been struggling to fashion a common energy policy. A
recession will make this even more costly and difficult. There are huge
gaps between the prosperous EU member nations, such as Germany, where
unemployment is below 3 percent, and poorer member nations such as
Italy, Greece, and Spain. Recession will also help the European far
right.
And if rate hikes by the central banks of the two largest economies are
perverse domestically, they are even worse for the rest of the world. A
stronger dollar is the flip side of weaker Third World currencies. So
poor countries end up paying more for their imports. Thus does the U.S.
export its inflation to the Global South.
Countries with debt denominated in dollars face higher interest costs on
their debt, and the principal amount of the debt also increases. The
Wall Street Journal
reports that 32 countries have a total of $83 billion in dollar debt
coming due next year. As they have to spend more to pay off or refinance
that debt, they spend less on health, education, and public services.
Last Thursday, the World Bank warned of "a string of financial crises
in emerging market and developing economies that would do them lasting
harm."
Central bankers are supposed to be looking out for the economy as a
whole. But at the end of the day, they have the mentality of bankers,
protecting creditors. The project of democratizing central banking is a
never-ending challenge.
~ ROBERT KUTTNER
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