Elevated inflation is expected to persist for longer than envisioned in the world, and vost analysts expect to see a serious financial squeeze in the US, mostly due to concerns with long-lasting inflation. What else can be expected in the period ahead? Professor Mehmet Şişman of Marmara University’s economics department who heads the department’s international economics programme, has shared his analysis of where the world and the US economies are headed at this time of high inflation
Can a dollar squeeze be expected in the US? How will the fallout from Russia’s invasion play out in the medium to long term? How will Fed monetary policy affect the rest of the world? high inflation
The possibility of a cash squeeze in the US is dependent upon the situation with the Consumer Prices Index (CPI), core inflation and emergency of recession conditions.The US inflation rate has been accelerating since 2021, and came in at 8,3 percent in April. The unemployment rate at 3.6 is a historical law, but despite this, they introduced a 50-basis-point hike on 5 May, although they had planned for an increase of 75 basis points. The situation is gaining urgency as the US is currently experiencing the highest rate of inflation in the past 40 years.” The Federal Reserve (Fed) – which will consider the inflation rate and also the unemployment rate – will continue rate increases in a cautious manner over the remaining months of the year. Russia’s incursion into Ukraine and the turmoil this caused in the energy and general commodities markets trigger inflation and at the same time, in one sense, block interest rates from being set at higher levels.
The main causes of the inflation rate are the expansion of the balance sheet of the Fed following the 2008 crisis and stimulant packages announced during the pandemic. Even though the pandemic has subsided, it is not completely. Fed now has to shrink its balance sheet that has ballooned to nearly $9 trillion; otherwise they will face even higher rates of inflation. This is why I believe that they will continue to raise the interest rates in the five meetings scheduled until the end of the year by at least 50 basis points each time. In total, this rounds up to 300 basis points; the total interest rate will be approximately 4 percent. This will not prevent inflation from reaching double digits. Therefore, in order to avoid a recession, a high inflation rate will have to be maintained. high inflation
The war in Ukraine will likely continue for a while. It is not clear whether the markets will find the time to manage the ongoing recession, as stock markets have already registered sharp falls over the past weeks. Shortly the global system will not be able to escape the grip of inflation, as it will try to put off recession. This, in turn, brings about stagflationist conditions to the agenda, at least for a while. Conditions for a financial crisis are ripe in this process, which might accelerate the flow of capital to central capitalist countries. While profitability still remains high in the global south, financial fragility also remains extreme, yet the financial conditions are relatively favorable in the north.
The looming threat of a recession in the US, rising inflation, newly introduced Covid-19 quarantines in China and Russia’s invasion of Ukraine have fueled investor concerns, while global stocks went tumbling down. How does the world economy recover in light of all these developments?
If the distorted proportions in industries do not create a favorable environment for green technologies or investment in new technologies, it is highly likely that there will be shocks and even financial crises in stock and capital markets. In a transitory period where US dominance has weakened, and where China and Russia aren’t dominant enough to be sufficiently effective, the crisis has made it impossible to further increase the exploitation of labor. The economy is in a situation where non-economic factors will strengthen any possibility of a crisis. Actually, it would be a surprise if there were no sharp financial crises during this time. This is possible if capital holders increase investments.
As the inflationary process will stifle investment, we will first see the creation of a new layer of the unemployed and poor to solve inflation. This process, of course, will likely have a profound effect on developing countries and countries of production, such as China. China’s growth rate is expected to come in at around 4 percent in 2022. The overall fallout from this will be understood from the contraction process where the global economy will grow by less than 3 percent. How sharp this contraction will be and how long it will last will depend on the developments in the political compromise. After this, when the problem of ‘inadequate consumption’ and ‘disproportionate investments’ is overcome, the increase in real wages will shape the emergency of a new environment that might allow new opportunities for profitability. Unfortunately though, real wages do not increase without the inflation and unemployment rates going down. At the same time, issues in the global supply chain, geo political impasses and energy prices remain as the top problems that have yet to be solved. high inflation high inflation high inflation
Unlike the Fed, the European Central Bank (ECB) hasn’t shown a clear stance indicating that it will continue to increase the rates. The EU and EuroZone are also about to enter a recession, and the question of how much they can increase interest rates remains unanswered. What is the reason behind this uncertainty?
Although the Eurozone will expand to include Croatia, it still is closer to a deep depression. Germany does not have much of a choice to replace Russian gas, with the exception of some gas exports from Norway and a bit from the US. This is why high energy prices affect all of Europe, especially Germany. The UK is already in recession. Because of this, they won’t be able to raise the rate right away; the inflation rate is close to the US on average in Europe, and unemployment is relatively high. Raising interest rates in the EU may not be on the table until the end of summer, but in autumn, the EU will follow the US and up the rate, because inflation is growing. Structurally, the interest rate hike could push the euro-dollar parity upward again, putting the debt of Portugal, Spain, Italy and Greece at higher fiscal risk. These countries owe about $1,5 trillion in bonds to German and French banks. The debt problem of the Southern European countries may make the situation in the EU hard to get out of. Since the EU also considers this, it is taking steps aimed at technological transformation, making investments in green technologies , computer chips and industry 4.0. If the problems regarding Southern Europe don’t suddenly worsen or increase , the EU will continue and catch up with the developments. Otherwise tendencies to divide within the union might get stronger. I am not sure if the first situation is more favorable for Turkey. However, a crisis in the EU would certainly affect Turkey and vice versa.
Steps taken by the Central Bank of Turkey in terms of its monetary policy decisions have failed to address the inflation rate. Would it still have an effect on the inflation if the Central Bank increased the interest rate after this point? What other steps should the Central Bank take or what instruments should it use to improve the economy of Turkey in a positive way?
The inefficacy of the monetary policies of the CB has grown since August of last year. Academics and economists like myself have issued warnings in this regard. They could have increased the interest rate and responded to the rising inflation trends. If that had been the case, maybe the official inflation rate could have remained below 40 percent. Cutting the interest rate and the increase in the gap between the interest rate and inflation clearly indicates that the government’s preference here is achieving growth through the construction industry and credits. But despite all of this, there won’t be a high level of growth, plus if you also add lower demand to this picture, the risk of recession actually increases. high inflation
These conditions amount to something that the Central Bank cannot overcome by itself. But still, initially monetary tightening policies should be introduced through increasing the interest rate and with this, create an environment for rebuilding currency reserves. Foreign investors still might not pay attention to the interest rate drop. But the summer months are the last opportunity for starting monetary tightening, and if that doesn’t happen, there is no guarantee that there won’t be a financial crisis. Even if no financial crisis arises, the inflation rate will likely hit three-digit figures by October, deepening the problems of society by increasing poverty and depravity. Monetary policy by itself can’t be enough to set things right, new policy instruments should be employed.
Turkey’s 5-year credit default swaps (CDS) hit a level above 700 base points and placed the county in the third place after Argentina and Russia in terms of risk. How can economic indicators improve so as to inspire confidence?
Rising inflation and poverty is the number one problem of our country. This course can be reversed through economic policy. For this, efforts should be conducted first to achieve disinflation and then to improve the unemployment rate and achieve growth. A taxation regulation that will reverse the rise in property prices is called for.
In addition to this, further acceleration of producer prices should be stopped, which can only be possible by bringing the exchange rate to more reasonable levels. March data showing a decline in industrial production means that the low-interest loans that were issued have not gone towards productive investments, and the current accounts deficit is moving back up to its previous levels (the end year current account deficit is expected to come in at 40 billion dollars). This development also shows that the current FX-Protected Deposit model does not work. A policy model change is needed as soon as possible and urgently. In relation to this, since we cannot intervene in the rate increase by the Fed, we are left with no choice but to slow down credit expansion at home.
Domestic demand is relatively more favorable compared to foreign demand, considering the course of higher rates in the US. It is hard to build confidence without pulling the inflation rate down back to around 8 percent – the average rate in most of the developed world. It is difficult to achieve this with the current monetary, foreign trade income policies in place. high inflation
We need to find ways to renew all of this and build reserves again. A Turkey Council of Economists should be formed to design long-term economic policy and strategy discussions. We are currently faced with a problem that is way beyond just a problem of financial input. In the economy the foremost issue is to equalize indicators to the levels of similar countries starting with sustainable levels in agriculture and industry. And a change in model after that is imperative. Neoliberal policies are having an effect that are disrupting social balances. Over the long term, without increasing the interest rate and cutting down on spending, we can’t bring down the inflation rate or rebuild the reserves. In the medium term, increasing revenues to increase production is an urgent issue. In addition to this, the tendency towards a crisis is further negatively impacting confidence in the indicators. Adopting a process to increase real wages should be a priority in order to fight this problem.
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