Leconomy was once called “gloomy science”, a qualifier that 2023 will certainly prove right. We are indeed at the mercy of two cataclysms that are purely and simply beyond our control.
First, the Covid-19 pandemic continues to threaten us through its new, deadlier, more contagious or more vaccine-resistant variants. The outbreak has been particularly mishandled by China, primarily because the country has failed to administer more effective (Western-made) mRNA vaccines to its citizens.
The second cataclysm is Russia’s war of aggression in Ukraine. This conflict does not suggest any outcome, and presents a risk of escalation or even more significant ripple effects. Either way, more disruptions in energy and food prices are to be expected. And as if these problems were not serious enough, everything suggests that the response of political leaders will transform a serious situation into an even more catastrophic situation.
For example, the US Federal Reserve may push interest rates too far and too quickly. The current inflation is mainly the consequence of shortages of supply already in the process of being resolved for some. Raising interest rates even further could therefore be counterproductive. This will not produce more food or oil and gas, but will make it more difficult to mobilize investments that can specifically contribute to alleviating supply shortages.
Fertile ground for populists
Monetary tightening is also likely to lead to a global slowdown. Some commentators, convinced that the fight against inflation requires economic pain, readily expect a recession. The faster and more violent it is, the better, they say, not seeming to think about the risk that the cure will prove to be worse than the disease. If a stronger dollar certainly moderates inflation in the United States, it is because it weakens other currencies, and it worsens inflation elsewhere. To mitigate these exchange rate effects, other countries, even the most fragile ones, are forced to raise interest rates, which further weakens their economy. Higher interest rates, depreciated currencies and a global slowdown are already pushing dozens of countries to the brink of default.
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