The US’s selfish war on inflation will tip the world into recession

Phillip Inman in The Guardian


As the Fed raises interest rates, dollar-denominated loans become an unsustainable burden to states around the globe

The Federal Reserve is planning a second interest rate rise in a year this month. Photograph: Chris Wattie/Reuters 


Later in July US interest rates are expected to jump for a second time this year, and that’s going to wreck any chance of a global recovery.

The Federal Reserve could push its base rate up by as much as a full percentage point, ending 15 years of ultra-cheap money, intended to promote growth.

This jump, to a range of 2.5%-2.75%, would take the cost of borrowing money in the US to more than double the Bank of England’s 1.25%. And yet the Fed could just be taking a breather as it contemplates even higher rates.

This column, though, is not about the US. It is concerned with the terrible impact on Britain and countries across the world of America’s selfish disregard when it decides to tackle high inflation with higher borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation until it is “defeated”, come what may.

Higher interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their own currency and buy dollars, sending the price of dollars rocketing higher.

In July the US dollar increased in value against a basket of six major currencies to a 20-year high. The euro has slipped below parity with the dollar in the last few days. The pound, which has plunged by more than 10% this year to below $1.20, is losing value with every week that passes.

In Japan, the central bank has come under huge pressure to act after the yen tumbled to its lowest level against the dollar since 1998.

There are two important knock-on effects for those of us that live and work outside the US.

The first is that goods and raw material priced in dollars are much more expensive. And most commodities are priced in dollars, including oil.

Borrowing in dollars also becomes more expensive. And while getting a loan from a US bank is beyond the average British household, companies do it all the time, and especially those in emerging economies, where funds in their backyard can be in short supply.

The Bank of England interest-rate setter Catherine Mann recently said that her main motivation for wanting significant increases in the UK’s lending rates was her fear that the widening gap with the dollar was pushing up import prices. And higher import prices meant higher inflation.

If only she could persuade her colleagues on the Bank’s monetary policy committee that the devaluation of the pound was a serious issue, maybe they would push up the Bank’s base rate in line with the Fed rate increases. After the Fed makes its move, more may join her.

Until January this year, Britain’s inflation surge was on course to be short-lived. Now it seems the Russian invasion of Ukraine and a splurge of untargeted handouts by the Biden administration during the pandemic, which have served to push up prices in America, will keep inflation in the UK high into next year. 

Those governments that have borrowed in dollars face a double whammy. Not only will they need to raise domestic interest rates to limit the impact of import price rises, they will also face a massive jump in interest payments on their dollar borrowings.

Emerging markets and many developing-world countries will be broke when these extra costs are combined with a loss of tourism from the Covid pandemic. Sri Lanka has already gone bust and many more could follow.

For the past three decades, western banks have marketed low-cost loans across the developing world as a route to financial freedom.

Zambia’s government borrowed heavily before the pandemic to become self-sufficient in electricity. It is a laudable aim, but has left the central African state with a ratio of debt to national income (GDP) much the same as France’s – about 110%.

The problem for Zambia is not the same as for France, which pays an interest rate of 1.8% to finance its debts, measured by the yield on its 10-year bonds. The Zambian 10-year bond commands a rate of 27%. Now Zambia, like France and so many other countries, must borrow simply to live. To invest is to borrow more.

There is no sign that the US will change course. Joe Biden is in a panic about the midterm elections, when fears of spiralling inflation could favour the Republicans. This panic has spilled over to the Fed, which has adopted hysterical language to persuade consumers and businesses that higher rates are coming down the track and to curb their spending accordingly.

The Fed knows inflation is a problem born of insufficient supply that only governments can tackle. But that doesn’t look like stopping it from pushing the US economy, and everyone else’s, into recession.

I'm glad to see David Davis 'still hasn't looked into' the economic impact of Brexit

Mark Steel in The Independent

Some people are concerned we aren’t prepared for this Brexit situation, so it was heartening to hear Minister David Davis explain what happens if we don’t manage a deal with the EU, by saying he “hadn’t looked into it yet.”

This shows a steady hand, rather than someone who rushes into things by looking into stuff within the first nine months of a job specifically created to look into exactly that stuff. What’s achieved by panicking like that? Because Davis is only Minister for Brexit. How is he supposed to find out anything about Brexit, on top of all the other things in his title?  

The government should create other specific posts to try and match Davis. They could create a Minister for Desiccated Coconut, so that after nine months they can say: “I won’t lie, I haven’t given a passing thought to desiccated coconut.” At least campaigners for  leaving the EU were honest. Before the referendum, supporters of the Leave campaign like Davis always explained that if we left, they didn’t have the slightest idea what would happen, and even came up with the slogan “nine months after the result we’ll confirm we haven’t looked into it”, which as I recall they put on the side of a bus.

Theresa May has insisted that “no deal is better than a bad deal”, which introduced a philosophical edge to Brexit. Because how can anyone know whether it will be better or worse if we haven’t yet looked into it? It’s like saying you have no idea what’s on the other side of the universe, but whatever it is, it’s better than a donkey.

But Davis went even further, explaining: “You don’t need pieces of paper with a number on it to make an economic assessment.” Of course not, an economic assessment isn’t about numbers. When you apply for a mortgage, the bank asks how much you earn, and you say “a bit”, then the bank manager has a think and says: “In that case you’re allowed to borrow a yellowish amount, that reminds you of the sea.” So you ask: “How much will I have to pay back every month?” and they say: “Come back in nine months, by which time I won’t have looked into it yet.”

Asked whether British citizens will continue, after Brexit, to get free healthcare in the EU, Davis said they probably wouldn’t, but added reassuringly: “I have not looked at that one.”

There’s a man on top of his brief. Anyone can be clueless on the general direction of Brexit, but it takes dedication to be even more vague on each specific detail.

Hopefully the foreign health authorities will adopt the same attitude, and when a British citizen arrives at a Spanish hospital with appendicitis, they’re met by an appendicitis doctor who tells them to wait nine months, then they’ll be given a letter saying: “Do you know, I haven’t got the slightest clue about appendixes.”





Davis agreed that UK producers of dairy and meat will face tariffs of up to 40 per cent, conceding: “The numbers in agriculture are high.” It’s a shame he let his side down there, because acknowledging “high” is a bit too specific. Ideally he’d have answered the question by saying: “How long’s a piece of string, mate? I tell you what I do know about meat, I’ve got a lovely recipe for a liver casserole. The ingredients are a chunk of liver, an unspecified volume of stock and in indeterminate degree of vegetables. I won’t give you a piece of paper with exact numbers as that spoils a recipe.”

Asked how Brexit is likely to affect the border between Northern Ireland and the South, he explained it will be “light, not hard”. That was as much detail as he gave, so I expect he means the customs officers will always wear gloves before they put their fingers up your bottom.

This shows the problem Hammond made with his Budget, he gave out exact numbers. He should have said: “The borrowing requirements for the coming year as predicted by the Office of Budget Responsibility are a bit salty and not as soggy as you might think. To this end, National Insurance contributions for the self-employed will be curlier than they have been, and taste of cucumber.” Then he wouldn’t have had to change his mind and look an idiot.

But Davis was impressively consistent. Asked: “Would financial services lose passporting rights to trade in the EU?” he replied: “I expect so, that’s an area of uncertainty.”

Hilary Benn, who was asking the questions on behalf of a parliamentary committee, nodded, which shows how aloof he’s become. Because anyone normal would have gone: “Oh that’s the one area of uncertainty is it? That’s one small zone of ambiguity amidst a sea of poxy certainty with your definite super-accurate answers such as 'oh blimey I haven’t the foggiest idea' is it, Mister David 'Atomic Clock' Davis?”

The committee could have asked if he was a man or a woman, and he’d have said: “In these days of binary non-specific gender types it’s not easy to say, especially as I haven’t looked into it yet.”

You can understand how he was caught on the hop, because the campaign for Britain to leave the EU has only been going on for around 40 years, so they’ve hardly had a moment to consider what to do if they got their way.

But it brings politicians nearer to the common person, because Davis sounded like any random passer-by on a vox-pop for local news. When he finally presents the final treaty, it will just say: “Blimey, phhhh, dear oh dear, there’s all sorts to think about isn’t there? Does anyone know anything about olive oil?”