Recession & Stagflation Risks: Not Only US, But Global Economy Heading to Crisis, Scholar Says
18:40 GMT 19.05.2022 (Updated: 15:19 GMT 28.05.2023)
Dow Jones Industrial Average dropped 1,164.52 points, or 3.6%, on 18 May, as investors are becoming increasingly concerned about a looming recession. Meanwhile, big American retailers are reporting huge losses due to surging inflation. Is the US facing a 2008-style crisis?
I don’t think it will be just the US that is affected here", says Tom Luongo, a financial and political commentator. "Between rampant shortages causing price inflation and governments adopting a war footing as it pertains to basic commodities, global trade and finance will contract. It looks to me this will be a global financial crisis more similar to the sovereign debt crisis in Europe which preceded the Second World War, rather than the liquidity crisis of 2008".
Record inflation has hit both the US and Europe this year. US inflation is fluctuating around 8.3% and 8.5%, remaining at 40-year high levels. Meanwhile, it is expected that inflation for the whole European Union will reach 6.8% in 2022; the UK's inflation rate soared to 9%, its highest annual rate since 1982.
The US Federal Reserve and European Central Bank (ECB) have opted for interest rate hikes in order to tame inflation. The ECB's deposit rate currently stands at minus 0.5%, according
to Politico. The European financial institution should raise interest rates three times this year before hitting 1.5 percent or higher in 2023.
For its part, the Fed has raised interest rates by 0.75 percentage points so far in 2022, with its head announcing more aggressive hikes to take mounting inflation under control. In response, financial analysts and business leaders have warned
that the US economy could face a recession as early as next year
. Thus, Wells Fargo CEO Charlie Scharf said on Tuesday there was “no question” that the US is headed for an economic downturn, according to The Wall Street Journal.
However, recession is not the only problem for the US and Europe: soaring inflation coupled with low economic growth create the ideal circumstances for "stagflation".
"Stagflation describes a highly unusual economic state of affairs when the economy is weak or stagnating — with high or rising unemployment — yet inflation is also elevated", Axios explains.
Earlier this week, former Federal Reserve chair Ben Bernanke suggested that the US could be poised for "stagflation"; Bloomberg reported on Thursday that the UK is "on track to be the advanced nations’ stagflation capital"; Germany and much of Europe are now bracing for stagflation, with France already "there", according to CNN.
US Economy Can be Revived, But With Tremendous Amount of Pain
Meanwhile, there are no signs that the Biden administration is going to solve the emerging economic dilemma, according to Luongo.
"The Biden administration is getting everything wrong… but that is, in my opinion, why they were put in charge, to destroy as much of the US’s ability to respond to the current situation as possible, to accelerate the World Economic Forum’s plans for a Great Reset", the commentator says.
Luongo believes that the US managed to avoid global economic collapse in the past thanks to the country's capacity "to spend its way to temporary prosperity".
"The bills from those past binges are not on the US government’s balance sheet and have to be reckoned with", he says. "Biden and the Democrats have pursued policies which have only made the problem worse".
He notes that there are ways to fix the US economy, "but not without a tremendous amount of pain". According to the commentator, the Fed is "starting the process, by raising rates, forcing a global contraction and liquidation of mal-invested capital worldwide".
"This has touched off a big run into the US dollar in the short term, which will cause a recession in the US and a slowdown (and de-dollarisation worldwide)", Luongo emphasises. "But it will decouple the US financial and banking system somewhat from bailing out foreign governments who have been subsidised by profligate US spending. The path starts with the Fed breaking those economies and forcing them into reckoning with their own unsustainable practices – mostly Europe, China to a lesser extent. Then a period of retrenchment and fiscal tightening in the second half of the decade".
When it comes to political pains, it's likely that the Democrats are set to sustain big losses
later this year. Luongo forecasts that "with an aggressive Fed", the Dems should be prepared to lose
between 70-100 seats in the House and five in the Senate.
"That sets the stage for a wholesale political revolution in the US in 2024 along populist lines, as the younger generations take the reins from the octogenarians trying to hold together a political system creaking under the weight of their corruption", the commentator concludes.