The situation has been deteriorating as the US Federal Reserve and central banks across the globe have been raising interest rates to offset the record high inflation levels that have set in the US, the European Union and other countries amid events such as the COVID-19 pandemic and Russia's special military operation in Ukraine.
To fight inflation, the Fed has raised interest rates by 300 points this year, from an original base of just 25 points in February. The head of the US central banking system, Jerome Powell, said last week that US rate hikes would have some way to go before the Fed considers a pause or reduction, with the likelihood of another 125 basis points being added before the end of the year.
This does not bode well for the bond market, which is already on its way to its worst year since 1949, according to Bank of America estimates. Earlier in the week, media reported that the yield on 10-year US Treasury notes, which is inverse to their price, reached its highest point since April 2010, while the yield on 2-year US Treasury notes rose to its highest level since August 2007.
Meanwhile, the yield on the United Kingdom's five-year government bonds has risen to its highest level since 2008 after UK Chancellor of the Exchequer Kwasi Kwarteng unveiled a new 60-billion-pound growth plan to support the country's economy amid the rising cost of living. A similar situation is playing out with eurozone government bond yields, which have spiked to multi-year heights as well.
"My feeling is that, much as the Federal Reserve missed the boat on inflation, they are now missing signals showing that the economy is already slowing down rapidly and that further rate increases (which they seem determined to implement) will cause a very serious recession in America," Marshall Auerback, a research associate at the Levy Economics Institute of Bard College, said.
The expert also took issue with the Fed's projection of 1.2% growth for next year, saying that it would require the country's unemployment to stop in its tracks at 4.4%, which does not happen per the historical record, as well as a productivity boom. He noted that productivity growth has been lackluster since the Great Recession and particularly bad in the first eight months of this year.
"The US economy has traced out an eight-month period of something a little worse than apparent stagnation with turbulence. The historical record says that with further tightening of financial conditions, it will be followed by a waterfall recession that could be among the few most severe and protracted recessions in the postwar period," Auerback continued.
The researcher noted that inflation is eroding the real value of bonds while the rising nominal rates are inflicting capital losses. He went on to predict the widening of credit spreads and debt defaults, suggesting the Fed could lessen the damage by abandoning its restrictive policies. However, the US central banking authority is unlikely to make that move, in his opinion.
"The Fed Heads will have strutted about with so much hawkish machismo they will be blamed for a possibly protracted and severe recession that wasn’t needed. They will have made a second major policy error in less than two years," Auerback stated, warning that "society might decide that it cannot let a dozen clowns who created an inflation and then killed the economy, all in two years, run the US economy."
Randall Germain, a professor of political science at the Ottawa-based Carleton University, suggested that the steep and sudden interest rate hikes by central banks in North America and Europe as well as the economic effects of the Ukrainian crisis will result in a period of high volatility for the global economy.
"This will almost certainly involve a recession in Europe and North America, combined with financial and currency market turmoil. I think there will be much economic harm coming our way," Germain said.
Effect on Russia
With a major recession looming on the horizon, one question is how will it affect Russia, which has been largely cut off from the global financial system as well as multiple parts of the world economy in the wake of the conflict in Ukraine.
Auerback suspects that a global recession is on the cards and it will "certainly hurt Europe as will the continued war in Ukraine, which is hurting the EU more than it is hurting Russia at this juncture." He then suggested that with western businesses having abandoned Russia, the country would have its market left to domestic companies and would receive investments from major Russian business people transferring their funds from abroad.
"As a result, I think that, yes, Russia will be less affected than the rest of the world, especially as Russia now has China behind it. A Russia-China combination will prove to be a formidable competitor to confront and withstand US hegemony," the expert concluded.
A similar opinion was offered by author and social critic James Howard Kunstler, who suggested that Russia had been given "much inspiration" for developing an import replacement policy while "each new load of sanctions pushes her deeper toward an economy independent of foreign bullying."
Germain, on the other hand, is less optimistic about Russia's prospects, saying that even if Russia does escape the turmoil, it is hampered by other factors such as the economic shift to supporting the country's military aims, to the detriment of other parts of the economy, as well as economic isolation and the labor drain.
"These will all harm Russia’s economy for the foreseeable future, regardless of turmoil in world financial markets. There is no silver lining for Russia in the current global economic outlook," he stated.