Transition to a new world order was never going to be quick, smooth and easy.

Acquired and long-held positions of power and privilege will not be given up without a long, costly and exhausting confrontation.

American bankers see that much better than the Beltway’s political establishment.

Despite toping Wall Street profit expectations and feasting on rising stock market valuations, the country’s leading bankers are warning about an increasingly dangerous global environment and America’s sharply deteriorating public finances.

Both issues are a legitimate concern, even though some Wall Street cheerleaders think that the country is successfully past the eternal inflation-recession conundrum.

That, of course, is an excessive optimism raised by a pause in monetary tightening to assess the impact of an increase in policy interest rate from 0% to 5.5% over the last 22 months.

Be patient with U.S. inflation

Such a time interval is necessary to examine the effect of restrictive monetary policy on interest sensitive GDP components like household consumption, residential and business investments. Taken together, those three sectors account for 86% of U.S. economy.

Predictably, the largest negative impact was seen on residential investments. They fell at an annual rate of 17% during the first half of this year, showing a strong deterioration after a 14% annual decline in the last two quarters of 2022.

Usually, that is bad news for consumer spending on “big ticket” items for home furnishings. That part of household purchases was virtually stagnant in the first half of this year, with a downward trend to follow whenever home sales experience such sharp declines.

Business investment outlays were also week, falling at an annual rate of 4% during the first two quarters. And that decline reflects a less optimistic outlook for the economy, because producers expect that they can meet future sales from existing output capacities.

All that evidence suggests that the restrictive monetary policy since the beginning of last year has had a dampening effect on aggregate demand.

A strong 4.1% increase in government spending in the second quarter of this year is part of the reason why the rising interest rates did not cause a greater activity slowdown.

The fiscal support to aggregate demand also explains why inflation did not decline as much as expected. Indeed, at 3.7% consumer price inflation remains far from a medium-term objective of 2%.

Inflation, however, is a complex problem and requires patience for two major reasons.

First, inflation has an internal inertia of its own. Price increases that were built up in sectors sheltered from aggressive competition – such as services – take a bit more time to respond to declining demand. Second, huge U.S. budget deficits (6.3% of GDP) and the runaway public debt of $33.6 trillion (124% of GDP) leave no room for further increases in fiscal spending. As a result, the depressive impact of monetary policy will be felt much more in the months ahead.

The U.S., Russia and China owe the peace to the world

There is a good bet, therefore, that U.S. interest rates could be cut rather than raised in the coming months.

All that should be good for U.S. asset prices, and the possibility that the economy may go through a relatively short and shallow slowdown – instead of a full-blown recession.

Bankers are apparently working with that scenario, but they – and the U.S. Treasury -- worry that a war in Europe, the huge and growing bloodshed in the Middle East and the ticking time bombs in East Asia present unfathomable risks to the world economy.

Those risks are seen as part of a beckoning new world order – a leap into unknown or, according to inconsolable pessimists, a sleepwalking to the end of humanity.

Too much indeed because Europe’s new security architecture seems to require Russia’s secure western borders, and the U.N. resolutions for the peace in the Middle East call for two independent states of Israel and Palestine.

Those are urgent problems because lives are being lost and entire cities and regions are reduced to rubble.

The East Asian problems – the nukes challenged Korean War armistice of 1953, China’s contested maritime borders and the West’s obsession with China -- could wait a while.

Europe is a mess. The E.U. trading bloc looks like it is falling apart. Internal squabbles, social unrest, clashes with hostile immigrant communities and the devastating Ukrainian proxy war with Russia are taking their toll. The E.U.’s muddling through won’t do anymore.

And neither can the Arab Israeli carnage be tolerated in some of the world’s holiest places.

The U.S., Russia and China have a unique responsibility to work together to stop the bloodshed and lay the foundations for a peaceful global modus vivendi. Close to 7 billion people struggling to make ends meet in the developing world -- and those 800 million that go hungry -- expect no less.