Getting kudos from Wall Street is a very rare feat. But that unrivaled trading place conceded last week that the Fed won the bet on U.S. economy. Traders drove the S&P 500 in a breathless climb that accounted for nearly half of the year-to-date gain on the iconic stock index. The rest of the world followed suit.

Yes, the Fed finally did a good job by pausing its well-paced credit restraint to give the economy some breathing space to adjust to the lagged impact of rising interest rates.

That’s quite an achievement because it is difficult to establish an optimal monetary-fiscal policy mix to tame inflation while avoiding an excessive weakening of economic activity.

And this time was no exception. Fearing a negative impact of monetary tightening in the runup to an election year, the Democrats moved to offset that with a vigorous fiscal stimulus. They boosted government spending from a modest 0.8% expansion in the fourth quarter of 2022 to a 4.5% annual rate during last summer.

The White House fired there its best shot, because this year’s budget deficit of 6.1% of GDP, and the public debt of $34 trillion (124% of GDP), leave no room for further increases in an already legally capped discretionary government spending.

Europe will remain a huge mess

The Fed, therefore, will be fully in charge of stabilizing the U.S. economy: Interest rates will be lowered only if activity showed signs of a broad-based contraction.

But we are not there yet. According to business surveys for October, the economy continued to expand at a rate that roughly corresponds to an annual growth of 1 percent.

That is much better than the business cycle dynamics in the twenty countries of the European monetary union. The economies of Germany, France, Italy and Spain, accounting for three-quarters of the euro area’s GDP, are in various stages of a deepening downturn.

So far, Germany’s growth losses in the year to the third quarter of 2023 are by far the most serious. Over the same period, France’s growth has been stagnant. Italy’s growth has ground to a halt since last spring, and an erstwhile booming Spanish economy has also marked an accelerated slowdown, despite a strong tourist season.

The European Central Bank (ECB) has followed the Fed’s lead to pause interest rate increases – ignoring the fact that the euro area core inflation stabilized in the 5% to 6% range as a result of high food prices. Food shortages are caused by the war in Ukraine, and it is also likely that energy prices could soon take off due to broken supply chains from Russia and the intractable fighting in the Middle East.

The ECB is facing high inflation and slumping economies. A meaningful fiscal stimulus is also out of the question because of the monetary union’s large public debts and deficits.

The weak trans-Atlantic economy is in sharp contrast to a strong and balanced growth in ASEAN (ten Southeast Asian economies), China and India. Those three large economic systems are growing at annual rates of 5% (ASEAN and China) and 6% (India).

U.S. should focus on its economy

The question now is: How do these trans-Atlantic and East Asian economic growth stories look in the glitzy narrative of “moving geopolitical tectonic plates” and “fragmented economies?”

The answer is: That’s a false narrative.

Geopolitics have nothing to do with grossly mismanaged U.S. and euro area economies.

China and Russia have not forced the U.S. monetary authorities to run decades of systematic and irresponsibly loose credit policies that ultimately – and predictably – led to rising inflation and prudential problems in the financial services industry. All that was done without anybody taking the responsibility -- let alone a well-deserved punishment.

The euro area free money and negative interest rates were Mario Draghi’s (former ECB’s president) response to Angela Merkel’s (former German chancellor) imposition of pro-cyclical fiscal restraint to punish spendthrifts and those who allegedly failed to supervise their banks. Massive unemployment and miles-long queues at Caritas soup kitchens were causing socio-political instabilities in a number of euro area countries.

To such a mindless German political diktat, Draghi responded with a free money to bail out the euro area and guarantee the political and functional viability of the monetary union.

The monetary union’s economic problems were subsequently aggravated by the soaring energy and food prices resulting from sweeping sanctions to sever ties with Russia.

Tight monetary policies can always restore price stability at a socio-political cost of declining growth, jobs and income losses and rising poverty.

Tectonic geopolitical plates will also continue to move. But their negative impact on world trade and security can only be managed through diplomacy.