Washington is now blaming America’s soaring inflation on rising energy prices caused by the war in Ukraine that started on February 24, 2022.
The mainstream media agree, but Americans know that their large losses of purchasing power over the last twelve months have nothing to do with the Ukrainian disaster.
Over in Europe, the splendors of a Versailles summit last week could not help to patch up the EU’s irreconcilable differences. That solemn occasion was also marred by the region’s exploding energy costs at an annual rate of 85.6%, and a producer price inflation soaring to a record-high 30.6%.
The Europeans have no idea what to do with the raging war and its devastating economic fallout. Their security architecture is crumbling in a darkening economic outlook.
The prospects for the U.S. economy are equally unappealing. With the U.S. consumer price inflation reaching a 40-year peak of 7.9%, the country is now on a course of growth-stifling credit policy to restore the heavily compromised price stability.
That’s the only policy choice left after the White House refused to deal with dramatically shrinking energy supplies by releasing more oil and gas from its brimming energy reserves.
And to make things worse, the U.S. also cut off its energy imports, followed by announcements that politically sensitive gasoline prices will be rising further from their shockingly high $4.40 charged for a gallon (3.8 liters) of gas.
Recessions' heavy political fallout
The way is now clear for interest rate hikes. The increase of 25 basis points is a matter of days -- a non-event because the move has been broadcast with a steady rise of money market rates to a 30%--40% range since early February.
America’s anchored inflation expectations are a thing of the past. That very precious policy asset has been lost for a long time to come. And that’s what always leads to economic recessions when a discredited monetary policy sets out to subdue rising costs and prices.
A particularly difficult aspect of the process that lies ahead is an inflation inertia fed by volatile inflation expectations. That sows a dangerous confusion as inflation continues to overshoot the policy target while the economy has entered an unstoppable decline.
The U.S. recession is a certainty. All the monetary policy can do now is try to influence the amplitude and the duration of an inexorable economic downturn.
The euro area, and the rest of the EU, are part of the same recession scenario. The difference is that the EU’s uncontrollable energy-driven inflation will cause a much greater damage to its demand, output and employment.
The reluctance of the European Central Bank (ECB) to promptly move toward tightening credit conditions is understandable in view of large growth and unemployment differences among its member countries. The ECB also knows that the region has no scope for supportive fiscal policies.
On top of that, the EU has introduced debilitating economic and financial sanctions as a means of managing the war in Ukraine. But sanctions that are meant to “destroy Russia’s economy” will also have a devastating impact on intra-European trade and investments.
EU cannot finance its sanctions policy
The Europeans understand their dire economic outlook. But they seem to think that the raging war in Central Europe will soon end.
Sadly, that’s just another European mirage. The French army’s chief of staff confidently says that there could be a sudden collapse of Ukrainian army, but that, in his view, would only be a transition to an intractable and long-lasting guerilla warfare.
The key point here is that Russia won’t relent until it gets Ukraine (Small Russia) back as part of Great Russia, Belarus (White Russia) included. France and Germany would probably acquiesce, but the U.S., Poland and the Baltic states don’t want to hear that.
What then is the way forward? The U.S. and the EU will not fight for Ukraine. They just want to send arms and money to keep the fight going to the last Ukrainian.
The Europeans are also deeply divided about sharing the burden of their sanctions policy. France, currently chairing a rotating EU presidency, wants another round of floating jointly guaranteed Eurobonds to protect growth from punishing trade and investment limitations.
Predictably, the Dutch, with a German nod, want no part of it. They are telling the French -- who are running a budget deficit and public debt of 10% and 120% of GDP, respectively -- to finance the EU sanctions bravado with their own money.
Note that all this fundamental disagreement is happening well before the cost of sanctions, the cost of a huge refugee crisis and the exploding inflation begin to take a heavy toll on the European growth and employment.
One wonders what will happen then.
Here is a taste of things to come. Germany’s main center-right daily is turning on the government with questions: “Why nobody saw this coming?” and “why are we never prepared to deal with crises?”