Financial markets are being drawn into an intensifying whirlwind of information warfare with Russia and China.
The alleged Sino-Russian “aggression” against the Western world order has not caused a sharply accelerating U.S. inflation with the exploding public debt and budget deficits.
But that’s what the mainstream media are now peddling to “explain” America’s rising interest rates and tumbling asset values.
The fact that the ongoing civil war in Ukraine had no part in the U.S. inflation soaring to 7.5% is simply ignored. Yes, because the story just nicely fits an attention-grabbing headline – as was the case with the “news” that Russian troops had invaded Ukraine, or that the war in that region would start on February 16.
So far, that new interpretation of economic events in the U.S. has not had any perceptible impact on the monetary policy. The Federal Reserve (the Fed) has eased up on its credit creation, allowing the short-term interest rates to hit 0.34% last Friday, and the yield on the Treasury’s benchmark ten year note to rise to 1.94%.
It remains to be seen how the Fed’s policy will play out in the months ahead, but an intense – and unfounded – speculation of a war in Ukraine is already swirling around to urge a prudent, go slow, process of interest rate increases.
Huge political interests are at stake
That is an inept political call. Negative real interest rates of -7.16% to -5.26% along the entire yield curve indicate that the U.S. credit tightening has a very long way to go to stop and reverse the accelerating cost and price increases.
But that’s not the issue. The main concern for politicians and the media is that the Fed’s decision to restore price stability would blow up a huge stock market bubble and do a great damage to Biden Administration in next November’s mid-term Congressional elections. Losing the control of the legislative power in the run-up to 2024 presidential elections would then be a calamity of major proportions for the Democratic Party.
So, the order of the day is not to blame the mismanagement of monetary, fiscal and trade policies for rising inflation and runaway debt and deficits. No, the main culprits should be geopolitical tensions raised by a reckless autocratic (Russian and Chinese) challenge to the rules-based democratic world order.
America’s European allies like France and Germany don’t go that far.
The French finance minister, for example, clearly states that it is not in his country’s economic interests to follow America’s hostile policies toward Russia and China, and to openly advocate an armed conflict in Ukraine.
Germany is even more reticent about political and military tensions with Russia -- a country that is an important trade partner and the main energy supplier. Berlin is particularly concerned about U.S. threats to the Nord Stream 2 gas pipeline. German businesses are actively promoting trade, investments and unimpeded access to Russia’s energy sources.
U.S. has nothing to gain from rising tensions
All that suggests that tensions within the trans-Atlantic community will become more difficult to manage in the months ahead.
Russia’s existential security concerns have been brushed aside by the U.S. and the NATO military alliance with simple “let’s keep talking” propositions. Moscow has rejected that, announcing that it will soon take political and military steps to defend its red lines and restore the security posture prevailing along its western borders in the mid-1990s.
China -- Russia’s strategic partner and the EU’s largest external market -- will also kick in with its powerful trade and investment flows.
Led by Germany, all major European economies want to expand business relations with China. Even Monaco and Malta are beating the path to Beijing’s door.
And then take Poland, Washington’s main and closest EU ally. Warsaw broke the U.S. imposed diplomatic boycott by sending its president to attend the official opening of China’s Winter Olympic Games, because Poland wants to play a key role on Beijing’s 16+1 East European economic and investment forum.
In the Indo-Pacific region, only Australia is ready to join the U.S. and UK AUKUS pact to confront China’s global power projection. Japan is talking up a great anti-Chinese game, but its economy crucially depends on China trade.
All that means that the U.S. will be pretty much alone facing a strong Sino-Russian partnership by trying to work trouble spots like Ukraine and Taiwan.
That, however, is a blind alley. Moscow and Beijing will not go to war with Kiev and Taipei. They will control access to both places and rely on economic and political instruments to get the relationship that is in line with their ethnic, historical and cultural ties.
Using the compliant media to blame Russia and China for tanking U.S. asset markets is a vacuous diversion that should fool no one. Only rising interest rates and a growth recession can tame inflation. And that, inevitably, will take a toll on grossly inflated asset values.