2022 – We are facing a global economic crisis. And no one knows what to do about it | Philip Inman

As recently as February, many investors were betting that the massing of Russian troops on the Ukrainian border was nothing more than a sophisticated hoax.

Russian and Ukrainian currencies surged as hedge funds and private equity firms signaled confidence in some form of peace deal, confidently buying the Ukrainian ruble and hryvnia.

Today, a war is underway which has virtually shut down raw materials and foodstuffs that are normally exported by both countries, and no one knows when the conflict will end.

The collapse of global stock markets and the decline in cryptocurrency values ​​show that investors are panicking amidst the uncertainty. Stocks in the US, where the S&P 500 has fallen by nearly a quarter since January, had their worst start to the year in 60 years.

We’ve seen panic before, particularly after the crash of 2008. Investment firms, despite their reputations as savvy custodians of pension funds, always hit the sell button at the first sign of trouble. Combined, this results in a router.

Seasoned politicians know how to act in such turbulent times, and that means doing everything possible to reassure investors that their money is safe. Western governments relied on their reserves, and when that money dried up, they borrowed heavily to maintain a stable outlook for their economies. Important support has arrived in the form of credit facilitation from central banks. With low interest rates acting like the cavalry of a John Wayne movie, everyone can rest assured that the panic won’t last long.

No longer. This time it’s a real war, not just a financial war, and no one knows exactly what to do. The major powers cannot agree on how to fight it, and policymakers cannot agree on how to deal with the fallout, particularly with shortages of raw materials and food from Ukraine and Russia driving up 10% inflation and further drift.

Central banks in particular have lost their nerve. Rather than being a reassuring presence, they amplify the sense of panic by increasing the cost of borrowing. As one analyst commented on the Fed’s decision to raise interest rates by 0.75 percentage points last week, “The Fed will raise rates until policymakers break inflation, but the risk is that they will too.”

On Thursday, the Bank of England raised interest rates to 1.25% after never exceeding 0.75% in more than a decade. Some analysts believe interest rates will rise to 3% by the end of next year after Threadneedle Street prioritizes fighting inflation over continued growth.

We know that the increases in borrowing costs in the UK, the Eurozone and the US, which we are seeing now, will not drive prices down.

Inflation is a scourge caused by Russia’s invasion of Ukraine and, to a lesser but significant degree, China’s difficulties with Covid after its vaccine development failed, resulting in frequent shutdowns and port raids. In the UK, Brexit adds another big development as it has affected trade and reduced the number of workers available.

So the justification for rising interest rates must lie elsewhere, and central banks justifying their twitches by saying that they must avoid the wage spiral — the wage spiral in which wages exceed inflation.

In the UK, this argument assumes that in order to prevent a decline in personal living standards, the average worker will be able to negotiate a wage deal that exceeds the Bank of England’s latest forecast of peak inflation of 11% later this year.

If the government is expected to limit public sector wage increases to between 0% and 3% this year, this means that increases in the private sector should be higher – around 12% or 13% on average. These salary increases are nothing but a fantasy. The power of workers, with the exception of some separate areas of the labor market, is a mirage.

However, the bank seems to be moving forward anyway, leading everyone to look for reasons to stay confident and switch to Rishi Sunak.

The advisor made it clear that he prioritizes financial integrity over open commitments needed to foster trust. He has warm words to investors about low corporate taxes, special visas for foreign entrepreneurs and a revived Thatcher plan to increase the workforce by forcing more welfare recipients to find work.

It is a flimsy set of precise guidelines that will do little to improve sentiment among companies looking to invest in the UK. No wonder the pound has fallen. Few investors want to buy Brits now, and who can blame them?

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