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A woman walks past a currency exchange office in Moscow, Russia, on March 21. Western countries have imposed an unprecedented level of sanctions on Russia in the wake of its invasion of Ukraine. Photo: EPA-EFE
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley

West’s sanctions war on Russia, China and beyond threatens to trigger an economic catastrophe

  • The global economy can only take so many blows but, right now, it is being hit indiscriminately by trade decoupling, Covid-19, war and sanctions
  • Inflation, supply chain disruptions and soaring prices of essential goods are just a taster of what will come if major powers continue to put security before the economy

First inflation, then stagflation. What next? The answer is fragmentation and disintegration of the global economy accompanied by financial market turmoil and social stress. This is not a case of “Monday morning blues” but a prediction of how things are likely to develop.

When the global economy has been functioning well for a long time in delivering steady (if not always equitable) growth, price stability and low interest rates, it is tempting to think the system can take indiscriminate and unthinking blows yet remain resilient.

Too many hits from different directions, however, will send it reeling and eventually crashing to the floor of the ring from a knockout blow. But this is where the boxing analogy breaks down because there will be no victor in this contest, just a heap of casualties.

We could characterise what’s happening now as “The Great Unwinding” but it might be more appropriate to call it “Back to the Dark Ages”. From an economic perspective at least, the Barbarians are not just at the gate; they are already inside and seizing control of the levers of power.

In Washington, nerve centre of the world’s biggest economy, some reports say that key presidential economic advisers have been “very much sidelined” in debate while those concerned with national security have the president’s ready ear. This shows in terms of policymaking.

Russia may be in open war with Ukraine, and more indirectly with the US and Nato, but the sanctions war that a US-led coalition has launched on Russia and China (with implied threats to strike others that might befriend them) has the potential to become an economic third world war.

A market operates without electricity in Ogun State, southwest Nigeria, on March 22. The global increase in fuel prices combined with poor infrastructure has resulted in one of the country’s worst energy crises in recent years. Photo: AFP

The fallout will be vastly wider than supposed. It will not only be a matter of energy and food shortages, but also a cascading implosion of output as myriad supply lines are damaged from Europe and Asia to the Americas and beyond.

This is what happens when national security is elevated above economic concerns and if this applies to Russia’s attitude toward Ukraine, it also applies in equal measure to the Biden administration’s frenzy of economic sanctions against Russia and potentially China and others.

Globalisation has not been perfect as an economic concept – and that is what it has been so far, rather than a system of world governance or the acceptance of a universal culture and language – but it has been the principal generator of low global inflation and prosperity for many.

As Harvard economist Paul Sheard and veteran economic analyst Jesper Koll noted during a panel discussion I moderated recently on inflation, globalised production has produced an abundance of low-cost goods – chiefly from China, as Japan’s former vice-finance minister Eisuke Sakakibara notes.

Unwind globalisation in favour of more limited trading among ideologically aligned economic blocs and the “reshoring” of production to native grounds (those of the US especially) and don’t be surprised if you get not just economic autarky but rampant inflation, too.

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Putin tells ‘unfriendly’ nations to pay in roubles for Russian gas as economic sanctions bite

Putin tells ‘unfriendly’ nations to pay in roubles for Russian gas as economic sanctions bite

We’ve seen only the initial tremors of inflation so far, given the magnitude of the economic shocks that Trump’s trade wars, then Covid-19, then the Russia-Ukraine war and now sanctions wars are administering to the global economy.

Likewise, the limited impact on financial markets so far is not so much owed to investors’ refusal to panic as to the fact that they do not understand what is about to hit them.

Once it does – in a few months’ time when the US Federal Reserve and other central banks begin reducing the size of their balance sheets while also raising interest rates – the shock in financial markets will begin to match the quakes already registering in global production.
A customer visits a supermarket in Duesseldorf, Germany. Inflation in Germany surged in March to its highest levels since reunification in 1990, as the war in Ukraine sent energy prices soaring. Photo: AFP

It’s not necessary to say that the outcome of all this will be global recession or at best a long period of stagflation (rising prices and stagnant output). True, this implies a reduction in aggregate demand and lower wage pressures but the “cure” might be worse than the disease.

Do US President Joe Biden’s security advisers, or those in other Western nations where vengeful sanctions have prevailed over economic rationality, realise the enormity of the calamity they are unleashing? If they don’t, they should not be where they are and if they do, then they should be fired anyway.

Don’t expect developing nations to back sanctions that leave them hungry

One reader suggested here last week (in jest I think) that “the best idea for all concerned would be to split the global economy into two closed systems that do not cross, interact or trade with one another, like an East-West iron curtain. One based on the US system, one on the Chinese system and let each decide its own path. This would eliminate squabbling.”

An elegant solution in some ways, but it might lead, if not to a war of the worlds, at least to war of the hemispheres.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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