War of the worlds
I hope and pray that things will get better in the weeks ahead—that the Middle East war ends, oil prices return to reasonable levels, peace prevails in the world, and that the global economic situation stabilizes. Sadly, various forthcoming developments appear to be moving toward a far less optimistic direction. Foremost among these developments are three that bear watching and that we should prepare for.
First, the United States/Israel—Iran war appears to be on an escalatory trajectory rather than a peaceful one. The more widely publicized and analyzed reasons advanced for this standoff have to do with the intractable demands and counterdemands from both sides of this conflict. These have been extensively covered in various media, such that repetition here would be superfluous. The deeper truth, though, may be that this isn’t just a battle between countries, but a sort of war of the worlds between the seemingly irreversible geopolitical balance-of-power march toward a multipolar world and the resistance to it via the staunch effort to maintain the Western (US-led) hegemonic world that has managed global economic and security relationships among countries since the end of World War II. At the risk of sounding simplistic, the latter (hegemony) has been labeled in some circles as Pax Americana, and the former (multi-polarization) is characterized by the rise of China and BRICS (Brazil, Russia, India, China, and South Africa). The stakes are therefore higher than what’s apparent, since the outcome of this confrontation will change the direction of world history. Can the US easily let go of the dollar’s preeminence without an all-out fight? Will the evolving alliance between rising economic powers and emerging markets upend US global military and financial dominance?
The second development has to do with oil prices. I realize that many are observing the recent reduction in fuel pump prices as a welcome return to relative normalcy, but sadly, this may be a short-lived phenomenon, since significant tonnage of oil exports at prewar prices had already been shipped prior to the start of the war, and the tankers carrying these have only recently reached their ports of destination. However, since then, due to the closure of the Strait of Hormuz, subsequent shipments are down to a relative trickle, thus all but ensuring a severe shortage in the months ahead and an inevitable price surge due to a dearth of supply. The cascading effect of this situation on the prices of just about everything, including fertilizers, food, and high-tech products, etc. will present a major challenge to the entire world economy that portends recession, civil unrest, and even famine, which will impact most heavily on import-dependent economies like the Philippines. Fasten your seatbelts!
The third development is that by mid-May, a new Federal Reserve (the US Central Bank) chair by the name of Kevin Warsh will replace outgoing Chair Jerome Powell. It is widely known that Warsh is US President Donald Trump’s pick and is thus expected by many to enact monetary policies Trump prefers, particularly the lowering of interest rates that Powell has resisted due to concerns about exacerbating inflationary trends. There is widespread concern that the US government’s penchant for fiscal profligacy—spending far more than it earns and subsequently borrowing and/or printing money far beyond what most would consider prudent debt-to-gross-domestic-product (GDP) ratios—will result in galloping inflation, currency devaluation, recession, and all sorts of nasty economic pitfalls. The global concern is that the US economy will not just catch a cold but pneumonia, thus causing dire consequences for the rest of us. Right now, US debt is at $39 trillion, about 129 percent of GDP. This translates into a debt service level that will crowd out the US defense, social security, and health budgets, among others. By comparison, we are already panicking with our debt-to-GDP ratio of about 60 percent.
Nevertheless, it looks like the Warsh strategy follows Trump’s preference. Will it produce the magic of circumventing the above described widely held concerns toward an economic crash? In a nutshell, it would seem that the gamble—entailing lower interest rates, together with more infusions of dollars printed or borrowed—would stimulate domestic production enough for the resulting GDP growth to far outpace even increasing debt levels thus resulting in an improved, supposedly more manageable debt-to-GDP ratio. This tactic appears to have worked before—shortly after World War II, when the US economy was the only one left standing, every country depended on it, no rival power existed, and thus the US dollar was a virtual monopoly. But times have changed. Rival economic powers (China, Russia, BRICS) have emerged, faith in US management of its economy appears fragile, and consequently, nearly blind trust in US treasuries by reliable lenders (notably China and Japan) has dwindled. Good luck to us all!
Roberto F. de Ocampo, OBE is a former finance secretary and was finance minister in 1995, 1996, and 1997.
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