A French leader once called the dollar America’s “exorbitant privilege”. Today’s world might go for blunter language. Vector of pain, anyone? Green monster?
Whatever we call it, the strong dollar’s victims have one culprit in mind — the Federal Reserve. Even Josep Borrell, the EU’s foreign policy chief, is joining in. This week he warned that the Fed was exporting recession in the same way the euro crisis was imposed by Germany’s post-2008 dictates. Much of the world is now in danger of becoming Greece.
Such finger-pointing is mostly unfair to the Fed. The US central bank clung for too long to its “team transitory” dismissal of inflation and is thus tightening at speed to restore its credibility. But it is only following the rules. It is hard enough to achieve full US employment with low inflation. Adding foreigners’ wellbeing to its mandate would make the job paralysingly complex. The Fed is nevertheless the engine of global contraction. Monetary pain is America’s fastest growing export.
The big unknown is, who will pick up the pieces. Here, as the world’s leading power, the US has often been prone to neglect. In today’s so-called polycrisis world it also risks missing a chance to restore America’s brand. The Fed has one tool — monetary policy. Higher US interest rates are spreading at pandemic speed.
As a whole, the US has many options. One such lever is the Bretton Woods institutions — the IMF and the World Bank, which are holding their annual meetings in Washington this week. The question is whether the US wants to cushion the blow to the developing world as its debt servicing costs go through the roof?
History tells President Joe Biden which road not to take. The Fed’s last period of steep tightening started under Paul Volcker in the late 1970s. Higher US rates helped trigger far deeper recessions in the global south. Africa and Latin America both suffered a lost decade of growth that was deepened by the IMF’s punitive bailout conditions. Structural adjustment was a cure worse than the disease. The 1970s had been awash with recycled Opec capital that made dollar borrowing hard to resist. The Fed’s quantitative easing has had the same effect over the past decade.
It is little consolation that inflation today looks less rampant than 40 years ago. In some respects emerging markets have it worse this time. Africa was neither responsible for the pandemic nor the war in Ukraine. The first is undoing years of human development gains. The second has unleashed a wave of food and energy inflation.
Now the Fed is adding a potential debt-servicing crisis to the cocktail. These upheavals did not originate in the global south but the costs will chiefly be borne there. That is without mentioning climate change, which is also harshest in those parts of the world least responsible for creating it.
Biden has so far found little bandwidth to confront these challenges. He had a chance to make US vaccine technology available to the developing world. Indeed, he initially vowed to suspend Covid vaccine patents. That now looks like an empty gesture since his administration did not follow up.
As a result, a third of the world’s population has not yet had one vaccine while most westerners have had at least two — some as many as five. Had the US taken a stronger lead, the world’s inflation-inducing supply bottlenecks would not have been as chronic.
Biden’s $1.9tn stimulus — the American Rescue Plan — threw fuel on an inflationary fire that is coming back to haunt Democrats. If they lose control of Congress next month, that bill will partly be to blame. The same applies to the roughly half a trillion dollars of student loan forgiveness he announced in August.
Again, though, the brunt is felt by the rest of the world through imported austerity. The road to hell is paved with good intentions. Not for the first time, progressive-minded steps to help disadvantaged Americans are regressive for the world’s disadvantaged.
The Fed has earned some of the resentment it is getting. It should have reacted earlier to inflation, which would have meant a less punitive response. It is not as if inflation was hard to spot. On that count, Jay Powell, the Fed chair, deserves some blame.
But America’s big shortcoming is political not technocratic. The global face of the problem is the mighty dollar but its causes lie deeper. The US can be oblivious at big moments to the spillover effects of what it does at home, which often come back to bite it. Call it exorbitant indifference.
edward.luce@ft.com
Source: Economy - ft.com
