By Dr. Frank Musmar
In March 2020, I published an article on BESA titled”The Effect of Coronavirus on the Global Economy”. In that article, I mentioned that the 2020 outbreak of the novel coronavirus (COVID-19) will go down in history for its massive impact on the global economy and on public health, both physical and psychological. At some point, life will get back to normal, but it will not be the same as it was before.
Since the outbreak, the major central banks worldwide started printing a massive amount of unhedged money in a historical experience that is coming to an end. According to all the laws of economics, the unlimited injection of funds has already begun to accelerate global Inflation. The path of the new COVID-19 variant (Delta variant) could add more sentiment and demand.
In the USA, Inflation accelerated from 1.4% in February to 5% in May. Inflation in April accelerated at its fastest pace; not only are those highest numbers since August 2008, when the global financial system collapsed, and people were buying real estate and other assets in a panic. It is even worse, as central banks now face two bitter choices: either allow Inflation to accelerate into hyperinflation when prices double every few months or raise the interest rate on loans and reduce support for businesses and individuals. So far, US Federal Reserve officials have vowed to keep buying $120 billion of Treasuries and mortgage-backed bonds every month until they see “substantial further progress” on Inflation and employment. The Fed has also signaled it expects to keep rates near zero through 2023.
Both paths are killing the economy. Hyperinflation in the dollar area will inevitably lead to a halt in global trade for some time, followed by a subsequent destruction of the global financial system, a temporary suspension of most production facilities in the world, and the bankruptcy of a large number of companies, with all its social repercussions.
Alternatively, an interest rate increase would bankrupt the majority of desperate debtors, whose share in the West grew to several tens of percent during the period of near-zero interest rates. It is a chain reaction bankruptcy that will destroy the financial system and successful businesses along the way due to non-payment and bank failures. This would be much worse than the 2008 financial crisis and even worse than the Great Depression of 1929.
In addition to reducing the support provided to citizens, the wave of corporate bankruptcy will lead to a massive increase in the unemployment rate and a sharp contraction in demand, to begin at that time the classic deflation, when a decrease in demand leads to bankruptcy and layoffs. The layoff thus leads to the decline in demand, and so on spirally towards the bottom. This collapse will continue to be followed by hyperinflation, as the supply of goods will fall due to bankruptcies on the back of vast amounts of money printed by central banks.
In the USA, India, Brazil, Russia, Mexico, Saudi Arabia, Egypt, Turkey, South Africa, Poland, Malaysia, the Philippines, and many other countries, the inflation rate exceeded 4%. This is what official statistics say, which governments often circumvent to issue the best ones, and the real Inflation is much higher than that. The Eurozone, Japan, and China are still lagging, and there they are suffering from deflation. But on the back of rising Inflation in other countries, price increases there will also accelerate
In my opinion, the next six months will be more or less crucial. Central banks will have to choose one of two paths to the collapse of the global economy. Either raise interest rates and cut subsidies, or, conversely, pump more money into the system to avoid bankruptcies, accelerating Inflation. Which path will depend on how quickly we peak when the dollar collapses and the world as we know it ends? I believe we have a year or two, maybe even three years for the most.