EDITOR'S NOTE: We saw what happened to the world’s major currencies when the Federal Reserve took a more aggressive stance on rate hikes: they tumbled. Even legendary hedge fund manager, Ray Dalio, whose mantra was “cash is trash” no longer believes that to be the case, as the Fed rate hikes elevated the dollar to a neutral position, meaning neither good nor bad. This may give us Americans some relief. But its impact on the rest of the world, according to a UN report, may be catastrophic. Every basis point increase translates to a half percent drop in the economic output of wealthy countries. The situation is even worse for developing countries whose economic declines can last for years. In other words, the Fed’s aggressive monetary stance may help ease inflation in the US but at the cost of destroying the global economy. Here’s a summary of the UN report.
The United Nations Conference on Trade and Development (UNCTAD) has warned that the U.S. Federal Reserve’s interest rate hikes and the slew of other central banks raising rates, could pose harm to the global economy. UNCTAD calculated that for every Fed basis point rise, the economic output of wealthy countries declines by 0.5%, and for poorer countries, the value of all sales of goods and services is reduced by 0.8% for a duration of three years.
UNCTAD Report Criticizes Central Bank Rate Hikes During Global Economic Downturn
Monetary tightening measures may not be a good idea according to the United Nations (U.N.) agency UNCTAD. The entity, created in 1964, is an intergovernmental organization created to help developing nations enhance global trade. UNCTAD notes in an annual report that the recent interest rate hikes by the U.S. Federal Reserve and numerous central banks worldwide will reduce the economic output of both wealthy and poor countries between 0.5% and 0.8% over a three-year period.
“The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies,” UNCTAD’s report notes. “UNCTAD projects that world economic growth will slow to 2.5% in 2022 and drop to 2.2% in 2023. The global slowdown would leave real GDP still below its pre-pandemic trend, costing the world more than $17 trillion — close to 20% of the world’s income.”
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The annual report immediately digs into central banks raising benchmark lending rates and creating tougher monetary policy. UNCTAD blames the world’s economic hardships on “supply-side shocks, waning consumer and investor confidence,” and the Ukraine-Russia war. “Despite this, leading central banks are raising interest rates sharply, threatening to cut off growth altogether and making life much harder for heavily indebted firms, households, and governments,” the U.N. agency’s report explains.
UN Agency Urges Governments to Increase Public Spending and Enforce Price Controls on Energy and Food
The report, authored by UNCTAD’s secretary-general Rebeca Grynspan, says that Latin American countries and specific regions in Africa may “suffer [from] some of the sharpest slowdowns this year.” “The average growth rate for developing economies is projected to drop below 3% — a pace that is insufficient for sustainable development and will further squeeze public and private finances and damage employment prospects,” Grynspan details. UNCTAD’s call on the Fed and the rest of the world’s central banks is quite similar to the complaint written by U.S. Senator Elizabeth Warren (D-Mass).
Warren complained about the Fed raising the federal funds rate after it hiked the rate by 75 basis points (bps) on July 27. Using the news outlet the Wall Street Journal (WSJ), Warren published an opinion editorial that said the U.S. central bank could trigger “a devastating recession.” Warren further talked about the subject again on CNN’s State of the Union weeks later, after Fed chair Jerome Powell presented his economic outlook at the 2022 Jackson Hole Economic Symposium. Grynspan’s report is in kindred spirit, and it details that “interest rate hikes by advanced economies are hitting the most vulnerable hardest.”
The UNCTAD report adds:
Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10%.
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UNCTAD’s report concludes by highlighting a few ways global leaders can address the problem and one of them is to “increase public spending.” The agency also urges governments to enforce “strategic price controls to directly target energy, food and other vital areas.” The U.N. agency calls on public and private executives to direct more funds toward green energy research and development. Lastly, the agency wants to see global leaders get behind the Black Sea Grain Initiative. The U.N.-led initiative would allow massive volumes of food and fertilizer exports from Odesa, Chornomorsk, and Yuzhny in Ukraine.