The United Nations is blaming Quantitative Tightening (a restrictive monetary policy tool applied by Central Banks to reduce the amount of liquidity), according to the international body and data from the International Monetary Fund, the aggressive rate-raising monetary policies of the Federal Reserve and other Central Banks around the world aimed at fighting inflation are hurting the economies of developing and poorer countries too much to the point where they must be ended if they want to mitigate the risk of a heavy global recession.
The UN does not like the Fed’s rate hike
The United Nations Conference on Trade and Development has pointed out that the policies of Powell and counterparts risk causing massive damage to developing countries if they continue to be pursued.
The estimate is that a 100 basis point increase in the benchmark interest rate by the US Central Bank would result in an economic contraction of 0.5% in the world’s other rich countries and as much as 0.8% in poor countries in the three years after the measures are taken.
The UN’s outing is also supported by the Indian Central Bank (which accounts for just over one-fifth of the world’s population) that after the Covid 19 Pandemic and the high energy prices as a consequence of the war in Ukraine, too aggressive and widespread rate hikes represent the third plague afflicting the world in recent history.
UNCTAD Secretary General Rebeca Grynspan stated that:
“There is still time to step back from the brink of the recession. We have the tools to calm inflation and support all vulnerable groups. But the current course of action is harming the most vulnerable, especially in countries in development, and risks plunging the world into a global recession.”
The UN’s request was not well received by the Federal Reserve, which, following a meeting, responded that it is aware of the dynamics its monetary policies can create in the world but that, in essence, it is exercising its national interest.
“We are very aware of what is happening in the other economies of the world, and what it means for us, and vice versa. The forecasts that we put together, that our staff put together and that we put together by ourselves, always take all of this, try to keep them. I count.”
Monetary policy is not in line with general discontent
For the first time, there is a feeling that we are at a historic crossroads, the temporal power and the financial power, for the first time since the latter took over as the supranational body which is the perimeter of important decisions about humanity, are clashing in a tug-of-war that unexpectedly sees the United Nations (of which America and many European states are also part) standing up in defense of families and peoples at large against monetary policies that are understandable but bloodthirsty for the economy and for the lives of the poorest people.
The first feeling is that of an attempt by the UN to put finance back in its place by reminding it of its role as an instrument and not a policymaker. The report compiled by the UN is not meant to be punitive, but constructive, peoples really do have widespread need to live decently as a matter of survival and no less important a matter of dignity, the danger is that by reducing populations to mere survival they may rebel massively in more parts of the globe leading to chaos or the more concrete risk of a severe recession ahead, highlighted by the numbers that leave no room for sugar-coated interpretations.
Richard Kozul-Wright, head of the report compiled by UNCTAD on the danger induced by the aggressive monetary policies of the Central Banks of America and Europe above all, wonders how supply-generated inflation can be solved:
“Are you trying to solve a supply-side problem with a demand-side solution? We think it’s a very dangerous approach.”
According to the UN, global growth forecasts need to be revised and it has corrected the forecast, which is now from 2.6% to 2.5% for 2022 while 2023 will see an even greater contraction estimated at 2.2%.
Against this already less-than-reassuring backdrop come the concerns of the International Monetary Fund, the ECB and the US Federal Reserve regarding a pool of four high-risk default banks namely Credit Suisse, Deutsche Bank, Intesa Sanpaolo and Barclays that see their CDS reaching extremely worrisome numbers.
The Swiss merchant bank recorded a value of 255 CDS compared to 55 performing at the beginning of the year, the figure is at the highest since 2009 and signifies that insurers, in order to protect the bank’s default risk, are demanding much more as the risk of failure has increased fivefold in just three quarters.
Insiders at the Swiss bank, according to the Financial Times, report that Credit Suisse executives spent the weekend reassuring larger clients from default risk as analysts clamor for a capital increase and restructuring of the bank.
An outstretched hand toward the Swiss Bank’s (Deutsche Bank’s) fellow misadventurer comes from the author of Seeking Alpha who states:
“[Credit Suisse] is trading at 0.23 times the tangible book value [and] Deutsche Bank is trading at 0.3 times the tangible book value. Investors should avoid [Credit Suisse] and buy [Deutsche Bank].”
The situation is basically treading water, and through the report prepared by Richard Kozul-Wright’s team, the United Nations is only trying to provide constructive evidence of the fact that, if quantitative tightening continues and is not stopped, we will be heading straight for a severe global recession that will starve 75% of the planet with uncontrollable consequences.
What is most worrying or reassuring, depending on your point of view, is that the Federal Reserve has decided to press on and has responded that it will continue in the interest of the United States of America with monetary policies of raising rates at least throughout the year in defiance of the UN warning.