OPINION:
The Federal Reserve’s quick raising of interest rates is disrupting stock and bond markets, and multiplying default risks for corporate and developing country debt. And threatening the investment strategies of pension funds and flexibility of governments like the U.K. to assume debt to slash taxes and promote growth.
From the end of the global financial crisis until COVID, inflation risks were low — thanks to businesses optimizing supply chains and cheap labor and energy in places like China and Russia. Chasing 2% inflation, central banks kept interest rates historically low.
The world has changed, and so have the trade-offs between inflation and unemployment and likely long-term interest rates.
Emerging from the coming growth slowdown or recession, we will have the usual carnage — corporations propped up by cheap debt going bust and private creditors taking haircuts on some developing country debt. But the Fed will be compelled to accept much higher inflation and unemployment than the Washington political class finds comfortable for job security.
President Biden’s curbing of domestic drilling and pipeline development — while the West boycotts oil from Russia and Iran and can’t build and deploy electric cars fast enough — requires that petroleum prices remain volatile and a source of inflation until at least the end of this decade.
Climate change driving droughts and floods and limited access to Russian and Ukrainian agricultural commodities and fertilizer will push agricultural prices higher, instigate starvation in the developing world and keep groceries a continuing factor in inflation for several more years.
Housing prices and rents may go through a correction over the next year, but longer term, real estate values are a function of the cumulative stock of units built more than the pace of new construction.
Higher interest rates and resulting slower economic growth may push down housing demand, prices and rents in the near term, but the resulting slowdown in the construction of new units exacerbates home and apartment shortages after central banks lower interest rates again.
Tighter monetary policy in 2022 manufactures more housing inflation in 2024 and beyond.
The suburbs were based on cheap cars, energy and land.
Chronic shortages of lithium will make electric vehicles much more costly. The unreliability of solar and wind and the cost of nuclear and fossil fuel backups will make electricity and driving those vehicles more expensive.
The work-from-home solution requires larger dwellings and more pressure, not less, on scarce developable land.
Together energy, groceries, autos and housing account for 57% of the consumer price index.
The skills shortages facing American businesses won’t abate soon. High schools focus too much on college prep and too little on vocational training alternatives. And the entire education establishment spends too much student time on critical race theory and too little time on critical thinking. Programmed for outrage and entitlement, too many young workers are not well positioned to meet the needs for more digital and team-building skills.
The lesson from Iran, which now suffers a street revolt, is underarming Ukraine, and relying on sanctions will not fundamentally alter the regime in Moscow or free up Ukrainian and Russian agricultural commodities and petroleum anytime soon.
In China, President Xi Jinping has decided to appoint himself the ayatollah and president at the same time. He is bent on wiping out feminism and homosexuality to promote traditional marriage and child bearing, tightening controls on thought and speech by filtering the internet and through an Orwellian system of domestic surveillance of ordinary citizens, neutering the power of high-tech and private entrepreneurs, and reasserting state planning and the centrality of ideological conformity — albeit through a queer resurrection of the kind of national socialism that directed pre-World War II Germany and Japan.
That’s not what made contemporary China a modern economy, a global leader in EV batteries and solar panels and permitted TikTok and WeChat to lap Meta and Twitter. Businesses are hedging their China bets these days, and that diversification means that the era of driving down U.S. prices with Chinese imports may be waning.
America’s rejoining the Trans-Pacific Partnership would be the logical antidote, but Mr. Biden is too much in the grasp of Big Labor and the hard left for that.
Inflation averaged about 4% for 10 years after former Federal Reserve Chairman Paul Volcker brought it down from double-digit levels in the early 1980s. We are likely headed to no better without more assertive measures to end the war in Ukraine, free up domestic drilling and pipeline construction, concede the transition to electric vehicles will be gradual, fix our schools, free up urban building sites and rejoin the TPP.
None of that is in the DNA of Mr. Biden, his West Wing advisers or his political masters among congressional Democrats and organized labor.
To get to 4% inflation, we will have to endure unemployment of 6.5% and similar interest rates until we get new, less-ideological leadership.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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