Jun 15, 2022
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First “Putin’s tax”, then “Putin’s recession”…

Biden’s statement that Putin is the cause of high inflation in the United States sounded very resonant. Speaking on June 10 in Los Angeles, Joe Biden commented on inflation data for May. If according to the results of April the inflation rate on an annual basis had a record value of 8.3%, then in May a new record was reached – 8.6%. At the same time, this is a record for more than 40 years (since December 1981). The main drivers of inflation are energy and food prices. The price of gasoline in America now is almost $5 per gallon (it was $3 a year ago). According to the US Department of Commerce, energy prices rose in May by 3.9% compared to April and by 34.6% compared to last year. Gasoline has become on average 48.7% more expensive than a year ago, and 7.8% more expensive than in April. Food prices rose 10.1% yoy and 1.2% mom. Another troubling sign is that the cost of housing in America rose in May by 0.6%, or 5.5% year on year (the fastest increase since February 1991). In recent months, however, there has been a significant increase in wages in the United States, but this is in nominal terms. Growth was supported by gigantic additional budget expenditures due to the increase in public debt. In early February, the US national debt crossed the $30 trillion mark. dollars. Nominal wage growth is not keeping pace with consumer price growth, real wages are declining. According to the US Department of Labor, the real average hourly wage fell by 0.6%. The inflationary rise in prices, real wages and employment is not only a social but also a political issue. With the November midterm elections approaching, the Democrats are in danger of losing everything. Fighting inflation is the Biden administration’s top priority until Nov. 8. In this environment, the administration habitually tries to shift the blame for America’s economic problems onto the Russian president. From Biden’s speech in Los Angeles: “We’ve never seen anything like Putin’s tax on both food and gas…Today’s inflation report confirms what America already knows: Putin’s price hike is hitting America hard…I’m doing everything in my power to contain Putin’s price increases and reduce the cost of gas and food.” Joe Biden is not alone in these interpretations. On June 7, Treasury Secretary Janet Yellen acknowledged that the sanctions imposed against Russia provoke an increase in food and fuel prices. True, she had the sense not to link the rise in prices with Putin. Indeed, in America they are already being ironic: “So who is our president – Joe Biden or Putin?” Biden’s ratings fell even more after the announcement of the “Putin tax”. According to The New York Post, which cites a Quinnipiac University poll, Biden’s approval rate among Americans has fallen to 33% (from 35% in May). And dissatisfaction with the government’s economic policy was expressed by 64%. How is Biden going to deal with the “Putin tax”? The only hope is in the Federal Reserve. However, the Fed had helped Biden before: it bought Treasury bonds and financed the budget deficit. However, on May 4, the Fedroreserve abruptly reversed course: abandoned the policy of quantitative easing, moving on to quantitative tightening. On June 1, the US Central Bank began to sell mortgage and treasury bonds from the balance at $17.5 billion and $30 billion per month, respectively. In three months, the volume of the sale is planned to double. This would mean a reduction in the Fed’s balance sheet by about $1 trillion. dollars per year. (at the beginning of the summer, the Fed’s balance sheet was nearly $9 trillion). At the same time, a course was taken to raise the key rate. Since March 2020, the Fed has kept rates close to zero. In March of this year, the Fed raised interest rates to 0.25-0.5%. In May, the rate was raised to 0.75-1.0%. It is expected that on June 15, at the next meeting, the US Central Bank will repeat the jump, and the key rate will be at the level of 1.25-1.5%. However, there are experts who say that the jump will be even greater, which has never happened in more than a century of the history of the Federal Reserve. It is assumed that by December the base rate range will increase to 2.25-2.5%. The main supporter of the rapid tightening of the Fed’s policy in its leadership, the head of the Federal Reserve Bank of St. Louis, James Bullard, calls for an increase in the rate by the end of the year to 3-3.25%. With some time lag, the leading Western Central Banks repeat all the turns of the US Central Bank. So Christine Lagarde, President of the European Central Bank (ECB), rounds off with her ultra-soft policies. On June 9, the ECB announced that it would leave the base interest rate on loans at zero, and on deposits at the same level of minus 0.5%. But this is the last time. Judging by the hints of the leaders of the ECB, at the July meeting the interest rate will be increased by 25 basis points. The ECB also decided to stop building up net assets under the APP program from July 1, 2022 (i.e. stop buying securities). By the end of this week, scheduled meetings on key rates will be held at the Bank of England (June 16) and the Bank of Japan (June 17). The first one already raised the key rate to 1.0% in May. The second since 2016 has stubbornly kept the rate at minus 0.1%. The leaders of the Fed cannot fail to understand what a dangerous game they have started. A sharp increase in the key rate greatly increases the likelihood of an economic recession (downturn). Even before the start of the sanctions war and the introduction of the “Putin tax”, there was talk of a high probability of an economic crisis, but it was predicted that this would happen in 2023. Now, taking into account the shock pace of the key rate hike, this could happen before the end of the year. It may happen that the Federal Reserve does not bring down inflation, and does not prevent a recession. There will be an explosive mixture of inflation and stagnation (stagflation). If the economic collapse occurs before November 8, 2022, then the Democrats will suffer a resounding defeat in the midterm elections for the US Congress and the state legislatures. References to the fact that Putin orchestrated the recession in the American economy will no longer help. PS An analogy from the past In October 1929, a panic began on the New York Stock Exchange, which launched an economic crisis throughout the capitalist world. The Soviet Union was then beginning industrialization, and the economic blockade of the West (prohibitions on the purchase of machinery and equipment) interfered greatly. However, the crisis made the West malleable, and holes appeared in the Iron Curtain. Deliveries of investment goods to the Soviet Union then saved many Western companies from bankruptcy. And conspiracy theorists came up with a version: the collapse on the New York Stock Exchange in 1929 and the global economic crisis was organized by … Stalin. This supposedly made it easier for him to carry out industrialization in the USSR. Photo: REUTERS/Elizabeth Frantz

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