Mar, 02/21/2023 - 02:14 -- bacosta


The year 2022 began as one of great uncertainty. A timid economic recovery cooled off in the third quarter of 2021, and the US economy, with its gigantic fiscal deficits, failed to pick up steam. Russia's tensions with Ukraine have grown, and there needs to be a sense of how it can be solved. China has grown steadily, and the Asian countries have performed well, counterbalancing the slowdown in the G7 economies. Inflation rose sharply in the US and had no ceiling. Against this backdrop, year 22 began with surprises and a realisation. The surprise was that their currencies depreciate when the Fed moves the interest rate for the first time if the other central banks do not do so simultaneously. That cost the Euro a 23% drop against the dollar. Second, the addition of economic sanctions against Russia over the Ukraine operation became the opportunity of a lifetime for China to consolidate an Eastern financial architecture. Finally, with the world already fragmented, the US opted firmly for import substitution policies and the de-globalisation that goes with them; while the Asian bloc led by China is advancing with its growth and globalisation. 


US economic recovery policies

The post-pandemic economic recovery that began in the second half of 2020 should have continued in 2022. Something got in the way, and stagnation emerged in the recovery of the most developed economies (G7). These stopped in the third quarter of 2021 and remained stagnant, proving the OBELA hypothesis that the shape of the recovery would be an inverted square root. Since 2018 the US economy has shown signs of slowing down and was heading towards a recession. In 2020 the stock markets collapsed, bailed out with a monetary injection of 20% of GDP. Then came the financial rescue of consumers and producers. Once the emergency stage was over, the secular economic problems of the great northern neighbour were still there. They have a severe productivity problem and consume 15% more than their economy produces, which generates an external deficit equivalent to that. The only reason it is maintained is that the world's international reserves are in US dollars and because the US financial markets are the safe havens for nervous global capital. The fiscal deficit is in the same range, while their tax revenue is 30% of GDP. They have a fiscal deficit equivalent to half of their tax revenue which is unthinkable in any other economy. The 2.9% of the EAP that stopped looking for work in 2022 is covered up, so that amount underestimates the unemployment indicator.

Since the stimulus did not work, the solution was to inject public money into the economy starting in 2023 through two laws: the Chips Act and the Inflation Control Act. The Chips Act gives resources to microchip manufacturers through tax credits. The Inflation Control Act does the same to revive demand for renewable energy vehicles and the sale of renewable energy generation equipment. The combination will have slight effects, and the IMF's World Economic Outlook (WEO) projects that the US will barely grow. GDP growth figures are 2.0% in 2022, 1.4 in 2023 and 1.0 in 2024. Whether US Congress recognises the recession as such and allows counter-cyclical measures taken with a higher debt limit will make a difference. The problem is that the levels of public debts are monumental for that country, the defender of economic equilibrium in the rest of the world. 

The truth is that there is a world order based on the significant imbalance and the application of austerity policies in the rest of the world to maintain it. In parallel, there is the continuing economic march of China, which despite the headlines of Western financial newspapers, is growing by leaps and bounds. GDP growth in 2022 was 3.0%. In 2022, it was projected at 5.2 and in 2022 at 4.5. These dynamics and the shift of trade axes from the Atlantic Ocean to the Pacific Ocean were consolidated in 2022, leaving beyond doubt the tendencies of Asian countries to gain more weight in the world economy and the Western G7 countries to lose it. Since the beginning of the third decade of the 21st century, the world balance has tilted towards the East, led by China, India, Thailand, Malaysia, Singapore, Indonesia, Vietnam and South Korea, among the most prominent. GDP growth projections for emerging and developing Asia are 4.3% in 2022, 5.3% in 2023 and 5.2% in 2024. As the West de-globalises, the East continues its globalisation, selling more to more markets and becoming the world's largest growing creditor and investor. The realisation that "the world" is de-globalising is a Western view of the ongoing process.



Federal Government of the United States of America

Year                           Debt/GDP ratio

2000                                            56.4%

2001                                            57.3%

2002                                            59.5%

2003                                            60.5%

2004                                            62.0%

2005                                            63.5%

2006                                            64.6%

2007                                            65.2%

2008                                            68.2%

2009                                            82.3%

2010                                            93.5%

2011                                            98.2%

2012                                            102.6%

2013                                            103.6%

2014                                            106.1%

2015                                            106.2%

2016                                            106.5%

2017                                            107.2%

2018                                            108.1%

2019                                            109.5%

2020                                            128.2%

2021                                            131.1%

Source: These data were obtained from the website of the United States Department of the Treasury, which provides regular updates on the total outstanding public debt of the United States government and the Gross Domestic Product (GDP) of the country from the Central Bank of Saint Louis ( Federal Reserve of St. Louis). The website can be consulted at https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec1.aspx and https://fred.stlouisfed.org/series/GDP.

The United States, the Fed and its interest rate.

The Fed's interest rate hike triggered the slowdown in the recovery despite the immense amounts injected as a bailout for businesses and consumers. It has been at negative levels since 2008, a reflection of the rate of profit. Keynes defined it as such. The problem is that the revival that started at the end of 2020 stumbled, and the pace of production in the just-in-time era needed to be in sync. As the links in the production chains did not match, there was a shortage of final industrial goods with consequences on prices. It is noticeable in automobiles, household appliances, and all industrial goods. To this must be added the US trade war against China, where the flow of microchips, already disrupted, was affected, which put pressure on the prices of these inputs. The problem of the lack of oil further impacted it at the beginning of the war between Russia and Ukraine. Fatal for Europe was the application of sanctions prohibiting it from importing energy from its next-door neighbour. The final consequence was pressure on the Western oil market. Then it became public that another oil market centred on China with supply from the Middle East, Russia and Latin America at 30% lower prices. These prices positively affected growth and low inflation in the East while the West suffered.


The Federal Reserve fights against inflation the only way it is monetarily inclined, i.e. with interest rate hikes to compress investment and consumption. It historically had some balance of payments consequences for the global economy, through commodity prices, except in 1981 (the Volker shock). This time it is clear that if the Fed raises the interest rate, the rest of the world needs to follow, or there will be a short-term movement of capital in favour of the dollar. When the European Central Bank, convinced of the importance and autonomy of Europe, decided not to raise the interest rate together with the FED, arguing that inflation was transitory and that it needed to reactivate its slow-growing economy, the Euro depreciated 23% against the dollar. Consequently, the price of energy in Europe in euros rose by that proportion in addition to the commodity prices rise. After 1990 came the deregulation and unrestricted opening of the capital markets worldwide. Added to this is the independence of the central bank, which prevents it from lending to its finance ministries. Thus the central bank's surplus reserves are international, and in dollars, the world's trading currency, and are held in US treasury bonds to finance the US fiscal deficit. In short, the Fed raised rates in 2022, and the whole world raised its own. This opens up the recessionary scenario of 2023.

Those that did not do so depreciated or disengaged from the western capital market, as did Russia in what appeared to be a punitive measure. It was the relief it needed to continue the reactivation drive with low-interest rates. China, with the capital market closed, did not raise its rate. The Shanghai stock exchange lost 5% of its capitalisation value from January to December 2022, the NY S&P 500 fell 8.9%, and the FTSE 100 rose 6.7% amid the British crisis and the global economic problem as an expression of the disconnection between the financial and the real. The pound fell and recovered because of the Bank of England's expansionary policies and interest rate hikes. On the one hand, eastern countries did not do so because they did not have inflation problems due to stable energy costs, and on the other, they are tied to China's central bank as they operate intra-Asian trade in Yuan. 

What was noticeable last year was the development of an international financial architecture parallel to the West's, with the People's Bank of China as a bank for international deposits in Yuan, the development of CIPS (a payment system equivalent to the Western SWIFT that has benefited from Western measures against Russia), and the development of the Asian Investment and Infrastructure Bank for the construction of the transcontinental projects of the new Silk Road. There are signs that the dragon country is at the beginning of a parallel commodities market to the West, operated in Yuan and serving gas, oil, wheat and barley, and metals. The volumes bought in the year that ended indicate this, along with the agreements reached with many West Asian neighbours and with Russia.

As a result of the above dynamics and in addition to the technological competition between the US and China, the US declared a Cold War on China and established a Senate committee to investigate it and make policy recommendations to the White House national security council. The House of Representatives voted to create a select committee in early January 2023 to assess China's military, economic and technological challenges, bringing to life one of the main pillars of the Republican national security agenda. The White House document National Security Strategy, October 2022, states that the main threat to the US is China and that, while they are not looking for a cold war, it is what appears to be the case. The trade war between the US and China declared over in 2020 continues with vigour with recent measures on 25 November 22, such as a ban on the import of new equipment from telecommunications companies Huawei Technologies and ZTE because they pose "an unacceptable risk" to US national security. The US Federal Communications Commission also banned surveillance equipment from Dahua Technology Co, video surveillance company Hangzhou Hikvision Digital Technology Co Ltd and telecommunications company Hytera Communications Corp Ltd. The real threat to US national security is that China is leading the technological competition, and there is no chance of catching up even with the injection of state money. According to the Semiconductor Industry Association (Chips), US semiconductor manufacturing capacity eroded from 37% in 1990 to 12% in 2022 of what they use. They argue that it has happened because the US government has yet to incentivise chip manufacturing, and other governments have. (https://www.semiconductors.org/chips/). The Chips Act pumps money into companies, and the Inflation Control Act subsidises consumers' use of renewable energy. It is equal to China's strategic investments, planned for international advantage.


The return of the historical enemy and the construction of a new oil market structure

Russia's special military operation in Ukraine in 2022 as a capstone to 2014 opened up a new field for the energy market. Until then, Western Europe's energy was supplied mainly by Russia, supplemented by Norway, Britain and the Arab countries, and ultimately by the United States. From 2022 onwards, energy trade with Russia was closed in several steps, the most dramatic being the blowing up of the Nordstream 2 pipeline on the Baltic floor in what is understood to have been a Norwegian-US[1] operation. According to Eurostat, the European Union's statistical office, Russia was the EU's largest oil supplier in 2020, accounting for almost a third of the bloc's total imports. Russia supplied the EU with about 40 per cent of its gas imports before the invasion, according to the World Economic Forum. The consequence of Russia's closure as a European supplier was to drive up the energy cost in Europe and in general. The result was that Russia found itself with an oversupply of gas and oil that it could sell in other untapped markets. Thus one result of the blockade of Russia for its invasion of Ukraine was the accelerated development of a new oil and gas market in Asia with significantly lower prices than in the West.

The increased use of CIPS, China's interbank payment system, and transactions in roubles and Yuan circumvented Financial retaliation and blocked bank accounts. Another mechanism is an agreement between central banks to use each other's payment systems. There is such an agreement between Iran and Russia. 

The development of the commodities market in Shanghai accelerated. There is the Shanghai International Commodities Centre (SHICC), a commodities exchange that trades various products, including, among others, agricultural products, precious metals and energy products. Crude oil futures trade on the Shanghai International Energy Exchange (INE) and energy are China's first futures product open to the overseas market, trading since 2018 and the proportion of foreign participants has grown. According to public data, the trading volume of foreign customers comes from more than 20 countries and regions across six continents, which was 10-15 per cent of the total in 2018 and 25 per cent in 2022. Crude oil futures trading volume reached 158 million lots or 158 billion barrels. It is currently the world's third-largest crude oil futures market after NYMEX in New York and Dubai. China significantly impacts the global oil market, and the INE plays an essential role in setting benchmark crude oil prices in the Asian market.

Therefore, INE is relevant to the global oil market because it provides a platform for trading crude oil futures contracts in China. Prices sold on INE can significantly impact global simple oil pricing. In addition, INE offers contracts denominated in Chinese currency (renminbi), which may attract international participants seeking to hedge their exposure to renminbi exchange rate fluctuations. It indicates that it aims to create an eastern oil market with benchmark prices.

A year of uprisings

The past year has seen significant social uprisings in Ecuador, Brazil, Bolivia and Peru, following earlier ones in Colombia and Chile. Ecuador, Bolivia and Peru have had noteworthy economic performances over the past three decades, while Brazil has benefited less. Ecuador's dollarisation in 2000 did not muzzle growth compared to its neighbours. However, in all four, the poorest 20% of national income continues to account for less than 10% of payment, according to the World Bank. According to Latinobarómetro, the richest 1% concentrate 30% of national income.

On the other hand, the pandemic seems to have encouraged citizens, and the Latinobarómetro 2021 Report states, "The pandemic puts a glass on the region that shows the crude reality, impossible to miss. Citizens, more empowered than ever, have left Macondo to join the world, raising their demands to those of the globalised world. The rulers have been warned". (Santiago de Chile, 7 October 2021). The demands came out strongly in the four countries mentioned, where there are no quality schools, no decentralised and well-equipped medical centres, and no guaranteed minimum income for all the people who do not have formal employment. According to the Latin American Barometer 2021, Mexico, Brazil and Peru are the countries with the most concentrated 1% income. Social protection coverage is limited, and levels of formal employment are also low. Mexico and Brazil have more extensive national social protection programmes with massive transfers, but Ecuador, Peru and Bolivia are not as widespread.

Peru has barely 20% of the population with any social protection. The ILO's December 2022 report said that "the crisis has disproportionately affected indigenous peoples in Latin America, highlighting the pre-existing barriers they face in accessing health care and social security (...) as a result of historical discrimination and marginalisation". Protests have erupted over the democratic deficit to address their demands. In Peru, the perception of ideological falsehood in politics complicates the scenario, where since 1990, there has been a left-wing election. Still, an increasingly totalitarian right-wing Government is always in power. In Brazil, the poorest sectors came out in support of Bolsonaro because of demands against the corruption of the PT and in favour of the immense social support that the military delivered. In Bolivia, the protests were about the power of Santa Cruz de la Sierra and its confrontation with the Andean world it governs. In Ecuador, it had to do with economic measures that impoverished people with little social protection, as in Peru. The combination is saturation with economic adjustments that disregard the poor, who are the majority in these countries, as the Peruvian marches make clear. References to Sheldon Wolin's inverted totalitarianism have to do with the power of corporate government and evangelical churches in the countries, as opposed to the Catholic state fascism of the 1930s.

Finally, the year 2022, after the uncertainty that the Ukraine war brought in terms of growth, has brought out some clear ideas. The first is that China is a strategic enemy of the United States. The second is that the European Union is subordinate to Washington's policies in military and monetary terms. The Euro depreciates if the European central bank does not move interest rates with the Fed. The third is that retaliation against Russia benefited US oil companies. The fourth is that China articulates a strategy with Middle Eastern trading partners, its western flank, to secure the development of its Shanghai oil market and take it away from the West. It will make the oil less vulnerable to Washington's war-mongering. Fifth, Asia is building an international financial architecture of institutions and procedures parallel to the West. It is for national security reasons since they are the backbone of the world's largest economic bloc and cannot expose themselves to the kinds of financial sanctions with which Washington targets countries perceived as enemies. Asia contains more population, GDP, and international trade than the West and is less armed militarily than the West. Sixth, people in Latin America are showing tangible signs of saturation of economic adjustment policies combined with state neglect of people's incomes, health conditions and schools in the name of not raising or collecting taxes. Seventh, political polarisation increased across the board. US House Speaker Pelossi's visit to Taiwan triggered military reactions from the PRC, and Huawei's recent innovations led to the US finally shutting down its use of Google and American Android phones. Within Latin America, the communist/anti-communist polarisation, not because it is old-fashioned, is less present in countries where there are progressive governments with a homogeneous discourse against the Sao Paulo Forum, Castro-Chavismo, hatred of Evo Morales and the dictatorships of the left. It is a discourse constructed to frighten the listener but explains nothing. Politics, more than ever, is in belief and not reason. Within the United States, there is a list of 1600 books banned from public libraries in 32 states out of 51[2]. In Peru, those suspected of being Marxists or books authored by Marx or Shining Path leader Guzman can go to jail. Similar patterns follow in other countries. This pattern is inverted totalitarianism because it is the totalitarian rule of corporate power and evangelical churches. It is the materialisation of religious prejudices coupled with corporate needs placed on governments, not for the betterment of the state and the population, but for their own in the understanding that there is a market/barbarism opposition, as von Mises pointed out. 

In conclusion, 2022 was a year of less growth than 21, more international and domestic political polarisation, more political confrontation and evidence of loss of freedom of thought. The emergence of the Asian hemispheric financial architecture led by China speaks of a world where the concept of globalisation is fractured. While the United States pursues import substitution policies to catch up with China's advances in integrated circuits, China continues its growing investment and international trade. The East-West confrontation in Ukraine has strengthened the Asian bloc and hurt Europe. The military-industrial complex's profits remain strong. The social conflicts that started in Peru in December 2022 continue and could become an economic risk factor for Peru in 2022, where both sides have irreducible positions.

Cuernavaca, 8.2.2023

Palabras clave: 
Tema de investigación: 
Crisis económica