As inflation ravages economies around the globe, central banks are allowing interest rates to rise in an effort to belatedly respond to a crisis they helped cause. Even now, though, the U.N. is seeking lower interest rates and price controls, asking central banks and national governments to “avoid . . . reliance on monetary tightening,” and instead institute “price and markup controls.” That is a recipe for worsening the problem, not solving it.
Despite the assertion by Rebeca Grynspan of UNCTAD (the United Nations Conference on Trade and Development, a body within the U.N. focused on assisting developing countries’ trading relations with the global economy) that “there’s still time to step back from the edge of recession,” the global economic downturn has been baked into the cake for months.
Data from regional Federal Reserve banks, including Dallas, New York, Philadelphia, and Richmond, show new orders for businesses have been trending down for almost an entire year and have now plummeted to the point where current output levels cannot be sustained. Once firms work through their backlogs of unfilled orders, they will have to scale back output. That means layoffs and unemployment, which yields less income, consumer spending, and GDP.
Indeed, central banks around the world laid the groundwork for economic pain when they decided to finance trillions of dollars in unfunded government spending in 2020. As those central banks continued—and in some cases accelerated—their excessive money creation throughout 2021 and into 2022, a global downturn became inevitable. The Fed, for example, rapidly expanded its balance sheet every month in 2021 and began 2022 by increasing its monthly bond purchase by an additional $27 billion.
This money printing, together with the government-imposed shutdowns during the pandemic, led to price distortions that made long-term planning next to impossible for businesses and consumers alike. History shows that high levels of inflation almost always lead to recession, however much the UNCTAD might want to wish that fact away.
For two years now—after initially taking action to stabilize financial markets in early 2020—central banks have inexcusably been attempting to fund unprecedented government deficits. In doing so, the Federal Reserve and its counterparts risked spawning the cancer of inflation, and now the consequences of their actions are catching up to them.
Rather than facing the situation head-on, however, and doing what they could to minimize the risk with tighter monetary policy, once inflation became apparent central bankers persisted with their earlier course, feeding inflation, rather than starving it.
If they had acted earlier, far less drastic treatment would now be required. Not to mention the fact that the collateral harm to the global economy would have been minimized, and the likelihood that much of the world would slide into recession could have been greatly reduced.
But that’s not what happened. By now, the tumor has grown, and inflation is thoroughly embedded in many economies across the globe.
America and the world are still in the initial phases of treatment. To kill this cancer, much higher doses of monetary “chemotherapy” are still to come, with much more harm to the patient in the process than would otherwise have been the case.
Higher rates will be painful, but the UNCTAD officials who are balking at the treatment for fear of its side effects are on the wrong track.
After all, there is no better alternative.
Today, there is no way around the harsh reality that the bill is coming due for the last two years of monetary malfeasance. Though the UNCTAD’s suggestion that central banks might square the circle by reducing prices without tightening monetary policy sounds nice, it would be entirely ineffective. In the past, price controls have proved to be little more than snake oil—entirely ineffective—and they will be no more successful this time than they ever have been.
Inflation fueled the boom, and inflation’s departure heralds the bust. The sins of the past always catch up to you—be they moral or monetary.
This piece originally appeared in The National Review