UN Agency Warns of Global Recession Due to Tightening Monetary Policy

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The United Nations Conference on Trade and Development (UNCTAD) got it half right.

The UN agency warned that there is a high risk of a global recession due to central banks tightening monetary policy to fight inflation. But the solutions offered reveal that the UNCTAD has no idea what causes inflation.

The UNCTAD issued the warning in a statement along with its annual report.

Any belief that they (central banks) will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.”

The agency warned that the ensuing economic downturn would severely impact emerging economies that already have high levels of private and public debt.

At a time of falling real wages, fiscal tightening, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones.”

UNCTAD Secretary-General Rebeca Grynspan told a press conference in Geneva that central banks need to abandon or at least slow down their tightening policies to prevent a global recession.

The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course.”

But the UNCTAD offers solutions that will do nothing to stop inflation and reveals total ignorance about the root cause of rising prices globally. Grynspan’s inflation-fighting measures include windfall taxes on corporations, better regulations to control commodity speculation and efforts to resolve supply-side bottlenecks.

Inflation was caused by central banks, including the US Federal Reserve, printing trillions of dollars out of thin air and injecting them into the global economies. And the debt Grynspan frets over was incentivized by those same central banks artificially holding down interest rates for more than a decade. The only way to reverse inflation is to soak the excess fiat currencies out of the economy. In fact, while current efforts by central banks to rein in inflation will almost certainly create economic chaos, it is not sufficient to slay the inflation dragon.

Even though Federal Reserve Chairman Jerome Powell has conceded the inflation fight will cause some pain. He’s still holding out hope that the Fed can orchestrate a “soft landing.” In a podcast, Peter Schiff said, “That ship has sailed,” noting that the Atlanta Fed has now dropped the Q3 GDP projection to 0.3%.

And yet Powell called the economy “strong and robust.” That means the economy can withstand these rate hikes. The markets seem to believe this. But Schiff said the markets are wrong twice.

They’re wrong about the economy and they’re wrong about the inflation. The economy is going to be much weaker than investors think. But at the same time, inflation is going to be much stronger than investors think.”

Powell’s thinking is indicative of most central bankers.

The Federal Reserve and global central banks around the world kept interest rates at zero and ran quantitative easing in order to put off economic pain in the wake of the 2008 financial crisis. These central banks didn’t want to allow a bad recession to get worse. Then they then doubled down as governments locked down their economies during the pandemic. Central banks wanted to prop up stock prices. They wanted to prop up real estate prices.  They wanted to prop up economies. So, in order to do that, they printed money and created inflation. They put interest rates at zero.

Now we’ve got a huge inflation problem. The Fed and other central banks have to fight a monster that they created. But they can’t fight and create inflation at the same time. So, if the only reason the economy was propped up was because of inflation, and now we’re going to remove the inflation prop, everything built on top of that foundation has to collapse. And that’s exactly what we’re seeing.

The UNCTAD is correct about the looming recession. It is correct that monetary tightening is exacerbating it. But they have no solution. That’s because there is no solution. Central banks have two choices – pop the bubbles and collapse the global economy as the UN warns, or capitulate to inflation and return to loose monetary inflation.

Reports like this one coming out of the UN will only increase pressure on the Fed and other central banks to pivot. For now, Jerome Powell at least has remained resolute and insists the Fed will stay in the fight no matter what. But a week ago, Bank of England Governor Andrew Bailey was singing the same tune. And then the Bank of England capitulated and pivoted back to QE at the first sign of a crisis.

At some point, the Fed will likely follow suit. But it will be too late to rescue the economy. So get ready for some serious stagflation.

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