[Insight & Opinion] The Invisible Hand That Moves the Economy

[Asia Economy] In 1980, the U.S. benchmark interest rate rose to 21%. This is a commonly cited example when explaining central bank interest rate policies aimed at combating inflation. Why did inflation occur at that time? The biggest reason was the oil shock. When the Fourth Middle East War broke out in 1973, Middle Eastern oil-producing countries directly targeted the U.S., which had unilaterally supported Israel. The international oil price, which was $2.9 per barrel, jumped to $12 within a month. In 1979, it soared to $39.5 per barrel. Although inflation was triggered by the oil shock, the oil shock itself was a result of the U.S.'s Middle East policy?in other words, a political choice made by the U.S.

President Joe Biden’s plan to curb inflation is very simple. First, leave it to the central bank. Second, lower living costs. Third, reduce the fiscal deficit. However, there are limits to what the central bank can do. Much of the current economic situation is the result of U.S. political plans and decisions.

First, consider international oil prices. Since taking office in January last year, President Biden has consistently pursued policies to curb fossil fuels. On his first day in office, he canceled permits for the construction of oil pipelines between the U.S. and Canada and banned drilling activities on federal lands and offshore areas. After strengthening methane gas emission regulations, he declared a ‘phase-out of fossil fuels.’ Naturally, oil companies reduced reinvestment in shale oil production, and Wall Street collectively halted related investments. Biden also did not lift the oil export sanctions on Iran initiated by former President Donald Trump. Although he may not have anticipated the current situation, it is not an exaggeration to say that President Biden has effectively caused the current oil supply shortage.

What about the Ukraine war? If the war ends quickly, it would likely be because a clear victory or a diplomatic ceasefire agreement has been reached. Given the current state of the conflict, it seems difficult for either side to gain a decisive advantage. It is also unlikely that Russia will rush into ceasefire negotiations. Putin is probably hoping that when winter comes, Europe will eventually surrender due to energy shortages. The country that can realistically exert influence is, of course, the U.S.

The war could end if the U.S. stops supporting Ukraine and actively mediates. Oil, natural gas, and grain prices could stabilize, and if inflation is controlled, there would be no reason for the U.S. to raise benchmark interest rates. However, it seems unlikely that President Biden will pressure Ukraine to end the war. Doing so would be tantamount to admitting failure, which is not an option for Biden ahead of the midterm elections.

The U.S. has turned both energy-rich Russia and the world’s second-largest economy, China, into adversaries simultaneously. Over the past 30 years, globalization has kept inflation in check, and China’s production capacity with its large low-wage labor force was the foundation. Despite the massive amount of money pumped into the economy, prices did not rise because China was able to supply inexpensive goods abundantly.

However, the situation is changing. As the U.S. attempts to build a global supply chain excluding China, the era of low inflation enabled by close U.S.-China economic ties is coming to an end. The world is now struggling with inflation. The structural shift toward a high-inflation era in the global economy is a political issue and a result of the U.S. strategy to exclude China and Russia from the global stage.

The U.S. aims to block China and contain Russia while simultaneously establishing a new and stable economic order. This is no easy task. Politics and economics are more closely intertwined than one might think.

Kim Sang-cheol, Economic Columnist