As Tensions with Oil-Rich Russia Intensify, Will Biden Pull a Carter 2.0?
Article written by Jett James Pruitt
"It's the inflation, stupid."
Last Monday, President Joe Biden shocked television audiences when he personally insulted a Fox News reporter who asked him about inflation during a press briefing.
Following the conclusion of a press conference, veteran White House Correspondent Peter Doocy asked the President “Do you think inflation is a political liability in the midterms?” As Doocy — along with other journalists— was being escorted out of the building, the President facetiously responded “No, it’s a great asset. More inflation.”
Then, seemingly out of nowhere, the President muttered “What a stupid son of a bitch.”
Later that evening, the President called Doocy to apologize. As reported by Fox News, Doocy claimed that Biden “cleared the air” and assured him the remark wasn’t personal.
As reflected by the President’s frustration, inflation is indeed on the minds of many Americans.
U.S. President Joe Biden
According to the U.S. Department of Labor, the consumer price index (a measure that helps economists track inflation) increased 7% in 2021, the largest 12-month gain since 1982. Overall, this translated to higher prices for food, energy, and shelter throughout the United States.
Certain niches of the economy have been hit the hardest. Gas prices, a sensitive spot for American consumers, were up nearly 59% in November 2021 compared to November 2020.
Evidently, this sank President Biden’s approval ratings, as well as struck a major blow to consumers. The situation became so bad that the Biden Administration released 50 million barrels of oil from the Strategic Petroleum Reserve to help reduce gasoline costs.
Sarah House, a senior economist at Wells Fargo, offered a bleak assessment of rising prices. “There is still tremendous momentum when it comes to inflation right now,” she told the Wall Street Journal. “While inflation is likely to peak in the next few months, the overall pace is going to remain a challenge for consumers, businesses and policy.”
Unfortunately, current economic trends are not expected to stop. A recent report by the University of Michigan shows consumers expect inflation to rise nearly 5% in 2022. Most of all, a Personal Consumption Expenditures (PCE) report indicated that consumer spending slightly decreased over the past year. As inflation is making goods less affordable, Americans are closing their wallets.
In response, the Federal Reserve announced it will raise interest rates for the first time in three years.
On Wednesday, January 26, Federal Reserve Chair Jerome Powell held a virtual press conference in Washington, D.C. Among other things, he acknowledged that elevated levels of inflation continue to dampen economic activity.
“There’s a risk that the high inflation we’re seeing will be prolonged, and there’s a risk that it will move even higher,” Powell said. “We have to be in a position with our monetary policy to address all of the plausible outcomes.”
U.S. Federal Reserve Chairperson Jerome Powell
For context, the Federal Reserve serves as the central bank of the United States. In short, the Fed is tasked with developing monetary policy, analyzing economic data, and maintaining price stability throughout the country.
Monetary policy involves changing interest rates in what economists refer to as “the money market.” In general, higher interest rates discourage private spending and investment, effectively contracting the money supply and lowering price levels. When this occurs, both GDP and inflation typically decrease.
This tactic was deployed by Chairman Paul Volcker during the Jimmy Carter Administration. When prices increased as much as 14.8% in 1980, Volcker spiked interest rates to curb inflation. As rates hit 20% in 1981, the United States entered an agonizing recession. Unemployment shot up to double digits.
Eventually, both inflation and interest rates started to decrease by mid-1982. While the United States recovered, the 1980-1982 Recession left an indelible stain on the American conscious.
With this in mind, Chairman Powell’s statements indicate that America might have a tough road ahead.
The Recession of 1980-1982
So, is another recession in our future? Think again.
Despite soaring rates of inflation, the United States is experiencing considerable economic growth. Per the Bureau of Economic Analysis, U.S. GDP (Gross Domestic Product) expanded 6.9% in the fourth quarter of 2021. For the entire year, economic growth accelerated at a 5.7% rate. This was the highest showing since 1984.
Moreover, the economy reached full employment in 2021. An average of over 500,000 jobs were created each month, shrinking the unemployment rate from 6.3% in January to 3.9% in December. While jobs gains slowed by the end of the year, it appears the job market is performing relatively well.
Taking a victory lap, President Biden shared the results on social media.
“Folks, great news,” said Biden on an Instagram video. “[We experienced] the fastest economic growth in 38 years in our first year in office. Things are moving!”
As most Americans know, the emergence of COVID-19 caused supply-chain disruptions, shortages of goods, and massive job losses as businesses were forced to shut down around the world. When consumers were forced to quarantine, economic growth took a nose dive.
Two years later, with the United States now dealing with the Omicron variant, the economy is contradicting itself. On one hand, consumers are getting strangled with higher prices; on the other, the job market is flourishing.
Biden Celebrates The Latest Economic Expansion Report
So, what is the true state of the economy? Is the United States economy truly standing strong in the mist of inflation, supply-chain disruptions, and COVID-19?
As of this writing, these are extremely difficult questions to answer. A variety of factors have yet to come into play, and it remains unclear as to how, or if, inflation will slow down in the near future. Furthermore, economists are eagerly waiting for the Fed’s official decision on interest rates. Will the bank raise it by 2, 5, or maybe 10 points? Few know for sure.
Yet, there is one major development that is flying over most economists’ heads: imminence of war.
Russia has amassed nearly 100,000 troops on Ukraine’s border. Concerned about the possibility of an invasion, the Pentagon recently put 8,500 soldiers on “high alert.” This move signifies the United States — along with NATO allies and other Western nations — is preparing for Russian military action.
Speaking at a press conference on Monday, Pentagon spokesman John Kirby assured the move was not an act of provocation.
“I want to reinforce that as of now, the decision has been made to put these units on higher alert and higher alert only,” Kirby stated. “No decisions have been made to deploy forces from the United States at this time.”
Despite this, the likelihood of war is increasing every day. Adhering to historical precedent, this could entail massive economic consequences for both the United States and Europe.
Russian Troops Lined Up On The Ukrainian Border
Russia is currently Europe’s largest provider of energy, supplying nearly 40 billion cubic meters of natural gas through Ukraine’s pipelines. According to the U.S. Energy Information Administration, nearly 90 percent of Moscow’s natural gas exports when to either European or Eurasian countries in 2020 (most recent year available).
Gazprom, a Russian state-owned enterprise, is the largest publicly-listed natural gas company in the world.
Against the backdrop of recent developments, oil prices surged to $90 a barrel for the first time in seven years (per Reuters). Considering that Russia is also the third-largest petroleum exporter in the world (as of 2019), all European nations have cause for concern.
Meanwhile, Russian exports account for a sizeable portion of American trade. S&P Global — a financial analytics firm — reports that Russia exported an average of 200,000 barrels of oil per day in 2021. War will indubitably cut that line off, budging prices up.
During talks with journalists and prominent government officials, U.S. Secretary of State Antony Blinken stated the USA will ensure international energy supplies are not interrupted. Despite this, many investors remain concerned.
Nigel Gould-Davies, a former British ambassador to Belarus, told CNN:
“If you’re talking about a major conflict [involving] one of the biggest energy suppliers in the world — and a major transit country to the rest of Europe — then there can’t not be significant impacts on energy markets.”
Elaborating on Mr. Gould-Davies’ statements, an invasion against Ukraine will disrupt agricultural output. As noted by CNN, Ukraine is one of the four largest grain exporters in the world, supplying large amounts of corn and wheat to trade partners. As such, many financial pundits fear an all-out-war could drive up global food prices.
Okay, now is that the end of the story? Going to war with Russia will cause even more supply-chain shortages for oil and food? Higher gas prices and more expensive groceries?
Not so fast. There is yet another added complexity to the current geopolitical situation: Taiwan.
As Russia prepares to pounce on Ukraine, China might feel emboldened to do the same to Taiwan. Similar to how Russia views Ukraine, China believes Taiwan is a “breakaway province,” destined to one day be reunited with the mainland.
In recent months, China has escalated its military capabilities in the event of war. Per Nikkei Asia — the world’s largest financial newspaper — China plans to increase its nuclear arsenal to 1,000 warheads by 2030. Domestically, Beijing has imposed strict limits on video game usage and cracked down on the mass portrayal of feminine men. This, coupled with robust comments made from central authority, implies China is preparing to “reclaim” Taiwan.
As of this writing, the United States retains a policy of “strategic ambiguity,” it which it maintains unofficial relations with Taiwan while recognizing Beijing as the sole legitimate representative of China. To keep it short, the Biden administration has pledged support for Taiwan in the event of Chinese invasion.
While the Pentagon is unwilling to fully commit American personnel to Taiwan, war with China is a serious possibility.
If that were to occur, the American economy would be absolutely devasted. China is the largest supplier of imports to the United States, as well as the USA’s third largest export market. If either the USA or China were to impose sanctions and embargoes each other, the American economy would collapse overnight.
Condensing everything discussed, Russia’s incursion into Ukraine could set off a chain of geopolitical events that could shatter the global economy.
In other words, a perfect storm is brewing. With COVID-19 ravaging nations, inflation strangling consumers, the U.S. Federal Reserve raising interest rates, Russia preparing to invade Ukraine, Europe bracing for a transcontinental energy crisis, the United States sounding off war bells, and China surrounding Taiwan, the entire world might be in for a brutal economic winter.
In that case, life in America could be much worse tomorrow than it was under Carter.
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