The world is a fast-changing and much different place than it was two years ago. The pandemic was a trigger for Governments around the world to impose far-reaching authoritarian regulations and restrictions on their citizens. Across the Western world, the ‘two weeks to bend the curve’ turned into extended periods of complete economic and destructive, social lockdowns. This has crippled Western economies and destroyed many small businesses and livelihoods. The government have funded this massive experiment through debt, which was enabled by Central Banks, which purchased the government-issued bonds. The money-go-round was facilitated by monetary policy, keeping interest rates and historical lows, at around zero. The huge aggregation of debt around the world is yet to be fully comprehended, but forced consideration will become necessary, as interest rates rise, and debt serviceability becomes a threat to economic survival.
The pandemic is receding, as the ‘omicron’ variety acts as a vaccine through infection and from natural immunity. The end of the pandemic has been welcomed by a ‘Black Swan’ event, in the form of a European war, in Ukraine. The Russians have taken advantage of the tumultuous political times and decided to effect regime change, through military means. The Russians have invaded Ukraine with the outcome still to be determined. There is a chance of escalation into other parts of Europe, or perhaps contained to just the Ukraine? Western powers have been quick to respond, with sanctions, which may have unforeseen consequences for Russia and the world. The economic sanctions include barring Russia from the SWIFT money transfer system and freezes on Russian Central Bank assets. The desire is to destroy the Russian Rouble and drive inflation and heavy pain on the Russian population. Ironically, the Russians are very independent, having been sanctioned for many years, but Europe is not. The West is heavily dependent on Russian agriculture, oil and gas, having experienced an energy cruise over the last few winter months, which will now be seriously
The impact on the global economy could be dramatic and change the way the whole world’s monetary system operates. SWIFT money system transfers have been the backbone of world trade and inter-bank money transfers for nearly 50 years. It was created almost 50 years ago and has been the main money transfer system between countries and banks, around the world. If the West decides to ban certain countries, as it has with Russia, there may be an emergence of a new money transfer system and even questions regarding the status of the reserve currency, the mighty US dollar. China already has a functional money transfer system, already operating, which provides alternative options and may then become the preeminent system.
Modern monetary policy (MMP) has suffered a severe reality check, with the return of rampaging inflation, across the globe. MMP was promoted as a new monetary policy theory, where the Government could issue debt and fund it through their Central banks (debt monetisation), at a near-zero interest rate, without consequence. Inflation has re-emerged, at levels not seen in more than 40 years and forced a shattering reality on the many foolish Central Banks and Governments. Fiscal and Monetary expansionism is over. The Bank of England and the RBNZ have already embarked on a tightening of monetary policy and began a new cycle of rising interest rates, to combat rampant inflation taking hold in their economies. The Fed has signalled they are also about to do the same, although the Ukraine situation may provide the excuse to defer this change in policy.