Inflation Fears and Poor Nations

Since our economic betters have overlearned the lessons of the 1970s and have responded to this brief and highly specific to a global pandemic period of inflation by going full 1979 and seeking to tank the economy, it’s worth noting that has global impacts, many of which are very negative to the world’s poor. And as Kate Aronoff points out, these impacts will do a lot to hurt the global south’s ability to mitigate against climate change.

This is good news, albeit a bit late. Actions elsewhere at the Fed, though, could hobble the world’s ability to respond to and mitigate the climate crisis. All signs now seem to point to the Fed raising the federal funds rate by another 0.75 points later this month. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation,” Fed Chairman Jerome Powell said in Jackson Hole, Wyoming, last month, “they will also bring some pain to households and businesses.” Powell affirmed that statement this week in a conversation with CATO Institute president Paul Goettler, pledging to “keep at it until the job is done,” while hoping that job could be done without the “very high social costs” that accompanied breakneck interest rate hikes in the late 1970s and early ’80s, which triggered two recessions and a global debt crisis. The Fed’s own economist, by contrast, has warned of a “severe recession” if that body stays the course with raising rates.

Fed officials have acknowledged at least some of the domestic dangers of that path. As Powell admitted, the goal is to “get wages down” and depress demand by making people here poorer and less likely to buy stuff; disproportionately, those thrown out of work and made worse off will be people of color. In the controlled burn that is raising interest rates, America’s  most vulnerable workers are the kindling.

But people in the U.S. aren’t the only ones who’ll be hurt; the controlled burn is already spreading. Some 90 percent of foreign currency exchanges happen in dollars, and so-called “emerging markets” (low- and middle-income countries) have enormous debt denominated in dollars, which have been abundant amid low interest rates since the Great Recession. Amid multiple crises over the last few years—a pandemic and ensuing vaccine apartheid, the war in Ukraine, and a steady drumbeat of climate disasters—those debts have increased. A stronger, more expensive dollar is making them harder to pay. According to the World Bank, more than half of low-income countries are at risk of debt distress, or already in it.

Among them is Pakistan, where at least 1,400 people have been killed in flooding that has displaced at least 35 million people. In the midst of a physical and political crisis sparked by rising food and fuel prices, Pakistan has also been attempting to secure additional funds from the International Monetary Fund to stay afloat, packages that come with mandates to enact painful “structural reforms” like making obscenely expensive energy even more expensive. While Americans have been pleasantly surprised to find their dollars at parity with the Euro while vacationing along the Amalfi Coast, the rupee and other basket currencies in poorer countries have hit historic lows against the dollar. As flood damage in Pakistan continued to mount—now estimated to be “far greater” than $10 billion—the IMF approved another loan worth $1.1 billion for the country last week.

Debt burdens limit countries’ ability to respond when disaster strikes, let alone make investments to adapt to extreme weather or mitigate their own emissions. Still, some 80 percent of the paltry climate finance on offer from richer countries to do all these things has come in the form of loans, further adding to climate-vulnerable countries’ debt burdens. There’s been scant climate finance on offer at all, though, as historical emitters like the U.S. continue to brush off concrete conversations about financing for “loss and damage” (recovery) during U.N. climate talks. Whether acknowledged or not, the IMF is now a major provider of climate finance by default.

It would be nice for the Federal Reserve to realize that this is not 1979 anymore.