The pain the Federal Reserve is inflicting around the world could hit Americans next. KevinTDugan writes
, the CEO of the financial-advisory firm Santiago Capital, predicted this phenomenon years ago. “As that dynamic worsens, there starts to be a rise in global defaults,” he told me recently. “Once these defaults start to happen, it can have a knock-on effect, which creates more defaults and more financial volatility and more contagion. And now with global growth slowing, they are all hitting the wall.
In Johnson’s analysis, there’s an even worse way the Fed’s 2022 playbook could backfire: As the supply of dollars shrinks, investors around the world could turn to other major currencies as a baseline for trade. China could take steps to make the yuan more attractive as an alternative, or a basket representing some combination of euro, sterling, and gold could emerge. That scenario is somewhat remote, with U.S.
If we’re embarking on a disaster, there may be no way to change course that wouldn’t risk calamity of a greater magnitude. Powell’s immediate predecessors, Ben Bernanke and Janet Yellen, flooded the world with cheap debt after the. When they sought to tighten the economy, investors revolted, and central bankers relented each time. Through a combination of their missteps and his own, Powell is essentially locked into a path of continuing to raise rates.
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