Yesterday, the United States Federal Reserve decided to yet again increase interest rates by 0.25% up to 5% despite the collapse of several US banks, including Silicon Valley Bank (SVB), as well as more trouble overseas.
This eye-watering increase is expected to have a negative impact on US economic growth, place banks under even further strain, and, by extension, have global implications. The goal of the hike is to tame surging inflation that has spooked Western countries and stunted economic growth. Even more financial turmoil may follow as the Fed anticipates another increase later this year.
The decision is a sign of the times we live in. In the Western world, the economic “good times” are over, and have been over for some years now. A series of successive crises, arguably starting in 2008, have severely damaged the structure of Western economies. They have never truly recovered, promulgating immensely unpopular austerity regimes, growing wealth inequality and reducing consumption. If the 2008 global financial crisis was one turning point, then the Covid-19 pandemic was another. The boom years are over and, with the new geopolitical environment the US has carved out, it’s questionable whether an era of stability, prosperity and certainty will return any time soon.
The current global economy is built on a neoliberal capitalist system, which has been dominated by the US and the dollar. This system, built upon the economic policies of Ronald Reagan and Margaret Thatcher, consolidated its current form in the 1960s through the 1980s. We might understand it as a “financial-centric” model of open markets which opposed regulation and promoted globalization. It believed ideological change could be consolidated through the export of capitalism, which was seen as “preaching the gospel” to the communist world that was opening up and was part of the process of “integrating” post-Soviet Russia and China into the “Western value system” at that time.
This economic model caused large-scale economic and social upheaval in Western countries, depleting it of industry and creating “left-behind regions.” However, the relative political stability of this unipolar system also ushered in a period of unfettered economic growth which, barring one small recession in the 1990s, was an era of prosperity. That was, until 2008 broke everything. The global financial crisis was a systemic political and economic turning point for the neoliberal order. The outcome of that recession, and the debt and austerity crises which followed, meant that some countries never truly recovered – like Italy and Greece.
The subsequent impact of the 2008 recession unleashed political shockwaves in the form of movements which, for the very first time, began to oppose or react negatively to aspects of globalization. Most notably, this included Brexit in the United Kingdom and the rise of Donald Trump in the United States. These political developments played on the reality that globalization in its current form had “net losers” and reacted to socio-economic and geopolitical changes around the world which had eroded existing identities and a sense of security such as the rise of China and the diminishing position of the United States.
Fast forward to the present day, and this “neoliberal economic order” is arguably on its deathbed. The years of Western boom, enjoyed in the 90s and early 2000s, never returned and if the past few years are any indication, won’t anytime soon. The geopolitical climate is now in such a position that globalization is being rolled back, deliberately.
The economic system the US once built and heralded as a virtue to show communist countries the light of capitalism is now being dismantled because it is perceived not to have converted, but empowered “adversarial” states.
The US now opposes free trade, opposes economic integration between its allies and both China and Russia, and has no qualms about tearing up the roots of the globalization tree. The answer is less free trade, more tariffs, more sanctions, more export controls, more forcing allies to comply with what it wants, and unreasonable investments fueled by geopolitics, not market needs.
Successive US presidents have claimed that by doing this, they are bringing back the “good old days” and “making America great again,” but the picture looks bleak. The Biden administration’s economic policy is a disaster precisely because it is a mix of geopolitical assertiveness, heavy-handed protectionism, and catastrophic fiscal policy.
Washington’s decision to inject trillions to shore up the US economy, prolong a war which produces a running inflation crisis, insist on a growing economic war with China, and then be forced to raise interest rates multiple times, despite banks going under, is a cocktail of death. The US has drastically narrowed its options, and continually lied that it can handle the fallout.
Thus, the good old days of Western prosperity are over. The neoliberal Reaganite economic order was once the bedrock of global growth, as unfair and uneven as it was. But it is fair to say that by 2023, the geopolitical conditions which enabled this system no longer exist. The world has changed, and it is little wonder why.
The US has not truly been able to arrest the rise of China despite trying its darndest to disrupt it, or to deal a death blow to the Russian economy, which Washington officials had prematurely declared doomed. All of it indicates that US leadership is in the past, living in denial, and running policies on how they assume the world “should be,” rather than how it actually “is,” and it’s ordinary people who are footing the bill for it all.