All actors and stakeholders of the international economic system are focused on the Russia-Ukraine war and the deepening inflation trend globally and the uncertainty regarding growth expectations. While the two "black swans," the global coronavirus pandemic and the Russia-Ukraine War, have exacerbated concerns about global food, energy and supply chain security, the general expectation at the beginning of March was that the leading economies would resume the expansionary monetary and fiscal policy program they set for a certain period of time. The term "black swan" is defined as an event or a process that causes irreversible and radical changes in the world economy and politics.

In fact, it seemed logical to focus on and maintain expansionary economic policies in order to compensate as soon as possible for the economic contraction and rising unemployment triggered by the pandemic, that affected 90% of the leading economies. However, in a few weeks toward the end of March, the concerns about the global inflation bubble escalated so rapidly. In April, the U.S. Federal Reserve's (Fed) rhetoric prioritizing the inflation risk became stronger and as of May, it was now the only one for the Fed. All markets have accepted that the priority is inflation.

In other words, despite all the uncertainties caused by the two black swans, the positive effect of the expansionary policies and the two-year economic contraction and rising unemployment, and without waiting for the positive growth and recovery in employment to catch a permanent trend, the Fed has chosen a new path that may face the recession risk. This new path is likely to cause a serious recession and increase unemployment in the U.S. economy, which will have repercussions on the upcoming Congress elections in November. Besides, if China’s heavy quarantine against the pandemic continues, a recession will be also observed in the Chinese economy. That means the recession of the world’s two leading economies will once again deeply affect global growth.

The public support that can curb the negative impacts of the two black swans can bring the budget deficit to a risky level. In order to avoid it, the leading economies need an increase in tax revenues, and accordingly reasonable positive growth and a decrease in unemployment. For this reason, the Fed's new path, which prioritizes inflation and tightened monetary policy, also puts public support that will eliminate the negative effects of the two black swans at risk. The decrease in tax revenues and the increase in the costs of bond borrowing, which will be needed to finance public support, point to the risk of banks' directing their resources to public borrowing instead of the real sector. It also points to the risk of returning to the world of the 1990s with the exclusion effect.

The new path

Well, what about the investments that target the global climate change and accordingly carbon reduction and prioritize green energy transformation? In other words, the Fed's new path will not only cause it to face the crowding-out effect of the real sector in financial markets. At the same time, it will endanger the delay of projects to meet climate change targets, the increase in global poverty that triggers global migration, and the management of the global debt spiral that has already turned into a vortex based on $300 trillion.

It is at this point that we diverge from the neoliberal orthodox economists' preference for prioritizing unconditional inflation. Between 1980 and 2000, the neoliberal orthodox tightening monetary and fiscal policy choices meant a risk of growth and job losses only for the countries that chose it. However, the multilayered economic relations that the international economic system has revealed today, which are sufficiently intertwined, increase the negative effects of the Fed’s preferences on the U.S. economy on the global economic system several times and make it even more unmanageable. While the two black swans have already caused a heavy global uncertainty, the further increase in global borrowing costs will also trigger different results in terms of poverty, regional instability, migration and social peace in terms of global economy and politics. Hopefully, the Fed is aware of the risk posed by deepening the global recession.