Since early 2022, when the US Federal Reserve started the stampede of global central banks raising interest rates, the favourite term of commentators around the developed world has been “resilience”.
“Fiscal dominance” is the idea that bloated government deficits – particularly in the United States – are frustrating the efforts of central banks to wrestle inflation. And the corollary of continuing, gaping budget deficits is that both inflation, and interest rates, will remain higher for much, much longer.. The minutes from the Fed’s meeting last month indicate US interest rates are likely “at or near their peak”.
The International Energy Agency last week warned that a sharp escalation in geopolitical tensions in the Middle East has rattled markets. “While there has been no direct impact on physical supply, markets will remain on tenterhooks as the crisis unfolds”, the IEA said. Although the US has managed to eliminate its energy deficit, it faces a much more intractable problem with the massive US government budget deficit, which climbed to around $US2 trillion in the fiscal year that ended on September 30.
But growing geopolitical tensions aren’t only creating budgetary strains for governments. They’re also affecting commercial decisions, and pushing production costs higher.