Trade Wars

US stagflation is a triple whammy from the Fed, Biden’s White House and big defense – Analysis – Eurasia Review

Stagflation is no longer just a threat of recession in the United States, but a global risk. It is the net effect of a triple whammy that penalizes American well-being and the global recovery. But it won’t hurt profit margins for defense contractors.

Recently, President Biden admitted that US inflation was stuck at “unacceptably high” levels after the annual rate in April soared to 8.3%. He blamed the Covid-19 pandemic and Russian President Putin for price increases in the United States instead of his government spending.

After four years of Trump devastation, the Biden administration had a historic opportunity to reset economic policies by undoing self-defeating trade wars, and geopolitics by redirecting military spending to welfare. Instead, the White House missed both opportunities. The net effect is the worst inflation in four decades that the Fed could turn into stagflation.

What went wrong?

The Mistakes of the Fed: From Inflation to Stagflation

Since the start of the pandemic, the Fed has made two mistakes. Ignoring WHO warnings about the international spread of Covid-19, it began cutting rates late in March 2020. The Trump administration amplified the error by trying to protect the US stock market at the expense of the American people .

The second error occurred after the middle of 2021, when inflation started to climb rapidly. Instead of a quick response, Fed Chairman Jerome Powell called the price hike “transient.” In December, inflation was up 7% from a year ago; and in March, 8.5%; a high of 41 years. In early May, the Fed raised its benchmark interest rate to a range of 0.75% to 1%, after a more modest rise in March. This is the Fed’s biggest hike in 22 years. In April, inflation slowed to 8.3%, but less than market forecasts (Figure 1).

Figure 1 How the Fed missed runaway inflation

The Fed is also planning quantitative measures contraction (QT) and will begin stripping assets from its $9 trillion balance sheet in June. He will do this at almost twice the rate of his previous QT. To respond late is to exaggerate. Hence the concern for stagflation: rising prices coupled with economic stagnation.

The Mistakes of the Biden Administration: Shocks to Commodities and Energy

Commodity prices have climbed 45% since the start of the year and remain close to record levels. The same goes for food prices, which hit a record high in March, up almost 20% year-on-year. UN Secretary General Antonio Guterres called it “a hurricane of hunger and a collapse of the global food system”.

Crude oil prices peaked at $125 in early March, rising 43% since January, and remain at $113. In Europe, the region most exposed to Russian energy, the price of natural gas quintupled to a high of 230 euros and fell to 96 euros as concerns about Russian supplies eased somewhat, for the moment (Figure 2). Hence the threat of recession hanging over the euro zone. And if the proxy war takes an unfavorable turn again, commodity and energy prices will skyrocket again.

Figure 2 Energy and food shocks

Commodity Index (S&P GSCI); food prices: UN/FAO food price index; oil: Crude oil (WTI); natural gas (EU Dutch TTF), 17 May 2022
Source: commercial economics; Difference Group

A benign scenario in the Ukrainian crisis would have required swift and proactive diplomacy. But that has not been a priority in the proxy war. As US Secretary of Defense Lloyd Austin acknowledged at the end of April: “We want to see Russia weakened.”

Russia is the world’s 11th largest economy with $1.8 trillion, the world’s largest exporter of gas and the second largest exporter of crude oil. Neither the protracted Ukrainian crisis nor the militarization of sanctions will advance peace. But both will penalize the global recovery.

While some U.S. policymakers are calling for tariff cuts to provide relief to consumers struggling with soaring prices, the Biden administration is reviewing tariffs imposed on Chinese goods before they expire in July. With Biden’s ratings plummeting, Democrats are struggling to avoid a Republican triumph in the fall election.

Despite the hopes of the Trump and Biden administrations, US trade tariff wars have failed to reduce the deficit. Unilateral trade actions do not solve multilateral trade problems. Indeed, the deficit widened sharply to reach a record level of $110 billion in March, due to a general rise in prices (picture 3).

Figure 3 Despite trade wars and pandemics, record US trade deficit

Source: BEA; commercial economics; Difference Group, May 17, 2022

The Pentagon Mistakes: Collusion with Big Defense

The architect of President Biden’s geopolitics in Asia is Kurt Campbell, a seasoned diplomat and CEO of Asia Group LLC. In January 2021, his appointment sparked public debate in the United States, due to Campbell’s portfolio of former clients plagued by potential conflicts of interest. According to its own disclosures, major customers include major defense contractors. In the eyes of critics, “shadow lobbying” groups like Campbell’s firm call themselves consultants to avoid the restrictions associated with traditional lobbying.

Campbell is not alone. Secretary of State Antony Blinken and National Security Advisor Jake Sullivan were in similar ventures, leading to similar debates. And before presiding over the Pentagon, Secretary of Defense Lloyd Austin served on the board of Raytheon, a major defense contractor.

What makes Campbell different is that he dominates American policy-making in Asia.

Additionally, in November 2021, Biden nominated Fed Governor Lael Brainard as Vice Chairman. With the confirmation of his appointment, Brainard’s dovish views changed. Now it is pushing rapid rate hikes. Brainard is an accomplished veteran Democrat, like her husband – Kurt Campbell.

So, in addition to Campbell’s alleged conflicts of interest, the husband-wife bond reinforces critics’ perceptions of unspoken collusion in decision-making by the executive branch, monetary chiefs, capital markets, the Pentagon and the Grand Defense.

Since the Obama administration, the White House has promoted a “pivot to Asia”, a doctrine which relies on American military power and which is entirely in line with the interests of Grand Defense. Its architect also happens to be Campbell.


Among other collateral damage, inflation has contributed to excesses in the US housing market, keeping it out of reach for many ordinary Americans. In contrast, defense contractors are the primary beneficiaries of inflation, due to increased defense budgets, including the use of inflation as an excuse to raise prices.

So it’s safe to ask whether Campbell’s kingpin is less driven by American welfare and the American national interest than by the revolving door practices of the Pentagon and the fat margins of defense contractors.

The first version of the column was published by China Daily on May 19, 2022