Nothing is worse than describing a political phase as “transitional” except describing an economic phase as “transitory.”
Such labels are typically used as euphemisms serving to downplay the detrimental impacts being experienced by a society during a particular phase. They also serve to obscure the limited understanding people have of the nature of that phase and when a new and presumably better one will begin.
“Transitory” is a word that was frequently used by US Federal Reserve Chairman Jerome Powell after 2021. It was in this year that the US economy began to be hit by a relentless rise in inflation rates amid sharp increases in consumer prices of a kind unseen in 40 years.
This was due to the supply chain disruptions caused by the Covid-19 pandemic and the consequences of the exceptionally generous monetary easing policies put in place in response to it. The practical effect of labelling such phenomena as “transitory” was to delay the implementation of the necessary monetary tightening measures, ultimately compelling the Federal Reserve to resort to more aggressive measures such as successive interest rate hikes to contain inflation before it spiralled out of control.
These measures eventually worked, but only at a considerable cost for society. Moreover, their impact was not confined to the US. The developing countries reeled as a result of unpredictable exchange-rate fluctuations, the depreciation of their national currencies, soaring debt-servicing costs, and steeply declining investment and economic growth rates due to higher financing costs, all as a result of economic developments coming out of the US.
“Transitory” resurfaced following the recent meeting of the Federal Reserve that resolved not to change US interest rate policy. This time Powell invoked the term to characterise the inflation that could arise from the Trump administration’s recent tariff hikes.
The Fed will not readjust its interest rate plans, despite market expectations and hopes for a half-percentage-point cut from the current rate of 4.5 per cent. The news comes amid renewed concerns over the spectre of stagflation, and forecasts of mounting inflation coincide with successive downward revisions of US economic growth projections for 2025 from 2.8 per cent last year to 1.7 per cent earlier in this. The US investment bank Goldman Sachs has raised the probability of a US recession from 20 to 35 per cent.
The purpose of interest rate cuts, if they were to be introduced, would be more about preventing a recession than about providing relief from inflationary pressures through monetary stabilisation and a gradual decline in inflation to the official two per cent target.
The return to protectionist measures in the US is a sign of a contagious disease that could spread beyond the economy to wreak profound damage on the political, social, and security spheres. The harms of such measures are well documented, and they date back to the mercantilist policies of the 17th and 18th centuries in Europe, when restrictions on imports and exports precipitated international trade wars.
History has repeatedly shown that the consequences of reverting to protectionism have never been benign. A more recent instance of this occurred in the US a century ago, when US farmers, struggling with a surge in European agricultural imports, pushed for higher tariffs. Manufacturers followed suit, and mounting pressures for change led to the Smoot-Hawley Tariff Act of 1930.
This triggered a global wave of measures inimical to free trade, turning former trade partners into bitter adversaries. While economists may debate whether these policies alone caused the Great Depression, it is certain that they caused global trade to shrink by two-thirds, undermined international cooperation, inflamed political tensions, and helped to create the conditions that led to the catastrophe of World War II.
Last week, Larry Fink, the CEO of BlackRock, the world’s largest asset-management company, warned shareholders in an open letter that “protectionism has returned with force.” People today are “more anxious about the economy than at any time in recent memory,” he said.
Given the rapid succession of economic shocks that the world has seen in recent years, it is not surprising that many people are worrying about the future of the world’s financial markets. Unfortunately, their questions are met with conflicting answers that predicate improvements on conditions that are unfulfillable under the current resurgence of protectionism.
People are also questioning the future of the dollar as the main international currency. To this the response remains the same as it has long been – the dollar is still the dominant international currency and the “lingua franca” of global finance, as the US economist Jeffrey Frankel put it three decades ago.
However, lest anyone should be too quick to take comfort in that answer, Frankel himself warned in a recent article that the Trump administration’s protectionism could “almost certainly spell the end of the US dollar’s reign as the dominant international currency.” At that point, alternative currencies will be poised to fill the gap, a topic which I will explore in an upcoming article.
Many hardcore wishful thinkers and resolute optimists confident that all will ultimately work out for the best believe that the blows currently being aimed at the global economy will pass without lasting effect. The US midterm elections will take care of that, they say, and if they do not, then their effects will not last beyond the 2028 elections. This is part of their confidence that these elections will produce wise leaders dedicated to shared prosperity throughout the world.
However, the reality is that we are not currently witnessing a mere political cycle or a seasonal economic phase whose effects will pass with the next cycle or phase. Nor is what we are witnessing a structural shift that can be rectified through supply – or demand – side restructuring.
Instead, it is part of an acute and systemic transformation that, after years of subtle hints, is now proclaiming loud and clear that the “global order” that has prevailed since World War II has effectively come to an end. For the Global South, this situation may present long-awaited opportunities if it seizes the moment wisely.
This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
* A version of this article appears in print in the 10 April, 2025 edition of Al-Ahram Weekly
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