People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, California, on March 10, 2023. Photo: VCG

The US economy is definitely hitting big problems. Three banks - Silicon Valley Bank, Signature Bank, and Silvergate Bank - have already collapsed, prompting emergency policies from the Federal Reserve to ensure depositors' money and provide loans to banks. However, US inflation issue has only been partially resolved. The market has generally expected a 50 basis point rate hike in March, but now there is confusion about whether to prioritize the banking system or continue to lower inflation. These two equally important goals are in serious conflict, which is the real crisis.

The root cause of this round of financial crisis is last year's high inflation in the US. To combat inflation, which peaked at 9.1%, the Federal Reserve raised interest rates eight times within a year, sharply raising rates from near-zero to over 4.5%. This was not only a sharp turn but also a double-edged sword. The only tool the US typically uses to curb inflation is raising interest rates. This boosts savings, leads to institutions purchasing government and bank bonds, while reducing economic activity, and earning interest without any effort. With less economic activity, the prices of various raw materials will decrease, driving down the prices of terminal products and reducing inflation. This is the most basic principle of economics.

However, such a sharp increase in interest rates will have an impact on the traditional business models of banks. As the US is a country with highly developed financial instruments, financial institutions are all playing the game of "making money from money." When deposits are more profitable than government bonds, that means the banks bond products will become worthless. As a result, small banks suffered huge losses and triggered a bank run after the news spread out. 

The Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other institutions promptly announced to ensure the full withdrawal of all depositors and provided new loan programs to all financial institutions. This is equivalent to promising to share the risks with them, all to restore confidence and calm the entire society. Because if the run on banks spreads, the US financial system will be completely ruined

However, it's far from being over. There are profound reasons for the soaring inflation in the US. Is the US economy overheating? Its GDP only grew by 2.1% last year. The US is messing around by itself. The US is already hollowed out to a large extent, and its defense budget accounts for around 3.5% of its GDP for a long time. Which country can afford that under normal circumstances? The US relies on the dominance of the US dollar to exploit the world and fill the gap between large-scale domestic consumption and disproportionate income. The US should treat the world well in this situation, but it doesn't.

First, there are frequent sanctions, and each sanction means that the US has to pay a certain cost at the same time. For example, due to comprehensive sanctions on Russia, a major energy and raw material country, the entire West has to buy more expensive things, and these losses will accumulate over time, causing problems to snowball and become bigger and bigger.

The US is also promoting "decouple," which is disrupting US manufacturing and overall economic operation. Many products could have been sold to China, and US high-tech companies could make more profits, which would lower their product prices; Products could have been imported from China, or US companies could have set up factories in China. Now, restructuring the supply chain inevitably means a significant cost. Recently, the US Department of Defense suspected that the made-in-China giant cranes used by US ports may be sending port business intelligence to China. If US ports switch to importing giant cranes from other countries in the future, it will mean at least a one-third increase in costs. If the existing Chinese-made cranes are replaced, the costs will be even higher. All of these losses will be spread to all goods entering and leaving the ports.

The primary task of the government should be to ensure people's livelihoods. However, the US government is fighting a proxy war with Russia in Europe, which is undoubtedly the most expensive proxy war since the end of the Cold War. At the same time, it is engaging in a "new Cold War" with China in Asia, which is also a bottomless pit of expenses. Ultimately, all of this will have to be borne by US taxpayers. But how? One of the simplest ways to pay for it is through inflation.

The US is paying an extremely high cost to maintain its hegemony and is approaching a tipping point where its strength may be insufficient. In the past, the US was very powerful, led a relatively united team of Western countries, and only had the Soviet Union as an opponent. Today, it faces a multipolar world where China's economic size is gradually approaching that of the US, and the two sides are economically interdependent. For the US to restore its traditional hegemonic pattern, it needs to spend much more money than in the past. And the status of the US dollar has been abused, leading to declining US' credibility.

Today, the US has to spend much more efforts to deal with serious inflation than in the past. As a result, the US is sharply raising interest rates, until it triggers the fragility of the financial system itself. Everyone knows that the US is an overly financialized country. Although the economic situation is not very good, the stocks continue to soar, which makes many investors worried about the possibility of a large-scale financial storm being triggered. 

The US may still have some technological means to control and alleviate the crisis, but in a country where the people are lazy, many infrastructure facilities are old and dilapidated, the financial system is super advanced, and the political elites are fiercely fighting internally and have ambitious foreign ambitions, the crisis will continue to lurk on the horizon.

To deal with its own crisis, besides shifting burdens abroad, the US also incites major crises and let the world share its volatility. The whole world is shaken, and new profit opportunities are created for the US. Now that Europe is in chaos, it is clearly advantageous for the US in terms of strategy. Asia should be cautious about being utilized by Washington to eliminate its own crises.

The author is a commentator of the Global Times. [email protected]