War sanctions against Russia, along with misguided U.S. central bank and trade policies, are likely to fuel an economic storm that will catapult America into a major crisis, an expert has warned.
Michael Wilkerson—author, investor, and financial analyst—told The Epoch Times in a wide-ranging interview that the economic sanctions against Moscow combined with years of Federal Reserve stimulus and decades of bad trade policies are now culminating in a perfect storm of persistently high inflation.
He believes that stubbornly high inflation will, in turn, force the Fed to keep hiking rates aggressively, triggering the worst economic catastrophe in recent memory.
The Coming Storm
Wilkerson, a former managing director at financial advisory firm Lazard Ltd. and former CEO of investment holding firm Fairfax Africa, has moved around the Washington Beltway and American business establishment for most of his long career.
Beginning in 2000, he started to write about economic and financial issues, and in 2020 he foresaw some of the events that would take place along with the pandemic, like popular social unrest, worsening economic challenges, and increasing tension between the United States, China, and Russia.
He has over the years been critical of the cheap money policies of the Federal Reserve during and after the Great Recession and of the United States’ imbalanced trade relations with Beijing.
In his first book, “Stormwall: Observations on America in Peril,” Wilkerson identified four problematic economic trends that are about to converge to form a “giant tsunami-like wave” that he believes will cause the worst financial disaster in U.S. history.
The first of these trends is a dangerously cozy relationship between America’s political and corporate class and its counterparts in Beijing.
“We spent decades pretending on both sides that this was a great and healthy partnership of mutual benefit, and I think that we as Americans got the short end of that deal for a very long time,” said Wilkerson.
Policymakers in Washington let China into the World Trade Organization back in 2001, driven by the hope that political change in communist-run Beijing would be facilitated by closer economic ties.
Decades later, that hope has proven futile. Not only does the Chinese Communist Party (CCP) retain its grip on power and continue to repress its citizens, but China has also strengthened its posture as a mercantilist regime.
Theft from the United States
China facilitates the theft of U.S. intellectual property, unfairly subsidizes domestic rivals to the detriment of U.S. firms, and is busy expanding its weapons arsenal, posing a growing military threat to its neighbors and the United States, Wilkerson said.
“Too many technology transfers have already occurred, especially in intellectual property, both through legitimate and illegitimate means,” he said, while criticizing Wall Street for becoming too beholden to Beijing.
Decrying the fact that America has become reliant on China for critical supplies and manufacturing, Wilkerson said there’s now a growing sense among U.S. businesses and corporations that being dependent on Beijing—or any other adversarial power for that matter—is an undesirable state of affairs that poses a risk to the security and welfare of the nation.
The pandemic and recent tensions over Taiwan and Ukraine have brought home for many Americans the fragility of an overstretched global supply chain.
“I think we are coming to a new realization that the relationship has to change at the most fundamental of levels, and it has to be based on reciprocity and a benefit to the U.S.,” said Wilkerson.
He credits the Trump administration for blowing the lid off of what he called the “Potemkin village relationship between the U.S. and China,” arguing that the ties between the two countries were skewed to America’s detriment.
Former President Donald Trump sought to reset trade policy between the two nations, pressing for better trade deals and imposing billions of dollars in tariffs in order to bring about a fairer playing field for U.S. businesses and workers.
It has since been harder for even the staunchest pro-CCP lobbyists on Wall Street to turn U.S. relations with China back to the former status quo.
Although the Biden administration is mulling revoking many of the Trump-era tariffs, citing a potential reprieve from soaring inflation, Biden has so far largely retained Trump’s hawkish stance.
The U.S. government recently delisted more Chinese firms from Wall Street and has continued to suggest that the American military is prepared to defend Taiwan in case of invasion by Chinese Communist forces.
Poking the Russian Bear
Wilkerson said that one of the key dangers the world is now facing is the standoff between the Western powers and Russia regarding Ukraine.
He said that the Ukraine invasion was a terrible thing on a “human life perspective” and was a tragedy that could have been prevented by both sides.
Wilkerson believes that if the United States and its allies had not been pushing so hard to have Ukraine join NATO, the war would not have happened.
He also blames the Biden administration’s clumsy exit from Afghanistan for making the United States appear weak, emboldening Russia to invade.
“It was not something that would have likely happened under the Trump administration,” Wilkerson contended.
“Putin saw weakness in the current administration and saw what had happened in Afghanistan with the very ham-handed withdrawal that cost many, many lives,” he said. “We spent over 20 years fighting the Taliban only to return Afghanistan to the Taliban.”
He said he was not surprised that the Kremlin made a decision in what was clearly in its best strategic interest, since every Russian regime in history has made it clear that Ukraine is a key fixture in its sphere of influence in the region, much in the same way the United States sees Mexico.
“Whether that’s right or not from our framework isn’t the question. It is how [the Russians] look at the world,” explained Wilkerson, who said that Ukraine should have been kept neutral as had been agreed earlier by treaty.
Despite public outcries over the invasion, he said that Western leaders responded with the only real weapon they had while avoiding a war, which was economic sanctions against Russia.
“The problem is that they just don’t work, and in fact they usually backfire on the imposing countries rather than on the target country,” he said of the sanctions.
Wilkerson pointed out that the Russians were prepared since 2014 to sanction-proof their economy and the ruble by diversifying their sources of revenue in case they were cut off from the global financial system.
He said that the sanctions may lead to a bifurcation of the post-war global financial system into separate blocs, weakening the influence of the Western economies, which have dominated the world for hundreds of years.
The sanctions have boomeranged on the West, worsening an already existing fuel and supply crisis in economies still reeling from the CCP virus and still heavily reliant on Russian exports.
“We have ensured that inflation will run much hotter than before, even so far that Europe’s energy security will be threatened by the perennial ability of Russia to withhold a flow of gas or other commodities, and in particular because Russia and Ukraine represent a significant portion of global grain exports and fertilizer exports,” he said.
Wilkerson added that the sanctions have also unintentionally contributed to a broader food crisis that could cause famine in parts of the world.
He also explained that Western oil and gas sanctions have only hurt Western economies and that Russia was able to maintain its energy industry by pivoting its fuel exports away from Europe to friendlier countries like China and India, which have essentially taken up the slack.
“We are pushing Russia and China into each other’s arms into an unholy alliance that will span across financial markets, capital markets, and trade for goods and services,” warned Wilkerson.
He said one of the important negative consequences of the sanctions is that Russia has moved to challenge the dominance of the dollar as a global reserve currency.
Russia, working jointly with China and other allies, is looking to develop an alternative to the U.S. petrodollar and reduce their dependency on Western dominated institutions like SWIFT.
Russian President Vladimir Putin has signaled that this new reserve currency would be based on a basket of currencies from countries like Russia, Brazil, India, and China, which will operate outside of the current system.
The Fed’s Inflation Problem
Wilkerson predicts that after a wave of high inflation, a “recession is likely,” followed by a financial market crash.
Since the start of the year, the central bank policymakers in charge of major global currencies, such as the dollar, the euro, and the British pound, have collectively raised interest rates in response to the highest inflation in decades.
“I’ve been talking about those issues in this cycle for over two years and of course, getting the timing right is one of the most difficult things, and it seems to me very likely that we will hit recession.”
“I think it’s important to note that while the Biden administration has blamed inflation on Putin, calling it a ‘Putin price hike’ on gas or what-have-you, the reality is that inflation was accelerating well before the invasion,” he added.
Monetary Police to Blame
Wilkerson believes that the current inflation is a consequence of monetary expansion that began two decades ago and has yet to run its course.
“Inflation is caused by forces that were set in play almost two decades ago now,” he said, blaming much of the current rise in inflation on a lag effect caused by low interest rate policies set after the crash in 2008.
“If you look at the total U.S. money supply—what’s typically labeled M2—all of the money that circulates in the U.S. since 2009, or something right before the financial crisis to today, has nearly tripled.”
He said that the tripling of dollars floating around is a result of quantitative easing and other stimulus measures that were put in place after the global financial crisis in 2008, combined with another round of stimulus related to the pandemic and the Biden administration’s Build Back Better bill.
He compared the potential consequences of inflation to what happened in the Weimar Republic of Germany and other similar cases in the 20th Century, and explained that price inflation historically follows monetary expansion, often following a time lag.
Price inflation in 1920s Germany eventually kicked in violently for a period of two years after an aggressive period of post-war money pumping, which effectively destroyed the economy.
“People say, ‘Well why is it that we didn’t see inflation before when, after the global financial crisis, all this extra money was put in the market?’ It takes time, and what history shows us is that it doesn’t track it right away, since it lags, often by several years,” said Wilkerson.
Wilkerson estimates that inflation will continue to stay high, warning that American consumers should brace for inflation of about 10 percent in annual terms over the next several years.
“The question is going to be how much further our financial markets are likely to come down,” said Wilkerson.
“I don’t think we’ve seen the bottom of the equity markets or the bear market, nor have we hit capitulation stage yet, so I do believe there is more pain to come in the financial markets.”
What’s the Fix?
Wilkerson proposed a number of solutions that Congress could adopt after the midterm elections to alleviate some of the economic problems he identified.
He said that the majority of Americans believe that “we’re on the wrong track, particularly in regard to the economy and turning the advantage over to our adversaries to undermine American energy independence,” and that “clearly one of the greatest follies and mistakes of the current administration is to actively undermine the energy independence upon which our energy security depends.”
“Above all else we must unshackle America’s domestic energy industry, and while not an overnight fix, this is the most powerful nonmonetary tool we have to confront inflation, protect our energy security, and provide Americans with tens of thousands of well-paying jobs.”
Wilkerson believes that there needs to be a complete revamp of the onerous regulatory framework and tangled bureaucracy that has stymied U.S. energy development and production.
He is a critic of what he called the bureaucracy’s “totalitarian response” to the pandemic with the lockdowns, travel restrictions, and the shuttering of businesses, which he said created serious consequences for the economy.
Wilkerson also called for the reinstatement of all Trump-era trade and immigration policies that reflect the current realities on the ground.
He says he only wants pro-American legal immigrants who can contribute to the nation’s strategic interest, namely with preference to those who have skills in science, technology, and the real economy.
“Supply chains must shift, manufacturing capacity on-shored, natural resources unlocked, and incentives aligned to get people back to work,” he said, adding that Congress must somehow come up with a plan that will actually fix the national infrastructure.
Wilkerson noted that, at least since the global financial crisis, Congress has been derelict in its duty to coordinate effective fiscal policy that stimulates investment and innovation in the real economy.
“Instead, Congress has defaulted to the blunt-force instrument of monetary policy, raising debt for handouts, stimulating inflation, and fueling an asset bubble, while handing over the steering wheel of our economy to the undemocratic Federal Reserve.”
Another suggestion is that Congress could pass what he described as rational, just, and comprehensive 21st Century laws regarding stablecoins first, and then cryptocurrencies generally.
He claims that a lack of clarity, antiquated law, tax policy confusion, and contradictory regulations are all conspiring to hamstring development and impede widespread consumer adoption of this particular sector of the new economy.
Wilkerson blames poor oversight and lack of understanding for enabling some of the spectacular cryptocurrency failures and frauds seen in recent months.
“Today, if we’re not careful, we risk squandering a similarly gigantic opportunity to lead the world in what will certainly be another revolution in technological and economic development,” he concluded.
Wilkerson believes that the changes he proposes would revitalize America’s status as a global power, bolster its capacity for self-reliance, and make Americans better poised to weather the coming crisis.
He will discuss these solutions in his second book, “Why American Matters: The Case for a New Exceptionalism,” due out in October 2022.