The Economist - USA (2021-12-18)

58 Finance & economics TheEconomistDecember18th 2021

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TheonlythingthatprovedtransitoryaboutinflationinAmericain 2021 wasthecon-

sensusthatitwouldsubside.Theleft-handchartshowsthatanalystsconsistently

reviseduptheirpredictions,trailingreality.Consumerpricesarenowrisingbynearly

7%comparedwitha yearearlier,thefastestpacesince1982.Whatdoesthefuture

hold?Theright-handchartpresentstwoscenarios.Inthefirst,month-on-monthin-

flationimmediatelyfallsbacktoitspre-pandemictrajectory.Evenso,itwouldtake

untiltheendof 2022 forannualinflationtoslowtothe2%pacethatusedtobethe

norm.Inthesecondcase,consumerpricesriseatthesamemonthlyclipseenoverthe

pastyear.Annualinflationwouldsoartonearly8%inFebruary,andstayelevated.

Eitherway,onepredictionseemsrock-solid:theFederalReservewillstartraising

interestratesin2022,asthecentralbankitselfindicatedonDecember15th.

Price surprise

United States

Sources:WoltersKluwer;BureauofLabourStatistics;TheEconomist

*Averageoftopanalysts’forecastsforconsumer-price inflation

†AveragerateduringJan-Nov 2021 ‡Average rate in 2019

5 4 3 2 1 0

2020 2021

Dateforecastmade

8

6

4

2

0

2019 20 21 22

Consumer prices, % increase on a year earlier

Based on 0.2%

monthly inflation‡

Based on 0.%

monthly inflation†

Actual

Consensus forecast of calendar-year inflation

in 202*, %

or  to  seize  infrastructure  vital  to  the  net­

work, such as a data centre in Virginia. In

2020 it used similar threats to force sita, a

network  of  global  airlines  based  in  Switz­

erland,  to  disconnect  carriers  from  coun­

tries facing American sanctions. 

But would excluding Russia from swift

actually  be  worthwhile?  There  are  three

reasons to think that it might not. It would

harm but not cripple Russia; it would im­

pose  costs  on  the  West;  and  it  would  be

counterproductive in the long run.

Start with the impact on Russia. The no­

swiftscenario  is  not  new  to  Moscow.  It

has  been  bracing  itself  since  2014,  when

America first raised the idea of unplugging

it from the network to punish it for invad­

ing  Crimea  (cooler  heads  eventually  pre­

vailed). If Russia were excluded today, cap­

ital flight and a run on firms and banks re­

liant on foreign funding would ensue. But

coping  mechanisms  would  then  kick  in.

Russian  banks  and  their  foreign  partners

would  use  other  means  of  communica­

tion, such as telex, phone and email. Tran­

sactions would migrate en masse to spfs, a

Russian  alternative  to  swift that  is  not

nearly  as  ubiquitous  and  sophisticated,

but  still  usable.  As  the  payments  infra­

structure struggled at first to cope, Russia

would suffer some disruption—but not di­

saster.  Over  time,  investment  in  spfs

would make the system speedier.

Meanwhile,  the  West  would  suffer

blowback.  Until  now  America  has  aimed

its financial firepower at small or isolated

countries such as Cuba, Iran and Myanmar.

Russia  is  twice  the  combined  size  of  any

economy  America  has  ever  embargoed.

Any  disruption  in  Russia  would  spill  over

to  the  countries  that  have  business  deal­

ings with it. It is the eu’s fifth­largest trad­

ing  partner,  for  instance.  And  European

banks have $56bn­worth of claims on Rus­

sian  residents.  There  would  also  be  indi­

rect  damage  through  retaliation.  Iran  in

2018  had  a  weak  hand.  But  Russia  is  the

source of 35% of Europe’s gas supply and is

home to €310bn ($350bn) of euassets. 

In  the  long  run  America,  too,  would

bear costs. It holds sway over international

finance  thanks  to  the  dollar’s  dominance

and  its  pre­eminent  role  in  global  settle­

ment  systems.  Any  country  with  uneasy

relations  with  America  would  seek  alter­

natives  to  swift,while  Europe  might  re­

double  its  efforts  to  develop  a  more  inde­

pendent payments network. Weaponising

swiftagainst Russia would be seen by Chi­

na as a “dress rehearsal”, says Adam Smith,

a  former  American  sanctions  official  now

at  Gibson  Dunn,  a  law  firm.  It  would  pro­

vide  China  with  the  impetus  to  bolster

cips,  its  rival  to  swift,  just  as  America’s

other  foes  look  for  alternatives.  The  net­

work,  which  already  counts  some  big  for­

eign  banks  as  members,  allows  messages

to be transmitted in both Chinese and Eng­

lish.Itsdailyaveragevolumeoftransac­

tions  of  310bn  yuan  ($50bn)  remains  well

behind  swift’s  estimated  $400bn,  but  it

has nearly doubled in the past year. Should

it  reach  scale,  America’s  financial  domi­

nance would be threatened. 

Other weapons of economic disruption

exist. America could, for example, blacklist

big  Russian  financial  institutions,  pre­

venting  its  own  banks  from  dealing  with

them.  That  would  probably  be  as  disrup­

tive  for  Russia  as  a  disconnection  from

swift, without undermining the global fi­

nancial  architecture  as  much.  Yet  the  risk

of  immediate  blowback  would  remain.

That  highlights  a  long­standing  dilemma

of wielding economic sanctions: although

they are cheap when aimed at puny states,

bigger targets can hit back, says Tom Keat­

inge of the Royal United Services Institute,

a  think­tank.  The  West  still  has  powder

left. But it must choose its battles wisely.n

Caught in the cross-border cross-fire