Until recently Washington’s closest ally/client state in South America, Colombia is now under new management. And that management has a different perception of US influence in Latin America and the wider world.
Just over a month ago, Colombia’s recently elected left-wing President Gustavo Petro ruffled a few feathers by lambasting the US-led war on drugs from the podium of the UN General Assembly in New York. He also condemned the NATO-Russia proxy war in Ukraine, which raised serious questions about Colombia’s position as NATO’s only Latin American partner. Then last Wednesday, during a visit to Urabá Antioquia, close to Colombia’s northern border with Panama, he set his sights on US economic policy:
An economic crisis is undoubtedly brewing. The United States is practically ruining economies around the world. The German economy has already been destroyed by the war [in nearby Ukraine]. The Russians, Ukrainians and Europeans, first and foremost, have unleashed a war upon their own continent, which is a war for gas, for energy. And as a result of that war the European economy is sinking.
Powerful Germany is entering recession. And who would think it? England, which one day was the world’s dominant colonial power, is mired in a deep economic crisis. In Spain, the residents of towns and cities are up in arms. The same in France. And in the United States decisions are being taken to protect the United States, sometimes without thinking about the consequences elsewhere.
The Growing Pains of a Global Dollar Shortage
Petro places much of the blame for the “looming economic crisis” on the US Federal Reserve, whose aggressive interest rate hikes of the past seven months have propelled the dollar to its highest level since the year 2000.* Raising rates draws capital toward the US economy and away from higher-risk emerging markets. As capital inflows push up the dollar’s value, capital outflows pull down emerging-economy currencies, which makes it much harder for governments and companies to service their US-denominated debt.
The US Ambassador to Colombia, Francisco Palmieri, responded to the accusations by urging Petro not to look for culprits for the worsening economic conditions around the world, only to shift the blame to Russia seconds later:
We must not think about where to lay the blame. We must focus on how to work together to improve and foster the development necessary for economic growth…
Russia’s aggression against Ukraine is a major threat to the global economy. Within the United States, we are also experiencing economic challenges, as are many of the countries in the world.
As the IMF noted last week, the dollar has appreciated 22% against the yen, 13% against the Euro and 6% against emerging market currencies since the start of this year. That the currencies of rich economies like Japan, the UK and the EU have, as a whole, fallen faster against the dollar than emerging market currencies is testament to the severity of the current global dollar shortage. As the Korean economist Keun Lee notes, “while US monetary policy is hardly the only factor in causing that shortage, it is undoubtedly making matters worse.”
The Federal Reserve is hiking rates right now to try to keep a lid on inflation at home, even though high inflation in the US is largely the result of global supply chain pressures. But in doing so, it is exporting inflation to the rest of the world by driving up the value of the dollar. And that is piling yet more pressure on already cash-strapped governments.
Many emerging market crises of the past were caused or exacerbated by a rapidly strengthening dollar. To try to stop their currencies from nosediving and thereby contain rising prices, national central banks are responding to the Fed’s aggressive hikes by tightening their own monetary policy. This squeezes yet more life out of the economy by making it even harder for heavily indebted consumers and businesses to service their debts.
With inflation at multi-decade highs in many places, dollars growing increasingly scarce globally and yields surging on sovereign bonds, governments, particularly of energy-importing countries, are also having to rein in their spending.
“The coffers of Latin American economies are being bled dry,” said Petro. “All of our currencies are falling, not just the Colombian peso.”
The Colombian peso has been on a downward spiral against the dollar since 2012. Having lost almost two thirds of its value in that time, it is now just a whisker from crossing the 5,000-to-USD threshold.
New Management, New Relationship
Until June this year Colombia was Washington’s staunchest ally/client state in South America. The country is home to seven or eight formal US military bases (depending on who you read), and is by far the largest recipient of US aid in the region, having received $13 billion since 2000.
But in June a political earthquake took place. For the first time since Colombia won independence in 1819, a majority of voters elected a left-wing government. Led by Petro, a veteran politician and former guerrilla, that government is determined to shake things up…
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