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Raising interest rates a recipe for world recession

Marxist Analysis · 2026-05-13

Core Argument

The article argues that the current wave of interest rate hikes by central banks cannot succeed in taming inflation because the underlying causes are structural, not monetary. Inflation is being driven by a confluence of forces beyond central bank control: geopolitical conflict, supply chain fragmentation, climate disruption, militarisation, and the breakdown of globalised trade relations. Raising interest rates will therefore not restore price stability but will instead provoke a recession, while failing to address the root causes of rising prices. The central banks are caught between two impossible options — allowing inflation to accelerate or triggering a slump — and whichever path they choose, the working class will bear the cost.

Theoretical Grounding

The analysis draws on the Marxist understanding of inflation as a surface expression of deeper contradictions within the capitalist mode of production, rather than a purely monetary phenomenon. It implicitly rejects the quantity theory of money and the notion that central banks can manage inflation through demand suppression alone. Instead, it situates inflation within the framework of crisis theory: the breakdown of the post-war global division of labour, the increasing unproductive expenditure of the state (particularly on arms), and the growing difficulty of maintaining profitability in a system beset by overaccumulation and declining productivity growth.

The article also echoes the Marxist critique of Keynesian demand management — not from a neoliberal standpoint, but from the position that the state's capacity to stabilise capitalism is limited by the system's internal contradictions. The reference to Ted Grant's analysis of armaments expenditure as a drag on the economy places the argument within the tradition of Marxist political economy that sees militarism as a form of unproductive consumption that exacerbates rather than resolves crises.

Conjunctural Relevance

The article was written in November 2022, at the peak of the most aggressive monetary tightening cycle since the early 1980s. The Federal Reserve had just raised rates by 0.75 percentage points for the fourth consecutive meeting, and the Bank of England was following suit. Mortgage rates had multiplied, government borrowing costs were spiralling, and recession warnings were becoming widespread.

The article identifies several conjunctural specificities:

  • The legacy of COVID-era money creation, which injected unprecedented fictitious capital into the economy and fuelled demand-side pressures once lockdowns eased.
  • The Ukraine war and Western sanctions, which disrupted energy, food, and raw material supplies and pushed up commodity prices.
  • Repeated Chinese COVID lockdowns, which continued to disrupt global supply chains, particularly through the port of Shanghai.
  • Climate change, which is destroying infrastructure, disrupting harvests, and raising logistics costs.
  • A wave of strikes and industrial militancy, partly provoked by inflation, which is itself feeding into price pressures (e.g., French refinery strikes pushing up diesel prices).
  • The breakdown of global trade relations, including US protectionism under both Trump and Biden, the weaponisation of supply chains, and the emergence of "friendshoring" as a costly reorganisation of production.
  • A massive increase in military expenditure across NATO, Japan, and other states, which diverts resources from productive investment and drives up costs in key industrial sectors.

The article predicts that central banks will not succeed in restoring inflation to pre-pandemic levels, and that the outcome will be a combination of inflation, recession, and high interest rates — the worst of all worlds.

Where the Argument Continues

The article references an earlier IDOM piece from May 2022 that dealt with the causes of inflation in more detail. It also cites Ted Grant's analysis of armaments expenditure from 60 years ago, which provides a deeper theoretical treatment of militarism and crisis. The argument about the structural nature of inflation and the limits of monetary policy is developed further in subsequent IDOM articles on the cost-of-living crisis, the energy crisis, and the geopolitical fragmentation of the world economy. Against the Stream episodes from late 2022 and early 2023 also take up the theme of recession and the failure of central bank orthodoxy.

Connections

  • Ted Grant, "Armaments and the Crisis" (1962) — the theoretical source for the argument about military expenditure as a drag on the economy.
  • Earlier IDOM article from May 2022 — provides the detailed analysis of inflation's multiple causes that this article summarises.
  • Marxist crisis theory — the article implicitly draws on the tendency of the rate of profit to fall and the theory of overaccumulation, though it does not deploy these concepts explicitly.
  • The work of Michael Roberts — his empirical work on the rate of profit and the long downturn provides a complementary framework for understanding the structural weakness of the global economy that makes inflation so difficult to manage.
  • The Monthly Review tradition (Sweezy, Magdoff, Foster) — particularly their analysis of monopoly capital, stagnation, and the role of fictitious capital, which is relevant to understanding the post-2008 and post-2020 monetary expansions.

Key Quotes

  1. "The truth is that they are caught between a rock and a hard place. If they let inflation run its course, they risk it accelerating, causing more economic difficulties and social unrest, and forcing sharper rate increases in the future."

  2. "The central bankers are at the centre of the storm. All roads now lead to ruin. Whatever measure they take to resolve one problem, merely aggravates another. In the end we will probably get all the ills of the present situation combined: inflation, recession and high interest rates."

  3. "This massive increase in military expenditure will drive inflation upwards. Many of the components needed to produce armaments... are already in short supply. As Ted Grant pointed out 60 years ago, armament expenditure becomes a massive drag on the economy as it cuts into capital expenditure."

  4. "The breakdown in world relations will force a readjustment of all supply chains, moving factories and reducing productivity. No one knows how expensive this will be, nor how much pressure it will put on inflation, but it will be costly."

  5. "It is therefore hard to see how central banks can succeed in their mission to push inflation back to pre-pandemic levels. The ruling class are divided over how far they should go."

  6. "The truth is that the crisis of capitalism continues to wreak havoc in the world economy and the bourgeois have no means of resolving it."