In the early 2010s, there was lots of talk about "currency wars" — the claim that major world central banks were in a race to the bottom with interest rates, competitively devaluing their nations' currencies to try to seize an economic advantage.

• Now, that has been turned on its head. If anything, a reverse currency war is underway, with central banks tightening to avoid importing inflation.

Why it matters: A cycle is taking hold in which global central banks have little choice but to keep shifting toward tighter money to keep up with their neighbors. If they don't, their currency will depreciate, and inflation will get worse.

• That could become self-reinforcing, resulting in even more global tightening than is warranted — and raising the risk of tipping the world into recession.

Driving the news: Just last week, the Swiss National Bank and the Bank of England raised their interest rates. The European Central Bank and Reserve Bank of Australia have signaled tightening is on the way.

The big picture: At the center of the story is the Federal Reserve's increasingly aggressive rate-hike campaign. The dollar is a more attractive currency when rates are rising, which is why the dollar index is up 9% this year.

• The dollar's status as a global reserve currency makes inflation pressures higher everywhere else. The flip side of an appreciating dollar is a depreciating euro, pound, Swiss franc, and so on.
• That means imported goods in those countries become more expensive, making inflation worse even if nothing about the domestic economy changed.
• That's particularly acute in smaller countries that must rely more heavily on imports than a large, geographically diverse country like the U.S. In Switzerland, imports are more than half of GDP, compared with 13% in the U.S.

As a result, those nations' central bankers are under pressure to keep up with the Joneses in an attempt to restrain inflation.

The problem: Trying to rein in inflation through reverse currency wars is ultimately zero-sum. Just as competitive devaluation can shift around demand but not ultimately generate more of it, currency fluctuations shift around the pinch of inflation.

What they're saying: "Instead of a race to the bottom in the foreign-exchange market, we may see a scramble to the top," wrote Harvard economist Jeffrey Frankel in an essay published last month. It now looks prescient.

• He argues that poorer countries are likely to suffer most, as higher borrowing costs in dollars squeeze their economies.

The bottom line: As this pattern becomes entrenched, the risk is that the world's central banks will overtighten policy, and steer us into global stagflation.

With the long weekend came a lot of talk about the odds of a recession.

What they're saying: "I was talking to [former Secretary of the Treasury] Larry Summers this morning, and there's nothing inevitable about a recession," President Biden told reporters yesterday, a comment other administration officials echoed in separate interviews.

• Meanwhile, Summers told Meet the Press on Sunday the "dominant probability" is that the U.S. economy will see a recession by the end of next year.
• In a speech in London yesterday, Summers said the unemployment rate would need to spike above 5% for five years to get inflation under control. He warned that "secular stagnation and secular stagflation" could be ahead.

On Wall Street: Goldman Sachs now sees a roughly 48% probability of a recession within the next two years, up from 35% previously. Its updated forecasts call for a slowdown in economic growth from Q3 through the first quarter of next year (though no contractions).

• "[W]e are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply," the bank's economists wrote yesterday, noting that any recession would "most likely be shallow."

The bottom line: Biden and his aides have repeatedly emphasized that recession is "not inevitable." Wall Street economists agree with that — but they increasingly see the odds of one going up.