In the present time, extremely loose monetary and fiscal policies, coupled with supply shocks, could result in 1970s-style stagflation (high inflation alongside a recession). In fact, the risk today is even bigger than it was then.
Supply shock is further heightened by the ongoing war of Russia-Ukraine, which has deepened the potential food and energy supply shock to the world.
Inflation is much higher today across the world. US is facing highest inflation-nearly 7 per cent inflation- in 45 last years.
History may not repeat in exactly the same way, but its elements can recur. The world economy differs from that of the 1970s, which suffered the oil shock of 1973.1970’s Oil shock caused cost push inflation, and resultant loose fiscal and monetary policies to contain recession pushed the US economy into a deeper crisis of inflation. Paul Volcker took over the Fed Reserve in 1979 and raised interest rates to 20% to put the brakes on galloping double digit inflation. This led to the famous recession of 1981-82. Economists are today talking about the choice between doing a Volcker ? deliberately slowing the economy by severely tightening money supply with big interest rate hikes ? or letting loose monetary and fiscal policies help growth, rather than attack inflation. Both strategies are risk-laden and can lead to equally severe recession. It is Hobson’s choice, really.
Some economists point out that it will not go 1970s way because in the 1970s, the global economy was far more energy-intensive and more dependent on fossil fuels. Energy intensity of GDP is much less today. The world economy on average sources 13-15% energy from renewables. To that extent, we are less vulnerable to energy price shock. The US was dependent on imported oil for 30% of its requirements in the 1970s, but today it is nearly self-sufficient. Europe is far more vulnerable today than the US ? no wonder Germany is resisting bans on gas imports from Russia.
In the present time, alternative energy is available in abundance. It may act as saviour.
The developed world is yet to consistently hit double digit consumer price inflation, but post-Ukraine disruption in food supply can easily push them and emerging economies to sustained double digit inflation.
Average national debt was less than 50% of GDP across developed and most large developing economies in 1970s. Today, it is 100% of GDP in Western economies and inching towards that in emerging economies like India.
Emerging markets like India are far more globalised today than in the 1970s. India acutely suffered from the oil shock, which caused inflation and became a big challenge for Indira Gandhi by 1974, with widespread social unrest. India has to brace for the worst because it is now far more globalised in trade, investment and finance. Today, the US Federal Reserve’s actions affect sentiment more than the RBI’s.
Verifying, please be patient.
