FFirst it was a financial crisis. Then a decade of slow growth that fueled political anger. After that came a pandemic. As the threat of Covid-19 seemed to recede, a European war arose. Welcome to the era of incessant crises.
Comparisons are often made between today and the 1970s, and in some respects they are appropriate. A global economy that was already showing strong inflationary pressures was hit by an oil shock, just like at the end of 1973.
Nearly half a century ago, the OPEC oil cartel drove up the price of crude during the Yom Kippur War. Sanctions on Russian energy exports are having a similar, though less dramatic impact so far. The cost of crude soared to nearly $140 (£107) a barrel at one point last week, but it would need to rise much higher – to $180 a barrel – to break the 2008 record, once inflation taken into account.
Even so, higher energy prices are something Western governments could do without. US inflation has already reached 7.9% and will rise further in the coming months. Almost every month since last summer, inflation in the UK has been higher than expected, and it wouldn’t be too surprising to see it top 10% this spring. That’s still a far cry from the peak of 1975, when inflation soared above 25%.
The first oil shock marked a turning point in the economic history of the post-war period because it ensued the transition from an approach based on the management of demand and full employment to an approach centered on liberalization. markets and controlling inflation. It took time; it wasn’t really until the early 1990s – two inflationary shocks later – that the new system was fully established and seemingly conquering. It is a period when crises are punctuated by brief periods of stability.
An even better example of the same phenomenon is the three decades between the start of the first world war in 1914 and the end of the second in 1945 – a period that also included a pandemic, a legendary stock market crash, a period of mass unemployment and the rise of totalitarianism.
According to this reading of events, the long boom of the 1990s and the American hegemony ushered in by the end of the Cold War was the equivalent of the Edwardian summer before 1914, with the subprime crisis beginning modestly in August 2007 but having deep ramifications. .
Attempts were made in the 1920s to restore the pre-war status quo, but none of them worked, at least not permanently. There was a period in the late 1920s – after the German hyperinflation – when it seemed that stability was returning, but there was no way to return to the world as it was before 1914. Eventually a new pattern was established, with stimulus, increased social spending, progressive taxation and capital controls at its core. But again, it took time. More than three decades passed between the end of the British-dominated Brand Globalization 1 and the arrival of the US-dominated Brand Globalization 2.
The current crisis has now lasted for almost 15 years. It has included the near collapse of the global banking system, the avoidance of a second Great Depression by the printing of large amounts of electronic money through quantitative easing, the low rise in living standards, populist insurgencies, the withdrawal of globalization and a pandemic.
Two years ago this week, the UK was approaching its first Covid-19 lockdown. Rishi Sunak announced spending increases in his budget (a taste of what was to come) and soon after the Bank of England cut interest rates to a record low 0.1%.
In some ways, the mood then was similar to today. Covid-19 was seen as a temporary obstacle on the way back to “normality”, just as the rise in inflation caused by Russia’s invasion of Ukraine is seen as a transitory phenomenon, which will delay but not derail the recovery from the pandemic. The Bank seems certain to raise interest rates by 0.25 percentage points this week, while Sunak had no desire to turn his March 23 spring statement into a mini budget, but it seems he could become one.
So what happens next? By the way, it should be noted that the pandemic did not disappear, it was simply pushed out of the news by Ukraine. Infection rates have started to rise again after the easing of restrictions, while the movement of millions of refugees across Europe will facilitate the spread of the virus. Currently, policymakers are paying more attention to the risk of a return to 1970s-style stagflation, which could occur in two stages – a surge in inflation followed by stagnation. Higher energy bills are initially inflationary, but are then deflationary as they increase business costs and erode consumer purchasing power.
There is, however, an unmistakable sense that the old model is running on empty, while discussions of leveling and greening the economy suggest that the equivalent of the economic settlement that brought stability to the post-decades war is hiding somewhere. The current era of permanent crisis has exposed the flaws in the current system and the difficulties in returning to the pre-2007 status quo. It has not yet given way to a full-fledged alternative, although history suggests that sooner or later she will.
Taking 1900 as a starting point, the period that followed followed a pattern: periods of stability and prosperity (1900-14, 1945-1973, 1991-2007) during which signs of trouble to come became more and more apparent; and periods of crisis (1914-45, 1973-1991, 2007 to the present) during which a new paradigm gradually emerged. The longer and deeper the crisis, the deeper the eventual change.