• Pete Jonson

A perfect inflationary storm – like the 1970s

Updated: Sep 6


‘Humiliating defeat, fading productivity and supply side shocks – half a century later, all the signs of inflationary boil over are there.’

Professor Kenneth Rogoff


This is how Professor Kenneth Rogoff starts his latest obiter dicta about the global economy.

However, further down the article there is a caveat. ‘Despite all these similarities to the 1970s, today’s central banks stand as a bulwark against inflation.’


‘With the United States’ disastrous exit from Afghanistan, the parallels between the 2020s and the 1970s just keep growing.’


Professor Rogoff asks if a sustained period of high inflation has become much more likely. He has believed the odds were against it but now says ‘I am not so sure.’ The professor quotes Robert Gordon’s ‘magisterial account of innovation and growth.’ This book, quoted widely, asserts the global economy is suffering a ‘sharp slowdown in meaningful innovation’. Productivity growth has been slowing in the 21th century, ‘and now the pandemic looks to be inflicting another heavy blow’.


The 1970s suffered two massive blows due largely to dramatic increases in petrol prices, that produced great global inflation. The US Fed’s Paul Volcker crunched US inflation in the early 1980s and most countries followed. Even Australia’s inflation flowed in jerks and cuts and inflation was finally killed in the deep recession of the early 1990s.


Now the pandemic deep debt shock has been hard hit by massive debts, and massive hikes in global debt seems to be driving US inflation. Common sense suggests this will become a global drama. Logically, large official and private debt creates low interest rates but also generates higher interest rates.


Rogoff’s caveat is because most central banks are ‘ready to raise interest rates.’ But rising interest rates will raise the cost of government and private debt. Despite the excellence of central banks these days, it is easy to see the risk of arguments between governments and central banks. Could this produce a ‘Jubilee event’ giving debtors relief through some apparently fair set of rules.


I would not expect Professor Rogoff to offer such a radical solution but it could well provide a better solution than decades of juggling debt, interest rates and inflation.


https://www.npr.org/2014/12/11/370156273/iceland-experiments-with-a-jubilee-of-debt-forgiveness


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