10
Caribbean Life, Mar. 31-Apr. 6, 2022
War or Peace, Barbarism or Hope
By Anis Chowdhury and Jomo
Kwame Sundaram
March 29, 2022 (IPS) – The
spectre of ‘stagflation’ threatens
the world once again. This time,
the risk is the direct consequence
of political provocations and war,
and not simply due to inexorable
economic forces.
Stagflation?
Stagflation is a composite word
implying inflation with stagnation.
Stagnation refers to weak,
‘near zero’ growth, inevitably
worsening unemployment. Inflation
refers to price increases – not
high prices, as often implied.
The term ‘stagflation’ was supposedly
first used in 1965 by Iain
Macleod, then UK Conservative
Party economic spokesperson. He
later became Chancellor of the
Exchequer, or finance minister, in
1970 for little over a month, the
shortest tenure in modern times.
In 1965, he told the UK Parliament
that amid “swiftly rising”
incomes and “completely stagnant”
production, “we now have
the worst of both worlds. We have
a sort of stagflation situation”.
The term caught on in the
1970s, when high inflation and
unemployment ended an economic
era dubbed the ‘Golden Age of
capitalism’ describing the post-
World War Two (WW2) boom.
Normally, in a recession, the
inflation rate – i.e., the overall rate
at which prices increase – falls. As
unemployment rises, wages come
under pressure, consumers and
businesses spend less, reducing
demand for goods and services,
slowing price rises.
Similarly, when the economy
booms, the labour market
tightens, pushing up wages, in
turn passed on to consumers via
increasing prices. Thus, inflation
rises and unemployment falls during
a boom.
However, stagflation poses a
dilemma for central banks. Normally,
when economies stall, central
banks try to stimulate growth
by cutting interest rates, encouraging
more borrowing, and thus
spending.
But that could also fuel further
price rises and higher inflation.
On the other hand, if they raise
interest rates to check inflation,
growth may slow even more, further
worsening unemployment.
1970s’ stagflation
The growth of world trade after
WW2 increased demand for the
US dollar, the de facto world currency
under the 1944 Bretton
Woods (BW) international monetary
agreement. The US financed
much post-WW2 reconstruction
to broaden its ‘Free World’
sphere of influence as the Cold
War began.
Following post-WW2 reconstruction,
demand for the greenback
was met by greater US
imports paid for with US dollars.
As foreign central banks increasingly
accumulated dollar reserves,
flows were reversed in the 1960s,
with net resources into rather
than out of the US.
During the 1960s, US economic
growth was increasingly
sustained by government military
and social expenditure. Spending
increased for both ‘defence’, especially
the Vietnam War, and social
programmes, e.g., President Lyndon
B. Johnson’s ‘war on poverty’
and ‘Great Society’.
Op - E ds
As LBJ was reluctant to
acknowledge the rising costs of
the Vietnam War, it was difficult
to raise taxes to pay for his ‘swords
and ploughshares’ spending.
Instead, spending was financed by
government debt, from selling US
Treasury bonds. Thus, the world
financed US government spending,
including the war.
By January 1967, Johnson was
under pressure to cut the growing
budget deficit. But it took a year
and a half for the US Congress
to pass his new budget with tax
increases. When finally passed in
mid-1968, US federal debt had
grown even more as spending for
both ‘guns and butter’ did not
decline.
US monetary policy was obligingly
expansionary. Unsurprisingly,
inflation shot up from 1.1%
during 1960-64 to 4.3% in 1965-
70. Higher inflation also eroded
US competitiveness, further
worsening its balance of payments
deficit.
Inflation also undermined US
ability to honour its BW commitment
to maintain full convertibility
to gold at US$35 per ounce.
This obligation did not go unnoticed
by foreign governments and
currency speculators.
As inflation rose in the late
1960s, US dollars were increasingly
converted to gold. In August
1971, US President Richard M.
Nixon ended the exchange of dollars
for gold by foreign central
banks, effectively violating its BW
commitment.
A last-ditch attempt to salvage
the international monetary system
– through the short-lived
Smithsonian Agreement – failed
soon after. By 1973, the post-
WW2 BW international monetary
arrangements were effectively
done with.
Commodity supply
disruptions
Oil exporting, European and
other countries which held
reserves in US dollars suddenly
found their assets worth much
less. With Venezuela, the Middle
East-led Organization of Petroleum
Exporting Countries (OPEC)
reacted by dropping their earlier
willingness to keep oil prices low.
In October 1973, ‘nationalist’
Saudi monarch Faisal embargoed
oil exports to nations supporting
Israel soon after President Anwar
Sadat’s attempted reprisal following
Egypt’s defeat by Israel in
1970. The oil price almost quadrupled
– from US$3 to nearly
US$12 per barrel when the embargo
ended in March 1974.
This steep oil price rise was
paralleled by great increases in
other commodity prices during
1973-74. Besides petroleum,
other primary commodity prices
more than doubled between mid-
1972 and mid-1974. Meanwhile,
the prices of some commodities
– such as sugar and urea – rose
more than five-fold.
Commodity supply shocks
and higher commodity prices
increased production costs, consumer
prices and unemployment.
As rising consumer prices triggered
demands for higher wages,
these in turn increased consumer
prices. Thus, wage-price spirals
accelerated price increases and
inflation.
The 1979 Iranian revolution
triggered a second oil price shock.
The resulting ‘great inflation’ saw
US prices rise over 14% in 1980.
In the UK – then deemed the ‘sick
man of Europe’ – inflation averaged
12% a year during 1973-75,
peaking at 24% in 1975, while
inflation in West Germany and
Switzerland exceeded 5%.
In the 1960s, unemployment in
the seven major industrial countries
– Canada, France, West Germany,
Italy, Japan, the UK and the
US – rarely exceeded 3.25%. But
in the 1970s, the unemployment
rate never fell below that. By mid-
1982, it rose to 8%, exacerbated
by interest rate hikes, ostensibly
to fight inflation.
The 1970s’ growth slowdowns
– with rising unemployment and
inflation – in major industrial
economies caught many economists
off-guard. Economic thinking
then presumed inflation and
unemployment were alternatives.
The Phillips Curve implied low
unemployment came at the cost
of higher inflation, and vice versa.
This crude and static caricature
of Keynesian economics enabled
a major assault on its influence.
The assault on development economics
was collateral damage in
this ‘counter-revolution’.
Peace is our best option
In October 2021, the International
Monetary Fund, the European
Central Bank, the US Fed and
other such institutions believed
the factors driving inflation were
transitory. None of these authorities
saw an urgent need for interest
rate hikes.
But in the last month, the war
in Ukraine and sanctions against
Russia have driven up the prices
of commodities such as wheat
and oil. This will exacerbate rising
inflation in much of the developed
world. The threat of stagflation is
undoubtedly more real now than
six months ago.
By October 2021, Google
searches for ‘stagflation’ hit their
highest level since 2008. Mention
of stagflation in online news stories
surged to more than 4,000
weekly by mid-March, up from
slightly more than 200 at the start
of the year.
This time, ‘stagflation’ is the
direct consequence of political
choices, especially for war, not
unavoidable economic trends.
Letters to the Editor are welcome from all readers. They should be addressed care of this newspaper to the Editor, Caribbean-Life
Publications, 1 MetroTech Center North, Brooklyn, New York 11201, or sent via e-mail to caribbeanlife@schnepsmedia.com. All letters,
including those submitted via e-mail, MUST be signed and the individual’s verifiable address and telephone number included. Note that
the address and telephone number will NOT be published and the name will be published or withheld on request. No unsigned letters
can be accepted for publication. The editor reserves the right to edit all submissions.
Founded 1990 • Published by Brooklyn Courier Life LLC
A Division of Sc hneps Media
Corporate Headquarters: One Metrotech Center North, Suite 1001, Brooklyn, NY 11201
President & Publisher: Victoria Schneps-Yunis
CEO & Co-Publisher: Joshua Schneps
Assoc iate Publisher: Ralph D’Onofrio
Editor emeritus: Kenton Kirby
Assoc iate Editor: Kevin Williams
Contributing Writers: Azad Ali, Tangerine Clarke,
Nelson King, Vinette K. Pryce, Bert Wilkinson
GENE RAL IN FORMATION (718) 260-2500
This newspaper is not responsible for typographical errors in ads beyond the cost of the space occupied by the
error. All rights reserved. Copyright© 2022 by Brooklyn Courier Life LLC. Caribbean Life is protected by Federal
copyright law. Each issue of Caribbean Life is registered with the Library of Congress, Washington, D.C. The
Caribbean Life, its advertisements, articles and photographs, may not be reproduced, either in whole or part,
without permission in writing from the publisher except brief portions for purposes of review or commentary
consistent with the law.
Jomo Kwame Sundaram. Food
and Agriculture Organization
link
link
