Why This Isn’t an Economic Crisis

We are writing Foreign PolicyIn the summer of 2022 the magazine “Back to the Future” because the main features of the global events seem to be similar to the past: fears of a nuclear war, strong politics, a new arms race, a return of conflict, food shortages, and much more.

In one of the magazine’s articles, FP correspondent Adam Tooze assumes that prices have returned to the 1970’s.

I spoke with Tooze in a FP Live interview that featured the release of FP‘s print articles. You can see all the discussions in the video below. The following is an abbreviated and updated version.

Foreign Policy: Why do you think some of the lessons we learned in the 1970’s do not work so well today?

Adam Tooze: I think you can look and say hypocritically, “There is a war.” There are barriers to the electronic system around the world; there is a problem with the price of food. All of these things look like 1973, frankly, which is the last time we saw this kind of change. But what supported the long-term rise in prices, throughout the decade of the 70s, was something that was outside the picture: the struggle of the parties. It is to be associated with collective bargaining power among workers, unions and employers, and governments around the world in the 1970s.

FP: Are people asking for government?

AT: Indeed, spending too much on government spending and higher wages and negotiations between employers and employers about how prices and wages will be determined — the so-called liberal corporatism. All of a sudden, you are offering to groups of interested people the major financial options. And that is the heart of the crisis of the 1970s: the fear among many elites around the world that they are failing to direct the war because of all the weapons we have learned to call the neoliberal rule that comes in the form of. 1980s and 1990s. And that has long-term consequences. Inequality is on the rise in the UK and US, which are examples of this type of policy from the 1980s onwards. And even now we have the fastest rise in the US and UK, which we have also seen is a real decline in wages. And it is not surprising that the number of groups – workers, trade unions, the ability to fight back – has been greatly reduced compared to what it was in the 1970s. ago. But if you dig into the social culture, it will greatly change.

FP: There is another part in the article in which you write that “the great powers of the early Biden dynasty came to an end.” I read that slowly grieving.

AT: Yes. I mean, I pretend to be free on the left, and there are a number of changes that need to be brought to the United States if the 21st century is not dangerous, not only for the disadvantaged groups but for the American people as a country. everything. I do not believe that the American people will continue to work in the way I would like without, for example, adequate resources to support families. There should be a tool that helps young American families to survive and thrive and raise their children better than they do because otherwise, it has serious consequences for society. Every country in Europe has more generous support for young families than the United States.

The Biden program had three wings, didn’t it? It was climate and construction combined with work and family care. And this has died in the last 18 months. So, yes, absolutely. It is not a matter of complaining. I think it’s a tragedy.

FP: Much of what we are discussing here is political and social. But the other side of the financial and financial system, which is run by central banks. Are Western central banks still approaching the financial crisis in the right direction?

AT: I would hesitate to describe our current situation — however — as a problem. There was a crisis in 2020 during the collapse of the COVID, and that was the most dangerous, fastest, most shocking, most shocking in the world. And what we deliberately did was a quick recovery from such problems. What we are seeing here is not difficult but the fastest decline we have seen in the last eight years.

FP: Thanks for saying that. I may be showing popular dissatisfaction with rising prices, but you are right, this is not a problem.

AT: It’s not difficult. America currently has all the services and every standard. But you are right, if you make the decisions of the American people right now, especially if you take the ones who are supposed to be against the Biden regime – they are sure that America has fallen. That’s the opposite. I mean, it’s a weird claim. America maybe get rich.

FP: I think people often associate the recession with the recession, that is, two consecutive stages of negative growth.

AT: Of course, their experiences, which are real, are cheap that we have not heard in a long time. What they are experiencing is the fall of real pay. And people are hearing that, and it really hurts. It’s very difficult, no doubt. It is not a financial crisis or a crisis right now.

Currently we do not have as much risk of economic damage as we saw in 2008. How do we know this? We can say that central banks are raising interest rates. If they thought that there was a real financial crisis — in other words, financial institutions were failing to make their money — they would not do so. The [U.S. Federal Reserve] raising prices because they see the problem of inflation. They feel that they need to be seen to be doing something. It can cause a slight decrease. It’s already. And this could lead to a recession, but this could be similar to the course in terms of rapid growth. It is not uncommon for an economic downturn, but because the recession is technically defined as two-fourths of the worst growth, and the negative growth will not be significant, we still expect 2023 to be a year of mid-term growth.

We are a long way from the problem. It is best to describe this as a gradual process.

FP: Much of what we have discussed so far has been relevant to rich Western nations. What about the southern hemisphere, where the central bank has a smaller organization at the beginning? Rising prices continue to rise, and as they rise, they stagnate and become more frequent. I think of countries like Sri Lanka, Pakistan, Egypt, and Argentina and Turkey. How do those countries cope with the rising cost of living?

AT: Yes. I mean, they’ll be instructed to do a lot of the same things. Their central banks will raise interest rates. They can try to reduce costs. But the problem in the nations we are talking about is that they have too many people. And when faced with rising inflation, one of the things governments can try to do is stop or provide tariffs. The state budget takes on a difference, and this produces shortcomings, which in turn leads to financial problems. And that is where the strong exchange begins.

Another surprise that these countries may struggle with is the change in prices. In Sri Lanka, for example, almost all imported oil is imported. When money goes down, the cost goes up because you pay with the local currency the higher foreign exchange rate you send abroad. And this is what really confuses.

There are other, obvious benefits, in reducing your costs. Turkey is good because it has a strong export base. As a result, when it falls, their exports grow exponentially, and there is less profit on labor, and thus, the lives of the people who work in the region. So not everything is lost because of this method, but it is very painful – and especially in areas with small cushions.

FP: I have a subscription question for you. Glenn C. asks if “expected inflation” is a major driver of inflation, how can anyone predict future inflation?

AT: One of the things that was learned in the 1970s is that if you are driving inflation, the most important thing is to control what economists call “athletes”. In other words, businesses, corporations, people who make economic decisions, which they look forward to in the future. Because according to that, they raise prices or try to raise their salaries. If you expect inflation and then fail to raise your income, you write a big L on your forehead and say, “I’ll be lost.”

So when central banks claim to be in the business of raising inflation, it is true that the most important thing they have in business is to regulate expectations.

And one of the reasons I think this is a time to “stay calm and move on” is that we have not seen fear in the stock market. If the people in the stock market think there is a real risk of going back to the 1970s, construction would be much cheaper than it is now. But what we have not seen is an earthquake that indicates a 5 to 10 percent inflation for the next 10 years. There just does not exist.