Fear of inflation prolongs recession, debt crisis – Global issues
SYDNEY and KUALA LUMPUR, September 27 (IPS) – The obsession with inflation among central banks (CBs) is dragging economies into recession and debt crisis. Their dogmatic beliefs prevent them from doing the right thing. Instead, they take their cues from Washington: the Fed, the US Treasury, and the Bretton Woods Institutions (BWIs).
Both the BWI – the International Monetary Fund (IMF) and the World Bank – have recently warned of the potentially dire consequences of the next ‘race to the bottom’. But their dogmas prevented them from being pragmatic. Therefore, their analysis and policy advice are incoherent, even contradictory.
Warning “Rising interest rates will make it difficult”, IMF Managing Director has called on countries to “seatbelt, acknowledging that anti-inflation measures threaten the recovery. “For hundreds of millions of people, it will look like a recession, even if the world economy avoids” two consecutive quarters of contract output.
She also noted that the Fed’s rate hikes have strengthened the dollar, increasing the cost of imports and making it more expensive to repay debt in dollars. But chanting the mantra, she claims, if inflation “is brought under control, then we can see the groundwork for growth and recovery”.
This contradicts all the evidence that low inflation is accompanied by strong growth. Per capita output growth and productivity growth both declined during three decades of low inflation. In addition, low inflation did not prevent financial crises.
Even as growth rebounds, the scars of recession remain. For example, a IMF research found, “the Great Recession of 2007–09 left heartaches.” More than 200 million the number of unemployed people worldwide, 30 million more than in 2007.
A 2018 San Francisco Fed study assessed the cost the Great Recession cost Americans. about 70,000 dollars every. The Harvard Business Review It is estimated that between 2008-10, the US government spent “more than $2 trillion, more than twice the cost of the 17-year war in Afghanistan”.
Learn has documented its harmful effects on health, especially mental health. Recession in Europe and North America caused more than 10,000 suicidesbigger drug abuse and other self-harming behaviors. The negative socioeconomic and health effects are even worse in developing countries with poor social protection.
Interest rate hike in the period 1979-82 activated debt crisis in more than 40 developing countries. The 1982 world recession “coincided with the second-lowest growth rates in developing economies over the past five decades, second only to 2020”. “A decade of lost growth in many developing economies” follows.
But the Bank research suggests that raising interest rates “may not be enough to bring down global inflation”. Bank even warning Key CBs’ anti-inflation measures could trigger “a string of financial crises in emerging markets and developing economies”, which “will cause long-term damage to them” .
The external debt of developing country governments – increasingly commercial, costlier and able to be repaid earlier – has increased since the global financial crisis of 2008-09. The pandemic has made many debts unsustainable as rich countries oppose meaningful relief measures.
There is no consensus on policy
Bank exact notes, “The slowdown… often calls for a countercyclical policy to support operations”. It acknowledged, “the threat of inflation and limited fiscal space are prompting policymakers in many countries to withdraw policy support even as global economic growth slows.” .
It also suggests, “policy makers could shift their focus from reducing consumption to boosting production… to generate more investment and improve productivity and capital allocation… so important for growth and poverty alleviation.”
However, it does not provide much policy guidance beyond normally unrelated circumstances, for example, CBs “must communicate clearly about policy decisions while protecting their independence.” .
It even blamed “labor market constraints”. For decades, the Bank has promoted measures that promote labor market flexibility, ostensibly increasing participation rates, lowering prices, through wages and re-employment of displaced workers.
Such policies since the 1980s have accelerated productivity growth and reduced real incomes for most people. They have reduced the share of workers’ national income, increasing inequality. To make matters worse, the Bank erroneously attributed many of the economic woes caused by policy to high inflation.
In May, the IMF Deputy CEO argues that wages do not have to be constrained to avoid inflation. She urged the CB to stay vigilant and take “robust” actions against inflation, which “will remain significantly above central bank targets for some time”.
No more Washington consensus
In June, a fund policy note recommends allowing “full transfer of higher international fuel prices to domestic users”. It advises recognizing the supply shock causes of contemporary inflation and protecting the most vulnerable.
But the more alarmed Foundation employees urged the opposite. In July, its ‘chief economist’ urge“Bringing back central bank targets should be a priority… Central banks that have already started tightening should continue to act until inflation is tame.”
Although he conceded that “tighter monetary policy will certainly have real economic costs”, without any evidence, he stressed, “delaying it will only exacerbate difficulties.” towel”.
In August, the Bank for International Settlements (BIS) came out on top urge Shift attention from demand management to supply facilitation. He warned that central banks have long assumed that supply automatically and smoothly adjusts to changes in demand.
“Continuing to rely heavily on aggregate demand tools to drive growth in this environment could increase the risk, as could lead to higher and more difficult-to-control inflation,” he warned.
But the BIS ‘chief economist’ soon called for the major economies “move forward with strength“Rising rates despite growing recession threats. He doesn’t seem to mind that the gamble that raising interest rates against inflation might not work and its costs could be extraordinary.
Fear of inflation is changing
Influential economists at US Fed, Bank of England, Fund and BIS fear of the “second round” impact of inflation mainly due to supply shock caused by the “wage price spiral”.
But the Foundation research admits, “little empirical research …… the effect of oil price shocks on wages and the factors influencing their strength”. It suggests a very low likelihood of such ‘pass-through’ effects due to significant labor market changes, including dramatic declines in unions and collective bargaining.
It reported “nearly zero transmittance for 1980-1999” and negligible effects for 2000-19, before concluding, “In a large stroke, the transmission has decreased over time in Europe”. Similar findings have been reported by others.
Reserve Bank of Australia (RBA) research found that “the current period is much different from the 1970s, when the wage price spiral appeared”. It concludes, “There are several factors against the emerging wage price spiral, … implying that the overall risk in most advanced economies is probably quite low”.
Australian professor Ross Garnaut has suggestions, “The specter of a toxic wage spiral comes from our memories, not current conditions”. Sadly, despite all the evidence, including their own, the Foundation and RBA still urge CB to take action against inflation!
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© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service