NEW YORK – In 2022 there was a marked increase in inflation in both advanced economies and emerging markets. Structural trends suggest that it will be a secular problem and not a transitory one. Specifically, many countries are locked in “wars” (some real, some metaphorical), which will produce expanding fiscal deficits, more debt monetization, and more inflation in the future.
The world is going through a kind of “geopolitical depression”, capped by the growing rivalry between the West and various revisionist aligned (or allied) powers such as China, Russia, Iran, North Korea and Pakistan. There is a rise of hot and cold wars. Russia’s brutal invasion of the Ukraine may yet expand to include NATO. Israel (and therefore the United States) is on a collision course with Iran, which is very close to obtaining nuclear weapons. The Middle East as a whole is a tinderbox. Meanwhile, the United States and China are at odds over two issues: dominance in Asia and the possibility of a forced reunification of Taiwan with the mainland.
So the United States, Europe and NATO are rearming, as is almost everyone else in the Middle East and Asia, including Japan, which has begun its biggest buildup of military force in decades. There will almost certainly be more spending on conventional and unconventional weapons (including nuclear, cyber, biological, and chemical) and those outlays will weigh on the treasury.
Meanwhile, the global war on climate change will also be onerous for the public and private sectors. Climate change mitigation and adaptation measures can cost trillions of dollars a year for decades, and it would be naive to think that all these investments will stimulate growth. It is true that after a real war, with the destruction of much of a country’s physical capital, a wave of investment can produce an economic expansion; but even so, the country in question will be poorer for having lost a large proportion of its wealth.
The same is true for weather-related investments: a significant proportion of the current capital stock will have to be replaced as it has become obsolete or destroyed by weather events.
We are also waging a costly war against future pandemics. For a variety of reasons (in some cases related to climate change), disease outbreaks with pandemic potential will become more frequent. Whether countries invest in prevention measures or deal with future health crises once they occur, they will experience a permanent increase in spending, and that additional spending will add to the growing burden associated with aging populations and the maintenance of paid health and pension systems. with current income. It is estimated that in most advanced economies, this implicit unfunded debt burden is already comparable to explicit public debt.
In addition, the war will intensify against the disruptive effects of “globotics” – the combination of globalization and automation (including artificial intelligence and robotics) that poses a growing threat to all types of high-skill and low-skill occupations. Governments will be under pressure to provide relief to the excluded, be it through basic income schemes, large-scale fiscal transfers or a huge expansion of public services.
These costs will be high even if automation causes a large increase in economic growth. For example, for a country like the United States, sustaining a universal basic income of just $1,000 a month would cost around 20% of GDP.
Finally, we also need to wage an urgent (and related) war against growing income and wealth inequality. If we don’t, the malaise afflicting young people and many working and middle class families will continue to fuel a rejection of liberal democracy and free market capitalism. To prevent populist regimes from coming to power and pursuing reckless and unsustainable economic policies, liberal democracies will have to spend a fortune bolstering their social safety nets (something many are already doing).
Fighting these five “wars” will be costly, and there will be economic and political factors that will limit the ability of governments to finance them with higher taxes. In most advanced economies (and especially in Europe), the tax burden is already high, and attempts to raise taxes on high incomes and capital (assuming such measures can overcome the lobbyists’ barrier or gain support) of the center-right parties) will collide with tax evasion, avoidance and arbitration practices.
So these necessary wars will increase government spending and transfers as a share of GDP, without a comparable increase in tax revenue. The structural budget deficit will grow even more, with the possibility of reaching unsustainable debt ratios that will increase borrowing costs and culminate in debt crises, with obvious adverse effects on economic growth.
For countries that borrow in their own currency, the easiest option will be to allow higher inflation to reduce the real value of long-term fixed-rate nominal debt. This strategy acts as a tax on capital that harms savers and creditors to the benefit of credit applicants and debtors; And it can be combined with drastic complementary measures, such as financial repression, capital taxes or even default (in the case of countries that borrow in foreign currency or issue mostly short-term or inflation-indexed debt). Because the “inflation tax” is a surreptitious form of taxation that does not require approval from the legislative or executive branches, it is the default path of least resistance when deficits and debt become increasingly unsustainable.
I have focused primarily on the demand-side factors that will cause more spending, deficits, debt monetization, and inflation. But in the medium term, there may also be numerous negative aggregate supply shocks that add to current stagflationary pressures and increase the risk of recession and chain debt crises. The Great Moderation is dead and gone; the Great Staflationary Debt Crisis is already here.
*The author is Emeritus Professor of Economics at New York University Stern School of Business, Senior Economist at Atlas Capital Team, and author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022).
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