Chronic. The war in Ukraine will not be the decisive factor, but it should accelerate the movement: after inflation, here comes the time of recession. In any case, this is the scenario to anticipate, since inflation came out of its box. The causes are known: bottlenecks in the economy after the Covid-19 pandemic, combined with ultra-accommodative monetary and fiscal policy. The war in Ukraine will accentuate the energy crisis and will not be conducive to the resumption of happy globalization, guaranteeing low prices for decades.
The US Federal Reserve (Fed) will therefore have to raise its interest rates stronger and faster, starting at its meeting in mid-March. This prospect has already caused the fall of Wall Street, which has learned the lesson: the Fed does not know how to pilot soft landings when it comes to combating rising prices. Money will cost more, corporate profits will decline and the economy will shrink, who knows, by the end of 2022.
It is the fear of this dark scenario that has been repeated for months by Larry Summers, former Secretary of the Treasury to Bill Clinton. Is it so true? In a podcast from Princeton University, economist Alan Blinder, a former Fed vice chairman under Bill Clinton, analyzed the previous cases. The collective memory remembers in particular a case, from 1993 to 1995, when the Fed raised its rates by 3.1% without causing a recession. In the other cases, the central bank acted brutally, leading to crises that were all the stronger because they reacted too late to fight inflation.
“The finger of the Fed”
In reality, very often, monetary policy has nothing to do with recessions. That of 1990, which cost George Bush senior his re-election, was very moderate and provoked by the invasion of Kuwait by Saddam Hussein. The 2001 recession, linked to the bursting of the Internet bubble, struck people’s minds because it resulted in a weak recovery in employment, but it was, in reality, a “recession”, according to Alan Blinder. Finally, the financial crisis of 2008 was in no way caused by the rise in interest rates.
There remain the cases that interest us, recessions in times of inflation: those of 1973 under Richard Nixon, 1980 under Jimmy Carter and 1981 under Ronald Reagan. These were preceded by considerable increases in the cost of money: 9.6 points of increase between February 1972 and July 1974; 13 points between June 1977 and April 1980, 10 points between July 1980 and 1981. A bitter potion, made to overcome the inflation born of the war in Vietnam, the soaring prices of agricultural materials and the two oil shocks of 1973 and 1979. The economic landing was hard, but that was the point: “There was never any intention to act softly”recalls Alan Blinder.
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Chronic. The war in Ukraine will not be the decisive factor, but it should accelerate the movement: after inflation, here comes the time of recession. In any case, this is the scenario to anticipate, since inflation came out of its box. The causes are known: bottlenecks in the economy after the Covid-19 pandemic, combined with ultra-accommodative monetary and fiscal policy. The war in Ukraine will accentuate the energy crisis and will not be conducive to the resumption of happy globalization, guaranteeing low prices for decades.
The US Federal Reserve (Fed) will therefore have to raise its interest rates stronger and faster, starting at its meeting in mid-March. This prospect has already caused the fall of Wall Street, which has learned the lesson: the Fed does not know how to pilot soft landings when it comes to combating rising prices. Money will cost more, corporate profits will decline and the economy will shrink, who knows, by the end of 2022.
It is the fear of this dark scenario that has been repeated for months by Larry Summers, former Secretary of the Treasury to Bill Clinton. Is it so true? In a podcast from Princeton University, economist Alan Blinder, a former Fed vice chairman under Bill Clinton, analyzed the previous cases. The collective memory remembers in particular a case, from 1993 to 1995, when the Fed raised its rates by 3.1% without causing a recession. In the other cases, the central bank acted brutally, leading to crises that were all the stronger because they reacted too late to fight inflation.
“The finger of the Fed”
In reality, very often, monetary policy has nothing to do with recessions. That of 1990, which cost George Bush senior his re-election, was very moderate and provoked by the invasion of Kuwait by Saddam Hussein. The 2001 recession, linked to the bursting of the Internet bubble, struck people’s minds because it resulted in a weak recovery in employment, but it was, in reality, a “recession”, according to Alan Blinder. Finally, the financial crisis of 2008 was in no way caused by the rise in interest rates.
There remain the cases that interest us, recessions in times of inflation: those of 1973 under Richard Nixon, 1980 under Jimmy Carter and 1981 under Ronald Reagan. These were preceded by considerable increases in the cost of money: 9.6 points of increase between February 1972 and July 1974; 13 points between June 1977 and April 1980, 10 points between July 1980 and 1981. A bitter potion, made to overcome the inflation born of the war in Vietnam, the soaring prices of agricultural materials and the two oil shocks of 1973 and 1979. The economic landing was hard, but that was the point: “There was never any intention to act softly”recalls Alan Blinder.
You have 30.8% of this article left to read. The following is for subscribers only.