• Hubert Kucharski

Enter, 'The Hiccup Era'

*This piece builds upon the Financial Times Piece: "Why the Bank of England has a case of the hiccups"

Mervyn King, the former Bank of England governor, coined the ‘nice’ era of non-inflationary consistent expansion that held true until the fallout of the global financial crisis. As such, in search of a more succinct description evaluated in the FT Letter (Why the Bank of England has a case of the hiccups) it was proposed that ‘hiccup’ or high inflation, continued crisis and underlying problems (such as demographics, productivity, and the pound) is more appropriate.

Many precursors to the hiccup era began to brew before the pandemic. The period of hyper-globalisation that followed after the second world war was in retrospect, for many economists, an overall net positive. For the time being, the increased integration of economic powers was a driving force in creating the Mervyn King doctrine of the ‘nice’ economy. This paired with the implementation of a stable monetary framework with regions such as the US, EU and the UK adopting inflation targets, meant that the non-inflationary, expansionist climate was reinforced by policymakers. As such, this strong economic backdrop paired with the natural trend of globalisation led to lower prices as upcoming powerhouses such as China depressed price levels once the nation joined the WTO in 2001.

However, with the benefit of hindsight, the pandemic brought a fatal flaw to light that was festering since the beginning of globalisation. The excessive complexity of supply chains. COVID-19 showed that our supply chains were too efficient. Too little slack meant that any disruptions left the systems that place our breakfast on our tables vulnerable. The pandemic exposed the Achilles heel of our globalised economy.

Yet, the pandemic had not just started the underlying problems of today's economy, rather, it has had an 'accelerationist effect'. The disruption caused by the pandemic has placed severe pressure on political institutions, particularly, in developing economies. Regions such as Latin America have been plunged into crisis as current leadership has been ruled unfit to lead. Moreover, advanced economies such as China are currently experiencing political dissent, and, even Western economies such as the US & Europe are seeing the rise of populist and nationalistic movements. Lastly, the trend of lacking productivity growth that occurred post-financial crisis and the problem of widened inequality, have both been severely exacerbated by the pandemic.

Like a chemical reaction, this has only been a catalyst for new problems, and, the deterioration of pre-existing ones. This culmination of factors has led to one crisis after another. Rising political discord has swelled into a full-blown war between Russia & Ukraine. Global supply chains are yet to recover and the global economy is now even seeing de-globalisation, which, many economists predict will only add fuel to the fire of inflation. Rising inequality in the environment of high inflation is swelling consumer debt to uncomfortable levels, especially for those on low incomes. The UK has had its run of political scandals and fiascos with Liz Truss announcing her swift resignation from the position of Prime Minister this week. Only 44 days under the post and what's left is a crashed pound, gilt market, and, a significantly worse growth forecast. The weaknesses of our economic & political systems have been exposed; as payment, we are in an era of consistent crises.

The overindulgence of policymakers has not aided the recovery either. Overzealous monetary support from central banks such as the Bank of England, the Federal Reserve, and ECB during COVID meant that all these regions now have to pay the price of higher rates of inflation. By neglecting and underestimating the effects of money growth, central banks have kept monetary policy too loose for too long. Instead, they have scapegoated the crisis on cost-push pressures. It takes one to set a gas leak (QE) in their own house, only to blame the one who set a match alight (Putin) for the sudden house fire. Now with tightening monetary, and fiscal (with the small exception of Kwasi Kwarteng) measures a correction in the form of a disinflationary recession is on its way. Once the smoke clears we can only hope that the global economy recovers and rebuilds from toxic trends exposed by the pandemic, the hiccup will prove transitory but still scarring.