ECONOMYNEXT – The International Monetary Fund has slashed global growth in 2022 by 0.4 percent to 3.2, emerging and developing Asia by 0.8 percent to 4.6 percent and advanced economies also by 0.8 percent to 2.5 percent, as inflation from two years of stimulus began to bite.
Sri Lanka is experiencing over 50 percent inflation by June 2020 and its economy may contract 6.9 percent leaders have warned as the country pays the price for two years of monetary and fiscal stimulus on top of earlier failed stimulus under output gap targeting.
The IMF said the unemployment from the current episode of dis-inflation may be higher than experienced at the end of the Great inflation of the 1970s.
“If the evolution of these factors surprises policymakers, or if they misjudge the appropriate policy stance––including the level of neutral interest rates––the coming disinflation adjustment could be more disruptive than currently expected,” the IMF said in its global economic update.
“Past disinflation episodes associated with monetary policy tightening, such as those experienced by advanced economies in the early 1980s, were often costly, with high unemployment the price of taming inflation.”
The Federal Reserve, the ECB and copying them also countries like Sri Lanka printed vast amounts of money to create jobs and economic growth and are now paying the price.
Classical economics have long pointed out that unemployment is not a result of dis-inflation policies as claimed by Washington-based and other academic economists but an inevitable consequence of expansionary policies.
The biggest culprit in modern-day monetary instability and unemployment is the Federal Reserve which by law is tasked with generating employment (the so-called dual mandate) and usually does the opposite.
“The truth is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing,” classical economist Friedrich Hayek said in his Nobel speech in 1974 as the world was gripped by high inflation and the Bretton Woods soft-pegs in shambles.
“Not because my view is sometimes misrepresented, this employment is deliberately brought about as a means to combat inflation, but because it is now bound to appear as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerated.
“The manufacture of unemployment by what are called ‘full employment policies is a complex process. In essence it operates by temporary changes in the distribution of demand, drawing both unemployed and already employed workers into jobs which disappear with the end of inflation.”
As the Fed ratcheted up money printing and inflation was blamed on supply constraints and Fed chief Jerome Powell claimed it to be ‘transient’ and the link between money supply and the economy was ‘something we have to unlearn I guess” he was cheered on.
Only a few, including some politicians in the US Congress, challenged the Fed, though reality is now hitting the world.
“It was John Maynard Keynes, a man of great intellect by limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized,” Hayek wrote.
“The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment conquered public opinion and after his death, professional opinion too.”
Global inflation is now at 40 years high at levels when Paul Volcker took over the Fed after the Great Inflation of the 1970s created by Arthur Burns who among other things claimed that there was two types of inflation, demand driven and non-demand driven.
“There is a need to realize the fact that he present state of the world and especially the present state of monetary affairs are the necessary consequences of the application of the doctrines that have got hold of the minds of our contemporaries,” another classical economist Ludwig von Mises said in 1952 as his book The Theory of Money and Credit written 40 year earlier in German was republished.
“The great inflation of our age are not acts of God. They are man-made or to say bluntly, government made. They are the off-shoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and making people happy by raising the ‘national income.’
“One of the main tasks of economics is to explode the basic inflationary fallacy that confused the thinking of authors and statesmen from the days of John Law down to those of Lord Keynes.
“There cannot be any question of monetary reconstruction and economic recovery as long as such fables as that of the blessing of “expansionism” form an integral part of official doctrine and guide the economic policies of the nations.”
At the time the US Fed has tightened policy following a battle with the Treasury under then Fed Chief Thomas McCabe guided by Mariner Eccles and Sri Lanka was experiencing its first currency crisis under the newly set up Latin America style central bank.
“The baseline projection for global inflation is also more pessimistic, having been revised up to 8.3 percent in 2022 on a fourth-quarter-over-fourth-quarter basis, from 6.9 percent in the April 2022 World Economic Outlook,” the IMF said.
“The upside inflation revision in 2022 is larger for advanced economies, where it is expected to reach 6.3 percent from 4.8 percent projected in the April 2022.
“For emerging market and developing economies, inflation in 2022 is expected to reach 10.0 percent on a fourth-quarter-over-fourth-quarter basis.”
The IMF in line with the political orthodoxy of the West blamed the war in Ukraine for higher fuel and food prices rather than the Fed and reserve currency central banks.
In 1951/2 as Sri Lanka was hit by its first BOP crisis and reserves amassed during the currency board period started to deplete amid monetary financing of imports (sterilization of reserves given for imports) the Korean War was blamed for global inflation.
However the Fed raised rates, with Fed Governor Eccles pointing out that the inflation came from money injected the purchase of Liberty Bonds, a World War I debt, to keep its yield down. (Colombo/July26/2022)