The New World Crisis

 The war in Ukraine and worldwide inflation and its consequences lead the news these days.  Many stories note that they are related.  The war has led to sanctions against Russia and a retaliatory cutoff of energy exports from there, sending energy prices skyrocketing.  Both, in my opinion, are the result of something much bigger: a crisis of globalization and its destructive effect on political authority around the world.  I cannot at this point see how we are going to get out of it.

As the world discovered in 1914, economic globalization relies on peace.  It encourages nations to depend on other continents for critical materials--food then, food and energy now.  When war comes those flows are disrupted.  When that happened in the First World War, both Germany and Japan eventually decided to try to create autarkic empires that would not be vulnerable to wars and world economic swings.  The United States led the coalition that defeated them and promoted globalization in the non-Communist world--but western governments continued to regulate trade and currencies effectively.  The deregulation of the world economy began in the 1970s with the end of the gold-exchange standard, and the gradual opening of Chinese markets and the fall of Soviet Communism spread the new system all over the world.  

Like the world of the 1920s, the world of the 2000s had become very financially interconnected.  In 2008, as in 1929, a credit crisis in the United States rapidly spread around the world.  China alone, as Adam Tooze pointed out in his book Crash--which I reviewed here--decided to fight the crisis with massive government spending on infrastructure, as both Germany and the US had done in the 1930s.  In the west, Tooze shown, central bankers, not elected leaders, determined the response, and transferred the burden of the crisis from the bankers who had caused it to ordinary citizens. The pandemic caused the next economic crisis, and massive infusions of capital from central banks appeared to be getting us out of this one.  But then inflation struck more than a year ago.

The inflation we are experiencing now replays the years of my young adulthood, from 1965 to 1982 or so,  when prices tripled.  They had already increased 50 percent by 1973 when the Arab oil embargo struck, and they had doubled by 1978 before further oil shocks raised inflation into double digits again.  Twice the US government took significant action to try to stop the inflation.  Richard Nixon in 1971 imposed wage and price controls, which cut inflation from nearly 6 percent in 1970 to a little over 3 percent for the next two years and insured his re-election.  After the oil shock in 1973 the US froze the price of domestic energy--a step which would have reduced inflation here very significantly today, since we are now energy self-sufficient.  Ronald Reagan and then-Fed chair Paul Volcker, however, finally broke the back of inflation with high interest rates leading to nearly 11 percent unemployment in 1982.  That was the formative experience for the Boom generation of economists and now the Fed is replaying that scenario.  Although many of them won't admit it, most orthodox economists really want a recession to control inflation, and I am not aware of a single western political leader who is trying to challenge that policy.  That threatens our political system.

Joe Biden's 60 Minutes interview last weekend illustrated what I mean.  Inflation is the nation's leading concern right now and will probably cost the Democrats control of the House, which will paralyze our politics and make it impossible for the Democrats to strengthen their case for re-election over the next two years.  Trump meanwhile is running neck and neck with Biden in national trial heats for the 2024 election--and I feel sure that Kamala Harris, who has never establish a real rapport with the American people, would poll significantly worse. Biden in the interview simply bragged that energy prices were down and that things could be worse.  He had nothing to offer, because the federal government has turned the care of the nation's economic health over to the Fed.  Rather than beating the Trump Republicans by taking big, active measures to restore economic health, the Democratic leadership seems to be counting on prosecutors in New York State and the Justice Department to bring Trump down.  They are in other words counting on the Deep State, which plays into Trump's hands politically.  That may succeed against Trump, but not against Ron DeSantis.

Similar political situations may be found in other parts of the world.  The German government courageously lined up with NATO to sanction Putin but has held back on giving Ukraine its best weapons, and now faces a major energy crisis because of cutoffs of Russian gas.  Inflation, as I have just learned, is much more serious in countries like Lebanon and Turkey and may threaten political collapse.  Prime Minister Truss of the UK has just announced a new round of high-income tax cuts, panicking financial markets there.  The most stable European country by far seems to be France, whose leader was just comfortably re-elected--partly, perhaps, because of de Gaulle's decision to use nuclear power to make France largely energy independent.  

A friend of mine, a scholar of China, has just informed me of a further breakdown of globalization.  Frightened by the crisis over Taiwan, she says, many foreign companies are pulling out of China so has not to be badly hurt by western sanctions against China if an attack on Taiwan occurs.  It seems clear, as Robert Skidelsky argued in his book Money and Government, which I also reviewed here--that western countries should try to become self-sufficient in more key products, or at least make sure that they buy them from friendly states.  But are governments actually strong enough  nowadays to make those changes?  They were from about 1870 until the late twentieth century, when democracy was a relatively new idea and governments had to mobilize resources to face serious foreign threats. They may not be now.  We don't know what the consequences will be.