As the world slinks deeper into inflation there is the customary search for causes and, of course, a scramble to apportion blame. Somewhat predictably, there is the tendency to look at more immediate empirically verifiable events or states of affairs — which is not entirely misplaced given the ahistoricity of orthodox economics. Hidden in the toolbox of instruments and methods are the historical origins and enduring continuities of political power plays.
In more immediate terms the causes of the current surge of inflation may be any combination of central banks feeding money into financial systems, the transnational fallout from Russia’s invasion of Ukraine — which ripped large chunks of gas, grains, oil and fertiliser from global supplies — China’s prepandemic disruption of global supply chains, the pandemic itself, and a prepandemic austerity by stealth marked by fiscal largesse to the wealthy, mainly to banks.
I come out on the side of the more historical and structural causes, with particular emphasis on democratising institutions and taking political power away from dominant actors along the Washington-Wall Street axis. My analysis would start with the claim that the crisis is the latest surge of a wave in a cascade of crises or effects that can be traced almost immediately to the 2008 global crisis.
That crisis left gaping fault lines in global finance, which were papered over by quantitative easing, when the US Federal Reserve flooded financial markets with liquidity. These fault lines can be laid over the shaky architecture of global finance identified towards the end of the 1990s, the decade of globalisation.
A set of “smaller” crises went under the radar after 2008. One was the 12-minute (9:33am to 9:45am) “flash crash” of October 15 2014, which to many people remains as befuddling as 1977’s “Wow! signal”, (speculatively from an extraterrestrial source detected by the Big Ear radio telescope of Ohio State University, which lasted a mere 72 seconds).
Another was when, in 2016, US interest rates on overnight repurchase agreements (the repo rate) experienced a sudden and unexpected spike from 2.43% on September 16 to 5.25% the next day. Next was the Covid-19 pandemic, and dislocations in credit, supply chains and labour markets around the world.
All of these pointed, again, to the urgent need to reform the architecture of global finance. This reform would have to start with strengthening regulations and supervision, reforming existing institutions such as the IMF. The fund, in particular, may have to reconsider its operations, focusing on better surveillance with special emphasis on reviewing who has their hands on the levers of power in the organisation. The world has changed in many significant ways since the Bretton Woods institutions were created.
There may also be room to create a World Financial Organisation (WFO) that would join the World Bank, IMF and World Trade Organisation (the institutions of “world government” that John Maynard Keynes referred to). Such a WFO should have the power to sanction member countries whose national regulatory policies were incongruent with adopted and agreed upon international standards.
Such an organisation would, at the very least, be more inclusive and representative than the ratings agencies that have the power to discipline and punish, without being accountable to democratic polities and institutions in countries around the world.
At a push, you may want to consider the efficacy (for global co-operation) of the Bank for International Settlements — if only for the fact that it is owned, as it were, by 63 central banks of countries around the world that account for about 95% of global GDP.
In the final analysis (I dare say), the inflation crisis has a history that reaches back farther than 2008. We may find some of its seeds in the 1970s. There are parallels between the inflation and eventually the stagflation of the 1970s; for the oil crisis of 1973 and the 1979 energy crisis we have Russia’s invasion of Ukraine and the energy and food crises it has created.
Starting in the 1970s the US sustained the net exports of Europe, Japan, South Korea, then China and emerging economies. The bulk of the profits sought higher returns on Wall Street, which emboldened financiers to build castles with private capital, mainly through options and derivatives. Corporations subsequently created networks of global transportation, including road and rail, shipping, ports and storage facilities.
The crash of 2007/2008 virtually destroyed these castles of capital and shook up global financial markets and supply chains. Central bankers, especially in the US, used public money to bail out several large banks and insurance companies (among others) with $700bn under the Troubled Asset Relief Programme.
Then came the pandemic, and the effective austerity (with socialism for the rich) drew to an abrupt halt. The pandemic changed the direction of the money flow from the elite to the poor — albeit in comparatively small amounts. With supply chains disrupted, consumers spent their money on scarce goods, and prices began to increase when corporations pushed prices even higher.
Here we are, now, slinking farther into inflation.
• Lagardien, an external examiner at the Nelson Mandela School of Public Governance, has worked in the office of the chief economist of the World Bank as well as the secretariat of the National Planning Commission.
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