We are Living in an Increasingly Dangerous World…

The former Irish prime minister points out that a supply side shock is causing inflation, leaving central banks and governments with few good options. Increasing funding is the populist choice but is likely to burden future generations. Increasing interest rates is likely to be unpopular.

August 05, 2022 11:25 EDT

There is more to worry about in the world today than in any time in my memory. I remember the Cuban missile crisis. It was a very dangerous moment. The crisis was defused by secret diplomacy between the Soviet Union and the US, and the willingness of the US to accept a communist state in the Western Hemisphere and the openness of the Soviets to turn their ships back.

If a similar crisis arose now, is there a basis on which Russia and the US could even talk to one another to defuse it?

Ambiguity, the enemy of peace

Tensions between Russia and the US might be high right now but the US-China confrontation is more serious. It will be far more long lasting.

China has dramatically increased its military spending. Confronting China is almost the only thing on which Democrats and Republicans in the US can agree. The US is pledged to support Taiwan remaining politically separate from China, even though it is part of China, and the US is theoretically prepared to go to war to defend that position.

Reality is more complicated. The US position is ambiguous and so is the Chinese position.

Ambiguity is often the enemy of peace. World War I arose from ambiguity in the pledges that the powers had given to one another in the event of attack. If the pledges had been clearer, the risks might not have been taken.

Inflation, the enemy of peace too

Inflation, and an artificially induced recession  to cure it, are increasingly expected. Central banks will use higher interest rates as the main tool to fight inflation. The political effects of this could be very serious. Public opinion is unprepared for increased interest rates and the ensuing hardships will not be evenly spread. As the adage goes, inflation hits everybody, though not equally.

High interest rates are even more selective. They hit states who have overborrowed, such as Greece and Italy hardest. They also cause unemployment, which hits people with marginal jobs hardest. Those in secure employment with  savings or even low borrowings  are less affected. Inflation led to high interest rates in the 1980s, which led to political tensions. Such tensions are back.

Some posit the idea that we should tackle inflation by extra state spending. This can only be paid for either by increasing taxation now or by borrowing, which increases taxes for our children and grandchildren. This does not seem sensible to me. Yet everyone is advocating it.

The current inflationary surge has come from a global supply side shock. It has made countries that import energy and food poorer. Attempting to redistribute this poverty through state action raises expectations that cannot be fulfilled. It will inevitably damage democracy. Government spending increases demand, which fuels inflation. The cure for controlling inflation is Increasing supply but that is not in the gift of any western government.

It is important that voters understand the gravity of the problems we are facing. Populism confuses facts with emotion. Anger is not a policy. Blame is not a policy either. Instead of acting rashly, we need to think things through carefully and choose sound economic policies.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.


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