Inflation 'policy errors of the 1970s echo in our times,' Financial Times columnist warns

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The Financial Times published an op-ed Tuesday which warned that the world economy is vulnerable to inflation, stagflation and recession, with loud "echoes of the 1970s."

The article, titled "Policy errors of the 1970s echo in our times," compared America and the world today to the economic ills that plagued that disorderly decade, with the added warning that "Vast debts make the world economy more fragile than it was over 40 years ago."

"Unexpectedly high inflation, wars in key commodity-producing regions, declining real wages, slowing economic growth, fears of tightening monetary policy and turbulence in stock markets — we see all of these things in today’s world economy," Martin Wolf, FT's chief economics commentator wrote.

"These were also the dominant features of the world economy in the 1970s," he added. 

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President Biden speaks about inflation and supply chain issues at the Port of Los Angeles, Friday, June 10, 2022, in Los Angeles.  ((AP Photo/Damian Dovarganes))

"That period ended in the early 1980s, with a brutal monetary tightening in the US, a sharp reduction in inflation and a wave of debt crises in developing countries, especially in those of Latin America," Wolf continued. 

He noted that this period of crisis was followed by an upheaval of the global economy. "It was also followed by huge changes in economic policy: conventional Keynesian economics was buried, labour markets were liberalised, state-owned enterprises were privatised and economies were opened up to trade." 

Some have speculated that similarly, the economic troubles of our time could lead to a reset of the global economy. Supply chain disruptions and increased geopolitical tensions between the U.S. and China could lead to more domestic production. Similarly, the U.S. and Europe’s dependence on foreign actors, such as Russia, for oil is being called into question given the national security risks involved. 

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U.S. President Joe Biden (C) meets with Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen, in the Oval Office at the White House on May 31, 2022 in Washington, DC. The three met to discuss the Biden Administration's plan to combat record-high inflation. (Photo by Kevin Dietsch/Getty Images)

Wolf pondered "how close are the parallels, especially to the 1970s? What are the differences? And what can we learn from those mistakes?" He said countries risk "stagflation" if proper policy actions aren’t taken.

"Does what we are seeing already amount to stagflation — defined as a prolonged period of higher than expected inflation and lower than initially expected growth? The answer is ‘not yet’, but it is a risk," Wolf wrote. 

"Inflation is well above target almost everywhere," he wrote. 

"The echoes of the 1970s are loud then: higher than expected inflation, big shocks and weakening growth." Wolf also argued that despite this, "the differences are also encouraging." 

In this Sept. 30, 2021, file photo, Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Capitol Hill in Washington. Powell says the tangled supply chains and shortages that have bedeviled the U.S. economy since this summer have gotten worse and will likely keep inflation elevated well into next year. (Sarah Silbiger/Pool Photo via AP, File)

Among these differences, Wolf noted that while oil prices have increased substantially in current times, the increase is less than in 1973 and 1981. 

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However, there is one stark difference that makes countries worse off in the years ahead, he said, "An obvious danger arises in the one respect in which the world economy looks more fragile than 40 years ago: the size of the debt stock, especially the stock denominated in foreign currencies."

Wolf also noted that risks persist in the global economy, such as Russia cutting off oil to the United States and Europe. "Russia might also cut off exports of gas to Europe, generating further disturbance."