Beware central bankers on the monetarist war path

THE state of the world economy is reminiscent of the period after the first world war in Europe. The 3 episodes of high inflation in people's minds - early 1920s, 1970s and 2020s - are all 50 years apart. In my student days we called this (after the eponymous Russian economist) a Kondratieff long cycle. If the world is in one of these, short-run policy changes worsen the crisis. So do not be surprised if central banks cause a recession as they move into macho interest rate-hiking mood.

From 1919 to 1923, Europe suffered shortages and rampant inflation, with the worst example in Germany (caused above all by the young Weimar Republic resisting reparations payments). The European economy took a long time reverting to pre-1914 prosperity. In many cases it never did. The Great Depression was one of the signs of a non-return to normality. In the meantime, continuing technological innovation exacerbated unemployment. It took another war and the Keynesian Revolution to bring European economies to "normality".

There are parallels to today's global economy. During 2 pandemic years, economies suffered an unanticipated, totally exogenous shock with supply collapsing. There was no comparable past economic framework. So governments turned to the simple principle of preserving lives and livelihoods. They improvised. They spent money. They violated the normal canons of sound finance, hoping it all would be corrected when times improved.