The specter of the 1970s

ARTICLE: "An old enemy rears its head: Emerging economies risk repeating the same mistakes that the developed world made in the inflationary 1970s," The Economist, 24 May 2008, p. 91.

Scary bit of reporting by the Economist: the rising New Core economies look to be triggering their own inflation much like the West did to itself in the 1970s.

If measured correctly, five of the ten biggest emerging economies could have inflation rates of 10% or more by mid-summer. Two-thirds of the world's population may be struggling with double-digit inflation.

No surprise on drivers: oil and food.

Naturally, emerging markets are loathe to raise interest rates, the usual fix. But the synchronized boom of today, just like that of the early 1970s, has caused commodity prices to surge across the planet, and "governments have responded with subsidies and wage and price controls," adding to money supply growth.

Logic in the West says the Great Inflation of the 1970s cannot be repeated because central banks in the West are now more independent from politicians. But when we add in all these state-directed market states, the old mix is back, especially when emerging markets don't want to trigger capital flight and/or job loss.

The Old Core says to the New Core: let your currencies float more and all will be solved. True in the global sense but less so in the local sense, and therein lies the rub.

But it rubs both ways, because the more emerging markets resist, the worse global inflation and local inflation becomes, and they're the economies that will suffer the most, according to most economists.

Comments

[farhad]

the loans from Americam families,corperations,banks,is $50 trillion,which is %350 of the GNP.America is not the leading producer any more,but a finacial and a barrower country.the industrial sector covers only %12 of the GNP.where financial sector has %22 of theGNP.to calculate GNP and its growth you have to figure the rate ofinflation.the research shows that with actual rate of iinflation beingnot %3 ,but 6 to %9,the US economy not only is not growing,but wehave been in recession for quiet a while.one of the reasons why theydon't show the true rate of inflation is social security;there are 40-50 million americans on social security,and to base the amount they have to pay them,depends on rate of inflation.there are 138 millionworkers in America who get from $20k to $200K salary a year.out of these, there are only 13,643 million in industrial,and only 9,849 million in direct production,less than %10 of GNP.and down theline i don't want to put the whole # here,the important point,it shows the deindustrialization of United States.the whole imports toUS cover only 17% of the GNP in 2007.if US export all of its whole productions,it still be left with a big trade defficit,and what that indicates;is that DOLLAR can no longer backing the bank money,andits life is at the end.so, i beilve it is not just amere backlash,and we are at a brink of a big crises,and i sure see oppertunity for Americanpeople to take back and leiminate the big money influance.