LET US PUT things in a historical balance sheet. In 1979, when the world was hit by the second oil shock, pent up inflation was unleashed and reached double digits. Jimmy Carter appointed Paul Volcker to the Fed and Volcker immediately hiked the interest rate and curbed all monetary aggregates, M1, M2 and M3. By November 1980, the FFR hit 17%. Carter lost to Reagan who left Volcker in charge. Volcker’s crusade continued and in June 1981 the FFR peaked at 20%. The result was historically named the “Volcker deflation”, which initiated the “Great Disinflation” of the 1980s.
However, this is not the end of the story. The “Volcker deflation” also triggered the worst recession ever since WWII at that time, whereby unemployment skyrocketed to 11%. Inflation was down to 4% and the USD/GBP rate was almost at par for some years. The USD depreciated only after the G-3 intervention at Plaza in 1985. Volcker stepped down in August 1987, two months before “Black Monday”. On the other hand, the most recent Fed move and the avenue it opens up may cause a stir in the future.
FED AND DOLLARS
However, even this has happened before. With the Fed’s BS mounting to unprecedented levels, fears of “USD blues” that could cause it to lose its status as the reserve currency – since Helicopter Ben was in the making – curtailed market enthusiasm in early 2009. Consequently, the EUR rose at an unseen weekly pace in early 2009. Now, not all Fed lending is inflationary, and not all Fed BS expansion creates “new money.” However, if we choose to use a widely cited euphemism, the last move is bound to add to money printing. In previous episodes the question was whether the tendency of Fed reserve credit book to expand would continue or not. Hence, Fed movements could be seen as temporary, although it would take time to de-escalate after massive BS expansions. Today there is a change in rules. Not only the long lost NAIRU is out of sight altogether, but even the inflation target is losing its practical meaning.
Yes, lessons were learned after 2008, albeit with some delay. Between 1929 and 1934, although reserve credits and henceforth the Fed’s BS expanded, M2 actually shrank. Bernanke knew this before 2008. Nevertheless, this time around the entire policy space is shifting, as if monetary policy moves in tandem with the ascent of a bizarre right-wing populism personified by Trump. Luck or not, if Donald Trump wins again, there will be ample space for resetting an expansionary stage even though a second fiscal package may not pass before the elections. The mandate for indefinite policy flexibility has been opened up by the Fed in Jackson Hole. This is not rules versus discretion; it is rather that practical macroeconomics can be restaged. That is monetary policy rules themselves are now subject to change.
POPULISM AND PANDEMICS
People tend to think things will change after the outbreak, for good or for worse, depending on political beliefs and psychological motives. Let’s see if things automatically changed after the Black Death, a pandemic that swept over up to half of the European population, not to mention what it did to the Middle East and Central Asia before it spread to Europe via sea routes. In the two centuries that followed the Domesday Book (1086), population almost trebled, manorial lands, demesne agriculture, serfdom, commerce and towns flourished. But in the 14th and 15th centuries, a complete reversal took place. After 1348-49, that is the infamous Black Death, demographic recovery was very slow and demographic expansion could only begin in the 16th century. In full truth, discussions concerning the major demographic trends in early modern England alone – not to mention continental Europe – are far more rich, if still inconclusive, in part due to the notorious scarcity of demographic data. There appears to be only scant evidence on mortality and almost nothing for fertility, a fact pointed to by the economic historian Mark Bailey (1996) in a prize-winning article. What seems to remain is a consensus surrounding the claim that, in the 15th century – circa 1400 – “wage” labor was better paid, both in terms of real “wages” and disposable income, than in any period in English history between 1200 and 1850. In fact, discussions concern many facets of occupational and demographic structure, including the proportion of serfs within the rural population. According to John Hatcher, a Cambridge historian, even though the great Evgeny Alexeyevich Kosminsky’s findings were confined to the counties included in the Hundred Rolls alone, Kosminsky (1956) seemed to constitute the best educated guess and pointed to a 3/5 ratio of unfree tenants in the lot. Bailey (1996) examines in details in which directions the occupational structure may have changed after the Black Death and Bailey (1989) scrutinizes the importance of the (various and time-varying) concepts of the “margin” in the late incarnations of the Postan-Habakkuk school, which contends that the land-labor ratio had already increased before the Black Death since marginal lands could not support population growth. In other words, even though the plague had ravaged entire populations, leaving on occasions only 1/7, 1/6 or 1/5 of people alive – especially if population density was high – the economic impact wasn’t instantaneous. It took waves of renewed plagues and the intermediation of monetary developments – two hyperinflations and then a deflation – to make things truly change economically. It took almost 50 years at the minimum for that to happen. Nothing automatically adjusts even after major outbreaks.
POPULISM AND DEMOCRACY INCORPORATED
Has fascism ever been dead? Or is it the un-dead of the century? The French Communist Party lost its popular support after 1978. This was due to a large extent to technological developments -deindustrialization coming hand-in-hand with the ascent of Jean-Marie Le Pen’s racist party. Before 1985, the hitherto unimaginable question was posed: can there be fascism in France? At about the same time, the perennial thesis that the impermeability of France to fascism was a fait accompli was put under scrutiny. Le Pen’s rise caused a debate among historians because the theses advocated outright were similar to fascism’s claims put forward half a century ago. The new right went beyond everyday fascism, banal nationalism and suchlike. The French neo-fascism took over from where José Antonio Primo de Rivera, Robert Brasillach, Pierre Drieu La Rochelle had left – the first two executed because of treason, the other committing suicide before being arrested after the downfall of the Nazi regime. In a document published in 1970, Rivera and Brasillach were sanctified as men of action, heroes who had opposed the decadence of bourgeois liberalism and democracy. The 1970 work was no simple text; it was penned by educated and talented people and used Sorel’s arguments concerning myths, for instance. Drieu La Rochelle’s criticism of Marxism also found its way into the 1970 manifesto, so to speak. The movement whose birth was announced in 1970 was addressed to European elites, and characterized itself as a non-political and independent salvation course for all of Europe. There is nothing erratic or random in the new right, right-wing populism, neo-fascism etc. that we are witnessing today. It is a self-conscious effort to recreate a re-engineered olden day ideological current. At best what we now face is some kind of Democracy Inc. as Sheldon Wolin baptized it 15 years ago. This can also be renamed populism remade. Populism is a right-wing phenomenon today.
WHAT LIES AHEAD?
Nothing automatically adjusts, and not even after natural disasters, even revolutions and such. This is exactly why either a dissection-cum-dissolution of popular reason in the form of a divagation of rightwing populisms will take place or purely economic reason (neoclassicism) will gain the upper hand or even more to the point, technology (classicism, Marx is a case in point) will prevail quickly. In other words, even the received macroeconomic wisdom of the period between 1980 and 2020, which is the dominant neo-liberal model, is now losing its appeal. An era may be coming to an end, both politically and economically. I mostly think of the U.S., but also Britain and even Continental Europe. To what extent other populism-cum-irrational autocracies will follow suit is a different matter.