ECONOMYNEXT – The International Monetary Fund cut global growth in 2022 from 0.4% to 3.2%, emerging and developing Asia from 0.8% to 4.6% and advanced economies also from 0.8 % to 2.5%, as inflation after two years of stimulus began to bite.
Sri Lanka is experiencing more than 50% inflation by June 2020 and its economy could contract by 6.9% leaders have warned as the country pays the price of two years of monetary and fiscal stimulus on top of the failed stimulus under output gap targeting.
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The IMF has said unemployment in the current episode of disinflation could be higher than that recorded at the end of the Great Inflation of the 1970s.
“If developments in these factors surprise policymakers, or if they misjudge the appropriate policy stance – including the level of neutral interest rates – the next disinflation adjustment could be more disruptive than currently expected” , the IMF said in its global economic update. .
“Past episodes of disinflation associated with monetary policy tightening, such as those experienced by advanced economies in the early 1980s, have often been costly, with high unemployment being the price of controlling inflation.”
The Federal Reserve, the ECB and also emulating countries like Sri Lanka have printed huge sums of money to create jobs and economic growth and are now paying the price.
Classical economics has long emphasized that unemployment is not the consequence of disinflationary policies as claimed by Washington-based economists and other academics, but an inevitable consequence of expansionary policies.
The biggest culprit of modern monetary instability and unemployment is the Federal Reserve which, by law, is mandated for employment and generally does the opposite.
“The truth is that, by a mistaken theoretical view, we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing,” classical economist Friedrich Hayek said in his 1974 Nobel Prize speech. when the world was plagued by high inflation. and the soft ankles of crumbling Bretton Woods.
“Not because my view is sometimes distorted, this job is deliberately created as a way to fight inflation, but because it is now bound to appear as a deeply regrettable but inevitable consequence of the misguided policies of the past. as soon as inflation stops accelerating.
“The fabrication of unemployment by what are called “full employment policies” is a complex process. It essentially operates through temporary changes in the distribution of demand, attracting both unemployed and already employed workers into jobs that disappear with the end of inflation.
As the Fed increased money printing and inflation was blamed on supply constraints and Fed chief Jerome Powell claimed it was “transitional” and the link between money supply and inflation Economics was “something we have to unlearn, I guess”, he was applauded.
Only a few, including some politicians in the US Congress, took issue, although reality is now hitting.
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“It was John Maynard Keynes, a man of great intelligence with a limited knowledge of economic theory, who finally succeeded in rehabilitating a view long reserved for the eccentrics with whom he openly sympathized,” Hayek wrote.
“The claim of an eminent public figure and a brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment won over public opinion and, after his death, professional opinion too.”
Global inflation is now at its highest level in 40 years when Paul Volcker took over as Fed head after the Great Inflation of the 1970s created by Arthur Burns who, among other things, claimed there were two types of inflation. inflation, demand-driven and non-demand-driven.
“It is necessary to realize that the present state of the world and in particular the present state of monetary affairs are the necessary consequences of the application of the doctrines which have taken hold of the minds of our contemporaries”, another classical economist Ludwig von Mises said in 1952 that Sri Lanka experienced the first balance of payments crisis after the establishment of the central bank and the abolition of its currency board.
“The great inflation of our time is not an act of God. They are created by man or, to put it bluntly, by government. These are the offshoots of doctrines that attribute to governments the magic power to create wealth out of thin air and make people happy by increasing the “national income”.
“The baseline projection for global inflation is also more pessimistic, having been revised to 8.3% in 2022 on a fourth quarter over fourth quarter basis, from 6.9% in the April World Economic Outlook. 2022,” the IMF said.
“The upward revision to inflation in 2022 is more significant for advanced economies, where it is expected to reach 6.3% from 4.8% projected in April 2022.
“For emerging markets and developing economies, inflation in 2022 is expected to reach 10.0% on a fourth-quarter to fourth-quarter basis.”
The IMF, in line with Western political orthodoxy, blamed the war in Ukraine for rising fuel and food prices rather than the Fed and reserve currency central banks.
In 1952, when Sri Lanka was hit by foreign exchange problems and its reserves accumulated during the currency board period began to run out amid monetary financing of imports (sterilization of reserves granted for imports) , the Korean War was blamed for global inflation.
However, the Fed raised rates, with ex-Fed chief Marriner Eccles pointing out that the inflation came from the money injected into the purchase of Liberty Bonds, a World War I debt, to maintain its low yield. (Colombo/July 26, 2022)