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Deflation Has Begun

The First Global Deflation Has Begun, and It’s Unclear Just How Painful It Will Be

By Adam Tooze

Mr. Tooze is an economic historian, the director of the European Institute at Columbia University and the author of the Chartbook newsletter.

Around the world, rapid economic recovery from the Covid shock unleashed the largest wave of inflation we have seen since the early 1980s. In response, in the summer of 2021, central banks began raising interest rates. Brazil led the way. In early 2022, the Federal Reserve joined in, unleashing a bandwagon effect: Once the Fed moves and the dollar strengthens, other countries either raise their interest rates or face a sharp devaluation, which further stokes inflation.

The outline of this pattern is familiar. But the breadth is new. We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. While the interest rate increases are not as steep as those pushed through by Paul Volcker as Fed chair after 1979, today’s involve far more central banks.

There are moments when history-making creeps up on you. This is one of those moments. As far as the advanced economies have been concerned, the era of globalization since the 1990s has been one of disinflation and monetary expansion by central banks. Now that balance is being reversed, and on a global scale.

To add to the disinflationary pressure, we are also seeing Covid-era stimulus programs wound up in favor of measures like the Inflation Reduction Act that promise to cut deficits and take demand out of the economy. In the United States in the third quarter, the so-called “fiscal drag” will slow the economy by more than 3.4 percent of gross domestic product, according to an analysis by the Brookings Institution.

The consequences of this global deflationary cycle are hard to predict. We have never done this before on this scale. Will it get inflation down? Very likely. But we are also courting the risk of a global recession that at its worst could bring down housing markets, bankrupt businesses and states, and throw hundreds of millions of people worldwide into unemployment and distress.

In light of this worst-case scenario, policymakers have to consider three questions: Are interest rates too blunt an instrument for dealing with our current economic imbalances? Can the central bankers pick the right rate, so as to slow inflation but not strangle the economy? And can a debt-laden global economy survive a serious interest rate rise led by the Federal Reserve?

Inflation in much of the world has been driven by Covid-related supply-chain bottlenecks and energy price shocks. Raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit future capacity and thus future supply. In Europe, for this reason, modest interest rate increases by the European Central Bank are being flanked by caps on electricity and gas prices imposed by some European Union countries. What the monetary and fiscal squeeze does do is to help ensure that inflation does not become entrenched and widespread. This is the main concern of the Fed right now.

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Air Travel

Boeing has agreed to pay $200 million for misleading the public about the safety of its 737 Max plane following two fatal crashes in 2018 and 2019. The Securities and Exchange Commission alleges that, following an October 2018 crash of a Lion Air 737 Max jet that killed 189 people, Boeing and then-CEO Dennis Muilenburg knew that part of the plane's flight control system posed an ongoing safety concern -- yet told the public that it was safe to fly. After a March 2019 fatal 737 Max crash, the SEC alleges that Boeing and Muilenburg knowingly misled the public about "slips" and "gaps" in the certification process of that flight control system.

Elsewhere in the aviation industry, American Airlines recently announced it will ban an unruly passenger for life after the individual punched a flight attendant.


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