Is the current debt crisis similar to previous crises?

Writing in the Financial Times, writer Martin Wolf argues that massive debt is making the global economy more fragile than it was 40 years ago.

He added that unexpectedly high inflation, wars in major commodity-producing regions, falling real wages, slowing economic growth, fears of monetary tightening and turmoil in stock markets are all features of today's global economy.

He explained that these features were dominant in the global economy in the seventies of the last century, until the early eighties, with severe monetary tightening in the United States, a sharp drop in inflation and a wave of debt crises in developing countries, especially in Latin America, as well as huge changes in economic policy ;

The traditional "Keynesian" economy was buried, labor markets liberalized, state-owned enterprises privatized, and economies opened to free trade.

Between the past and the present

Wolf said - in his article - that the similarities between the current period and that past period, especially the seventies, seem clear with some differences, noting that there are mistakes that must be avoided, including not being overly optimistic, not taking high inflation seriously, and not leaving people And weak economies are without protection against shocks and their painful repercussions.

The writer wondered if the situation we are witnessing actually amounts to the level of inflation accompanied by "stagflation", then replied, "Not yet," but it is a risk.

The writer believes that inflation is much higher than the target almost everywhere around the world, and is close to its counterpart in the seventies of the last century, when the global economy witnessed shocks that were accompanied by the October 1973 war and the Iran-Iraq war that began in 1980, while at the present time. There is Corona and Russia's war on Ukraine.

More importantly - says the writer - is the risk that this inflation will become an integral part of economic expectations and the structure of economies at the present time.

He explained that the lack of expectation of a slowdown in growth rates was one of the reasons for the intensification of the risk in the 1970s, but today, too, the optimists assumed that the growth trends recorded before the pandemic would continue beyond.

But the writer cautioned that monetary policy at the present time has become more credible and more focused on price stability, compared to the situation in the seventies of the last century.

One of the similarities - pointed out by the writer - is that policy makers tended to blame temporary factors for inflation, just as the situation is now.

Although economies seem more resilient now than they were in the 1970s - the writer says - the rise of protectionism may backfire.

He warned that tightening monetary policy for a long time could lead to the emergence of chaotic and costly debt crises, and warned of the possibility of more turmoil and price jumps, due to the absence of speculation about the situation of the Corona virus and the Russian war on Ukraine and its relationship to the stumbling exports.

uncertainty

A report - published by the International Monetary Fund last April - stated that the world is going through a dangerous period and faces a renewed state of uncertainty, after the Russian war on Ukraine added to the ongoing Corona pandemic and other problems that preceded this pandemic.

The report added that the debt had already reached very high levels before the imposition of the general closure measures due to the Corona virus, while the unprecedented economic support for governments contributed to stabilizing financial markets and gradually easing liquidity and credit conditions in various parts of the world.

He pointed out that the war in Ukraine came to add more risks to unprecedented levels of public borrowing, at a time when the pandemic is still imposing pressure on many government budgets.

According to the report, deficits and debt accumulation during the pandemic rose much faster than in the early years of other recessions, including the largest of the Great Depression and the global financial crisis.

This size is not comparable to what happened during the two world wars in the twentieth century, the report says.

According to the International Monetary Fund's global debt database, borrowing jumped by 28 percentage points and reached 256 percent of GDP in 2020.

Governments contributed about half of this increase, and non-financial companies and households contributed the rest, while public debt represents nearly 40% of the total global debt, the highest percentage it has reached over nearly 6 decades.