March 1, 2024

First: Inflation and Economic Hooliganism

Today, by contrast, the picture is full of seeming contradictions. Are we in a runaway boom, or is growth weak? Is inflation low, or is it spiraling out of control? The answer to all of these questions is yes. China, India and Brazil are growing much too fast for comfort; America, Europe and Japan remain depressed. Inflation is running high in the emerging world, while the prices of oil and food, which are determined in global markets and are largely driven by demand from those emerging nations, have soared; but underlying inflation in the wealthy nations remains low.

In short, at this point we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears. Whatever you’re afraid of, be it inflation or unemployment or fiscal crisis, it’s happening somewhere — but the problems are different in different places.

The important thing to realize is that this kind of two-speed world, with booms in some places and continuing slumps in others, was to be expected in the aftermath of a financial crisis that inflicted huge damage on many, but not all, major economies. And for those countries that were damaged — America very much included — here’s a piece of advice: focus on solving your problems, not other countries’ problems.

But before we discuss solutions, let’s consider how we got into this mess.

The global financial crisis of 2008-9 had its roots in more than two decades of growing complacency in wealthy nations, a complacency whose main financial manifestation was ever-growing leverage. Bankers and households alike piled on levels of debt that would have been sustainable only if nothing ever went wrong. Inevitably, something did — and a result was to force much of the advanced world into a harsh process of deleveraging, of slashing spending to pay down debts.

When everyone is trying to pay down debt at the same time, you get a depressed economy — after all, my income comes from your spending and vice versa, so if we’re all trying to spend less, we all end up with less income. And investment opportunities dry up along with output and employment: why should businesses add capacity when they’re not using the factories and office buildings they already have?

But if that’s the story of our economic woes, what’s with the booms and inflation out there? Well, not everyone was caught up in the same cycle of complacency and comeuppance as we were. Emerging nations — and in particular, the BRICs (Brazil, Russia, India, China) — have followed a very different trajectory.

Emerging economies never had the luxury of complacency. The decades before the storm were a time of relative economic calm in America and Europe, but it was an era of repeated crises in the developing world: the Mexican crisis of 1994-95, the Asian crisis of 1997-98, the Argentine crisis of 2001-2 and more. And this history of crisis fed a mood of caution, both on the part of governments — which paid down their debts and accumulated huge reserves — and on the part of the private sector, where debt-equity ratios and other measures of financial fragility fell sharply from 1998 onward.

As a result, by the time the big crisis in wealthy nations struck, emerging economies were far less vulnerable to disruption than they were in the 1990s — and, as it turns out, far less vulnerable than many advanced economies. In the panicky months after the fall of Lehman, past prudence wasn’t enough to insulate countries from the global recession. But once the free fall ended, the emerging world staged a strong recovery, even as advanced economies struggled.

In fact, once the acute phase of the crisis was over, the difficulties of advanced economies actually had the effect of promoting growth in the emerging world, as investors — finding few good opportunities in debt-burdened wealthy nations — began funneling money into up-and-coming economies, turning those economies’ recoveries into runaway booms.

These booms are, in turn, causing inflation to rise in the emerging world. China and India grew more than 10 percent last year, Brazil more than 7 percent. These economies are overheating, and inflation is the natural result.

Paul Krugman is a Times columnist and the winner of the 2008 Nobel Memorial Prize in Economic Science.

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