So as I said before, that decade between 1973 and 1982 really defined the oil era. It then led to war between Iran and Iraq while the Federal Reserve embarked on an unprecedented tightening of interest rates. To this day, his aggressive initiatives are praised as a fantastic moment of courage and boldness. It did open a new era of conservative policy making in most of the industrialized world.
At the same time, the next phase was marked by the end of the Cold War. This was “the end of History and the last man” as political scientist Francis Fukuyama stated it. There was a deep sense that this was it. The perfect model had been found. There was nowhere else to look for. Inflation seemed to be crushed at the same time thanks to the accelerating technology and the increase in productivity that came with it.
In Europe, the German reunification did cause a tremendous sense of uncertainty with the Bundesbank hiking rates without any hesitation as well, ten years after Paul Volker. The rest of Europe had to comply and found refuge in the common project of a single currency, the Euro. German inflation eventually fell from the peak of a 5% annual inflation in the early 90’s.
So that’s how the industrialized world survived the end of the cold war. The technological acceleration with the intensification of a digital economy seemed to improve productivity and soon from the middle of the 90’s, everybody started to talk about a “Goldilock Economy”, a kind of magical paradigm where nothing could go wrong. Inflation was contained, it appeared.
And then came 9/11 which reminded the industrialized world that the reliance on oil and fossil energy was also the source of all kinds of political compromissions around the world. But the world continued to think that the transition out of an oil based economy could still wait few more decades. Al Gore did come up with a documentary “Inconvenient Truth” that did shake some of us. But that was it. There was still that belief that we could just continue to kick the can down the road, and handle it later on.
But inflation seemed under control, at least apparently. Until this current resumption of price increases that we are entering with a lot of uncertainty. If you remember the pre COVID 19 world, we actually even feared deflation. The economy was so weak that central bankers worst nightmare was about deflation. So here we are now, the pendulum has swung.
This is the historical bird’s eye view that I wanted to provide you.
Let me know what you think. Leave comments and I’ll reply,