To the outside world, the resignation of British Prime Minister Boris Johnson on July 7 is tantamount to detonating a bombshell in British politics. Yet for the UK, which pays attention to the rules of the political game and excels at it, this is not exactly a big deal.
In previous history, Margaret Thatcher, with her achievements such as monetarist reform, privatization reform and victory in the Falklands War, had served as prime minister three times. Yet, in the end, she resigned anyway on November 28, 1990, in the name of “Party unity and the prospects of victory in the legislative elections”.
Similar to the background of Johnson’s resignation, the UK in 1990 also faced the threat of inflation. Although Thatcher’s economic policy focused on fighting inflation, at one point she reduced Britain’s inflation rate from 21.9% to 2.4%, but since then , the country’s high inflation rebounded to 8.3%, and the Thatcher government also raised interest rates 13 times in 15 months. The UK had the highest inflation rate among Western countries at the time, which caused Britons to lose faith in economic policies. Therefore, an important reason for the resignation of the Iron Lady is undoubtedly high inflation.
The UK is now also under the shadow of high inflation. In April 2022, its consumer price index (CPI) jumped 9% year-on-year, the fastest pace since 1982. This means the UK is currently suffering from the highest rate of inflation for four decades. High inflation is hitting UK consumers directly, with Bank of England (BoE) Governor Andrew Bailey calling the prospect “doomsday” for consumers. There is always the possibility of continued inflation in the UK. Catherine Mann, a member of the BoE’s monetary policy committee, said Britain’s inflation base is widening and inflation expectations for next year will be rather high.
Looking back at past and present inflation in the UK, it is clear that high inflation is nothing short of a disaster for the economy and society. This not only greatly harms the standard of living of ordinary consumers, but also leads to changes in government. Besides political reasons, for economic reasons, Thatcher resigned amid inflation, and Johnson also followed suit.
High inflation has become a global economic phenomenon. It is faced by most eurozone countries right now. In the first quarter of 2022, the euro area inflation rate reached 7.5%. In March, inflation was 7.6% in Germany, 5.1% in France, 7.0% in Italy, 9.8% in Spain, 19% in Estonia and 11.2% in the Netherlands. In the United States, the inflation rate in March of this year rose to 8.5%, the worst rate in four decades. Its inflation rate in April rose 8.3% from the same period a year earlier, slightly lower than in March. In May, it was 8.6% year-on-year, again reaching the 40-year high. High inflation pushes prices even higher, aggravating hardship for ordinary people, and can escalate into social and then political problems.
The reasons for the formation of high global inflation are not complicated. They basically fall into several categories: First, countries have had easing policies in place for a long time, while global central banks have imposed massive quantitative easing. Extremely low interest rates and ample liquidity have become the best breeding ground for inflation. Since the global financial crisis of 2008, the ultra-loose monetary policy has lasted 14 years. Based on the “crisis triangle model” (Chan Kung, 2015), it is continuous urbanization that leads to excess capital, which in turn causes economic crisis. The cycle of urbanization begins again after the end of the economic crisis. The current global phenomenon of high inflation is a precursor to the economic crisis caused by excess capital.
Figure: Evolution of CPI prices of major world economies in recent years
The second reason is that geopolitical crises have spurred the rise in energy and food prices. After the outbreak of war in Ukraine, world energy prices continued to rise. Brent crude oil has already reached USD 139/barrel and is still around USD 105/barrel. In the context of war, energy and food have become ‘weapons’ to varying degrees. The war factor intensified the risks, while high energy supply uncertainties contributed to higher energy prices, leading to high inflation.
The third is the outbreak of the COVID-19 pandemic, which has hampered the supply chain and increased logistics costs, compounding the cost of existing production and supply links. This ultimately leads to a higher price for the consumer.
As countries continue to release monetary issuances in recent years, discussions of Modern Monetary Theory (MMT) are hotly debated. MMT believes that money comes from the relationship between the rights of creditors and debts, that the government uses the means to create money for expenditures, and that tax expenditures precede revenues. With the impact of the pandemic on the global economy, for many countries that urgently need to increase their finances to stimulate the economy, MMT undoubtedly provides relief to open the door of public debt.
If a country is not concerned about local currency debt leading to government bankruptcy, increasing debt becomes a very tempting policy option for the government. However, the ANBOUND researchers believe that monetizing the fiscal deficit is not a policy that all countries can adopt, and the basis for debt issuance still depends on several fundamental factors: First, it depends on the country who issued the bond. The second is to examine the economic situation of the bond-issuing country, such as economic growth capacity and economic scale. Even for a country as large as China, excessive public debt would carry significant risks. In our view, unlimited debt expansion is certainly not a panacea for China, but rather a ticking time bomb.
Inflation having become a reality today, it is clear that MMT does not solve the problem. The world faces a complex future. Will inflation evolve into a lasting wound that cannot be healed? To answer it requires careful observation and research. Indeed, some countries may implement temporary wartime price controls and use stricter administrative measures to control rising prices. In addition, it also includes military control of some major logistics nodes. Will these measures take place? Few in the past would believe that such a scenario could become reality, but in the context of the war in Ukraine, the market and all sectors of society should seriously consider the possibility that various extreme measures may very well be put in place. implemented to control inflation.
There is another way to curb inflation mentioned by ANBOUND in the Crisis Triangle study. This rather extreme method consists in using war as a means of eliminating a large part of the accumulation of capital and social wealth. While this is a quick way to curb inflation, it is also the most catastrophic. Will the war in Ukraine evolve into a war of this nature? It is too early to draw conclusions, but what is certain is that inflation is evolving into a major public catastrophe that is ravaging the world. Therefore, on the issue of inflation, all countries in the world should abandon ideological disputes and deal with inflation rationally. After all, the damage caused by global inflation can pose enormous challenges and threats to humanity.
Conclusion of the final analysis:
Under the influence of ultra-loose long-term policies, the COVID-19 pandemic, wars and other factors, inflation is spreading to countries and economies around the world. It becomes a public catastrophe that all countries have to deal with. To this end, all countries should put aside their previous differences and seek a solution together.