As inflation continues to soar everywhere,
maybe the world's central bankers need a jolt to
awaken them from complacency. How about holding
one of their bi-monthly meetings in
hyperinflationary Zimbabwe? It might not be
comfortable, but it would be educational.
According to Zimbabwe's official
statistical agency, inflation topped 66,000% in
2007, which looks more like Weimar Germany than
modern-day Africa. While no one is quite certain
how the government managed to estimate prices,
given that there is virtually nothing for sale in
the shops, most indicators suggest that Zimbabwe
does have a good shot at breaking world records
for inflation.
Of course, curious as they
might be, central bankers could
decide
that
meeting in Harare would be too inconvenient and
politically unpalatable. Fortunately, there are
lots of other nice - albeit less spectacular -
inflation destinations. Inflation in Russia,
Vietnam, Argentina and Venezuela is solidly in
double digits, to name just a few possibilities.
Indeed, except for deflation-ridden Japan,
central bankers could meet just about anywhere and
see high and rising inflation. Chinese authorities
are so worried by their country's 7% inflation
they are copying India and imposing price controls
on food. Even the United States had inflation at
4% last year, though the Federal Reserve is
somehow convinced that most people won't notice.
Many central bankers and economists argue
that today's rising global inflation is just a
temporary aberration, driven by soaring prices for
food, fuel, and other commodities. True, prices
for many key commodities are up 25 to 50% since
the start of the year. But if central bankers
think that today's inflation is simply the product
of short-term resource scarcities as opposed to
lax monetary policy, they are mistaken. The fact
is that around most of the world, inflation - and
eventually inflation expectations - will keep
climbing unless central banks start tightening
their monetary policies.
The United States
is now ground zero for global inflation. Faced
with a vicious combination of collapsing housing
prices and imploding credit markets, the Fed has
been aggressively cutting interest rates to try to
stave off a recession. But even if the Fed does
not admit it in its forecasts, the price of this
"insurance policy" will almost certainly be higher
inflation down the road, and perhaps for several
years.
America's inflation would be
contained but for the fact that so many countries,
from the Middle East to Asia, effectively tie
their currencies to the dollar. Others, such as
Russia and Argentina, do not literally peg to the
dollar but nevertheless try to smooth movements.
As a result, whenever the Fed cuts interest rates,
it puts pressure on the whole "dollar bloc" to
follow suit, lest their currencies appreciate as
investors seek higher yields.
Looser US
monetary policy has thus set the tempo for
inflation in a significant chunk - perhaps as much
as 60% - of the global economy. But, with most
economies in the Middle East and Asia in much
stronger shape than the United States and
inflation already climbing sharply in most
emerging-market countries, aggressive monetary
stimulus is the last thing they need right now.
The European Central Bank (ECB)is staying
calm for the moment, but it, too, is probably
holding back on interest-rate hikes partly out of
fear of driving the euro, already at record
levels, even higher. And the ECB worries that if
the US recession proves contagious, it may have to
turn around and start slashing rates anyway.
So what happens next? If the United States
tips from mild recession into deep recession, the
global deflationary implications will cancel out
some of the inflationary pressures the world is
facing. Global commodity prices will collapse, and
prices for many goods and services will stop
rising so quickly as unemployment and excess
capacity grow.
Of course, a US recession
will also bring further Fed interest-rate cuts,
which will exacerbate problems later. But
inflation pressures will be even worse if the US
recession remains mild and global growth remains
solid. In that case, inflation could easily rise
to 1980s (if not quite 1970s) levels throughout
much of the world.
Until now, most
investors have thought that they would rather risk
high inflation for a couple of years than accept
even a short and shallow recession. But they too
easily forget the costs of high inflation, and how
difficult it is to squeeze it out of the system.
Maybe they, too, should try holding a few
conferences in Zimbabwe, and get a reality check
of their own.
Kenneth Rogoff
is professor of economics and public policy at
Harvard University, and was formerly chief
economist at the International Monetary Fund.
(Copyright 2008 Project Syndicate.)
(Published with permission of the
Global Policy
Innovations program
at the Carnegie Council for Ethics in
International
Affairs.
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