Since the beginning of 2020, the world has been changing in ways most of us did not expect it to. First, it was the COVID-19 crisis and what evolved from it like lockdowns, draconian rules, and new medical procedures. By the beginning of 2022, covid-19 seemed to be a thing of the past and then the Ukraine War popped its ugly head. In the first three weeks of October 2023, a new war between old foes has flared up again in the Middle East and the Ukraine War is now almost forgotten. The focus of this article will not be on these crises themselves but on governments’ reactions to them and how they have and will continue to affect our domestic economies.
The common denominator for all the crises we have seen since 2020 has been heavy government and Central Banking intervention and this has to be linked back to the nature of our monetary system which has been one based on heavy dependence on debt and credit. This system evolved from when President Nixon detached the American dollar from gold in 1971. Prior to the “closing of the gold window” as it was called all national currencies had a link to gold and also somewhat to silver. What this link did was provide stability to currencies as governments and Central banks could not inflate at will as the currency had to have a fixed amount or weight of gold backing.
So, in 2020 most Western countries and banking systems were already heavily indebted as the Crisis of 2008 resulted in major bailouts by taxpayers of the whole banking system. The only saving grace was that governments and Central Banks had been able to keep interest rates artificially low which not only helped governments to keep borrowing and spending but also kept consumers doing the same. With the outbreak of the covid-19 crisis the powers that be had an excuse to take out the inflationary bazooka once again as governments, with the help of the money printers at the Central Banks, were able again to borrow trillions at very cheap rates in order to keep hundreds of millions of us placated while we were told to stay at home and do nothing for almost two years.
The only problem with printing money and shutting down the economy was that it disrupted not only domestic supply chains but also international ones so when the COVID-19 crisis started waning and the economy was supposed to go back to normal it never did but people’s spending habits had not changed and that of course led to pent up demand which put upward pressure on prices. So by late 2021, we started seeing inflation as measured by CPI going up to levels not seen for many years. The inflation problem was accentuated by the breakout of the Ukraine War in February of 2022 which led to even more supply chain problems in the energy sector as the West sanctioned Russia and Russia decided to demand payment for its energy in rubles. Explosive oil and gas prices in 2022 led to even higher prices to go along with the monetary and fiscal bazooka of 2020 and 2021. Inflation rates as measured by CPI went to double-digit levels in the UK and Europe for the first time in about forty years.
Again like with the pandemic governments in the West provided consumers with more help which always means more fiscal spending and therefore more inflation down the line. Here in the UK, some energy providers were bailed out the households got financial help with their utility bills and other schemes too. Towards the middle of 2023 both the COVID-19 and Ukraine crisis's economic side-effects had started to wane as the inflation rate dropped somewhat and interest rates on mortgages had started to stabilise. The problem of debt had not been solved though and if anything had gotten worse as the very low rates instituted during 2020 and 2021 helped the government and the public load up on even more debt.
As was said earlier interest rates had recently started to stabilize so many had hoped this would alleviate the debt load but then came the Israel-Gaza War on October 7, 2023 why would that have an impact on interest rates and our domestic economy you might ask? Ecclesiastes 1:9 says: the thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun. Back on October 6, 1973, virtually 50 years to the day from the start of the current Israel-Gaza War, the Yom Kippur War between Israel and the Arabs kicked off and had major consequences for the whole world. Even though it is still too early to tell what the current consequences of the present war will be we can look back 50 years ago to see what happened.
The biggest impact of the Yom Kippur War of 1973 was that it drove Saudi Arabia and OPEC to embargo oil shipments to any country that backed Israel in that conflict. This led to a massive spike in oil prices from around $3 per barrel to $12 by the spring of 1974. Inflation had already been a problem prior to 1973 as President Nixon had floated the dollar and fiscal spending for the Vietnam War and the Great Society spending was starting to devalue the dollar. So as you can see things are not too different today and back in the 1970s we continued to see rising inflation and interest rates after the 1973 War. It was only by 1981 when the US central bank, the Fed, decided to let short-term interest rates rise to 20% that inflation was brought under control.
The conclusion then is that like in the 1970s we do not see the inflation situation nor interest rates stabilising anytime soon and the current war in the Middle East will, in our opinion, make things even worse much like in the 1970s. Governments and Central Banks have used all their ammo ( spending and printing) and if they try again to take out their bazookas we think inflation could possibly go even hyper. One thing is for sure the pound in our pockets or internet accounts will not be buying as much in the years to come.
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