Economic Whiplash

January 14, 2009

Something strange happened to the global economy.   If I had fallen into Sleeping Beauty like repose in June last year and woken up at Christmas, reading the Financial Times would have left me seriously confused (though I doubt Sleeping Beauty took much interest in macroeconomic trends, so her confusion might be easily explicable).   A whole array of macroeconomic risks that existed in mid 2008 not only faded away by the end of the year, they reversed.    Remember the global food crisis with severe impacts on developing countries?  Now commodity prices have crashed.  Inflation risks?  Gone.  Now we’re setting out to battle possible deflation.  Economic overheating in China?  Apparently we’re now on the brink of the 21st century version of the Great Depression.  In other words, the global economy has a bad case of whiplash.

I’ve compiled some evidence so you can appreciate just how much things have changed.  A sample of quotes from FT articles, just months apart.

Inflation Risks, 10 June 2008: ” Ben Bernanke, Federal Reserve chairman, believes that the danger of a ‘substantial downturn’ in the US economy has abated over the past month, but that inflation risks are increasing…. Eurozone inflation, at 3.6 per cent, is far above the ECB’s target of an annual rate ‘below but close’ to 2 per cent – and is expected to remain above that level significantly longer than previously expected.”

Deflation Risks, 4 November 2008: “The risk of deflation could lead Ben Bernanke to approach the new administration and Congress next year about adopting an ­inflation target at the Federal Reserve, some experts believe… He recognises that the deflation risk is not zero and will seek to minimise it, because sustained declines in core prices would greatly magnify all the problems ­facing the US economy.”

Weak dollar, 8 May 2008: “The US and Europe now have a united desire to see the dollar strengthen against the euro, senior officials have told the Financial Times. Senior eurozone officials believe that the dollar-euro rate had reached levels unhelpful to both the US and Europe.”

Strong dollar, 4 November 2008: “The dollar is rising… How can these conditions co-exist with a strong dollar? Against a basket of currencies, the dollar is up 22 per cent since its low for the year.”

Food Crisis, 5 July 2008: “The Group of Eight leading industrial nations will come under strong pressure at their annual summit in Hokkaido next week to boost food aid sharply after the Asian Development Bank added its voice to those warning that rising prices pose a grave threat to the world’s poor.”

Food Crisis?, 20 December 2008: “When [the FT] published a piece about food prices in January, British supermarkets were paying milk producers 26p a litre – the highest price in more than a decade… Today, the global wholesale milk price is down 40 per cent from record highs in 2008, while world grain prices are 50 per cent lower. More crops were planted and some export bans – imposed by countries worried about feeding their citizens during the ‘global food crisis’ – have been relaxed.”

Oil Prices, 22 May 2008: “Oil prices yesterday punched through $132 a barrel to a new high and fears of a looming global shortage pushed the cost of long-term oil beyond $140. Investors were increasingly worried that oil supplies, particularly from non-Opec countries, would be unable to meet rising demand in the next 10 years.”

Oil Prices, 14 January 2009: “World trade flows are falling fast as the credit crisis bites and oil prices plummet, with official figures yesterday showing export and import declines in the US, China, UK and Canada.”

Of course it’s not unusual for economies to go from looking good to looking bad (the history of financial crises is one where things look rosy until they look dire), but what’s odd about the whiplash phenomenon is that things went from being bad in one direction, to being bad in the complete opposite direction.

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