Rewind the Clock – Back to the 80’s ?
Fragility vs antifragility
Back when the Corona shock hit the world in March 2020, FED slashed rates to nothing, and Trump & the US Congress followed suit with the CARES Act. Monetary and financial conditions remained loose as 2020 became 2021 and 2022 and soon the boomer’s 1970s inflation analogy quickly became the ruling analytical frame of reference among hawkish senior analysts and economic observers. While initially surprised that the FED was so attentive to keeping labor markets tight and postponing normalization, I still found myself somewhat dismissive of the “return of the 70s” chatter.
Firstly, the modern financialized and globalized economy is just fundamentally different from that of the 1970s, where Unions, voters, and corporates had stronger political power and domestic distributional conflicts could be settled with less risk of jobs and capital moving abroad, etc.
Secondly, the intellectual diversity among veterans could basically be condensed to two opposing views: right-leaning hawks who sounded like the very Marxists they despise claiming repetition of the 1970s was inevitable, and on the other side doves who perhaps thought that wouldn’t be all that bad everything considered.
In the eyes of a millennial like myself, it all seemed a bit murky despite the obvious parallels. Instead, I saw the fiscal stimulus and easy policy in light of actual inflation from my lifetime that I know from Emerging markets. Brazil for instance frequently suffers from inflationary shocks and the BCB is not in the habit of saying “transitory” followed by keeping policy rates fixed. As you can see below, volatility in Brazil is much more brutal, yet my Bloomberg is not warning anyone about Brazilian banks.