Inflation’s Biggest Risk Is Geopolitical Unrest
Inflation’s Biggest Risk Is Geopolitical Unrest
Inflation isn’t just a domestic problem. Sure, year-on-year inflation hitting 7%, the highest rate in four decades, is threatening to derail Joe Biden’s presidency. As my Bloomberg colleague John Authers has written, the inflationary trend appears broad and durable.
Yet now as before, inflation is a geopolitical phenomenon, which is rooted partly in rising global tensions and could have deeply corrosive effects on the US-led world order.
That’s what happened the last time the US faced this problem, from the late 1960s to the early 1980s. “To all Americans,” Ronald Reagan said while running for president in 1980, inflation had become "something as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." The causes were closely tied to global affairs.
In the late 1960s, the combined costs of the Vietnam War and President Lyndon B. Johnson’s Great Society programs sent prices rising. In the 1970s, the chief drivers were soaring energy costs and supply disruptions caused by the Yom Kippur War of 1973 and then the Iranian revolution of 1978-1979. It was a vicious cycle: Geopolitical upheaval caused economic upheaval, which then added to the underlying global instability.
High oil costs and scarce supplies caused ruptures within the democratic world, as Japan, France and other US allies scrambled to cut bilateral deals with oil producers. Inflation ate away at an American defense budget that was already falling as a result of post-Vietnam retrenchment.
Secretary of State Henry Kissinger worried that economic chaos might destabilize the Western world. It certainly contributed to a general malaise in America and other advanced democracies, feeding fears that the Soviet Union — then benefitting from record oil prices — might win the Cold War after all. “Can Capitalism Survive?” Time magazine famously asked in 1975. Only when the Federal Reserve finally broke the inflationary cycle with bone-crushing interest rates did the US regain its geopolitical footing.
Today, rising energy costs are again pushing prices higher. The messy divorce of economies between the US and China is disrupting supply chains and generating inflationary pressure. The economic messiness provoked by another geopolitical breakup — Brexit — isn’t helping matters. Not least, the inflation surge has resulted from the massive stimulus that governments pumped into their economies in response to Covid, the greatest global crisis of this century.
In countries where there is lots of revolutionary kindling, inflation can provide the fatal spark. Historically, rising prices contributed to political upheavals such as the French Revolution, which touched off a quarter-century of war in Europe, and the Arab Spring, whose effects are still roiling the Middle East. This month, a doubling of fuel prices triggered protests, revolt and then Russian-backed repression in Kazakhstan. There’s probably more of this to come. In late 2021, the Food and Agriculture Organization at the United Nations reported that global food prices had reached their highest point in a decade.
Look out for geo-economic turbulence, as well. Argentina, the European Union, Russia and other countries have restricted the export of commodities such as grain to keep domestic food prices manageable. If Washington ratchets up interest rates to tame rising prices, it could unintentionally batter deeply indebted countries that have already lost years, even decades, of economic progress due to Covid. Indeed, when the Fed slayed inflation in the early 1980s, a decade-long Latin American debt crisis was part of the collateral damage.
Finally, there is the question of what will happen to the US Biden isn’t entirely wrong to argue that inflation is actually a sign of strength: The US economy rebounded quickly from Covid, fueling demand that is outstripping supply. Yet inflation is rarely a good-news story.
Inflation is psychologically demoralizing because it makes growth meaningless, and stagnation crippling, for people whose real wages are in decline. It fosters a sense that the people are victims of forces that their leaders cannot control. It gives credence to arguments that America’s true problems are at home, rather than abroad, and thus threatens to create a more distracted, inward-looking superpower just as global threats are intensifying.
The damage isn’t hypothetical: As John Ferrari of the American Enterprise Institute points out, the US defense budget is already at risk of being strangled by the “inflation anaconda.” The 5% bump that Congress approved for the Pentagon this year sounds impressive, but only until one considers that inflation is running at 7% and the military is particularly exposed to rising costs for energy and materials such as steel. As inflation builds up, Pentagon is forced to build down — just as China is racing to expand its military capabilities, Russia is threatening a major conflict in Eastern Europe and relations with Iran deteriorate.
The Biden administration appears to be recognizing, perhaps belatedly, that rising prices pose a severe threat to its domestic agenda and political fortunes. Inflation may also have nasty geopolitical effects in a world that hardly seemed stable before.