The coup that will not happen *
If we want to take a picture of the global macroeconomic context, we should highlight:
– The Russian-Ukrainian conflict it contributes alarmingly to keeping the price of oil and gas high.
– The power war between nuclear powers it is imposing new and unexpected limits on markets.
– Conflict e energy crisis fuel inflation, which is already high, and the Federal Reserve has to make rather difficult decisions, risking jeopardizing economic growth.
It is not very different from a film already seen in the early 70sfor different but not so different causes.
A coalition of Arab countries launched a surprise attack on Israel, in an attempt to recapture the Israeli-occupied Sinai Peninsula. The conflict, known as the 1973 Arab-Israeli War or the Yom Kippur War, pitted the two powers against each other: the Soviet Union, then, supported the Arabs and the United States supported Israel.
Six Arab OPEC members declared a embargo on allies of Israeland in particular the United States, quadrupling the price of oil.
It was the Federal Reserve that commented on the events of the time as “a perfect economic storm”: an oil shock in the midst of an inflationary spiral. And rising oil prices have the economic impact of worsening inflation while slowing growth.
The result in the 1970s was what we call today stagflation: a bad mix of high inflation, high unemployment and stagnant or negative economic growth.
The question today, of course, is … will it be different this time or back to the economy of the 70s?
Of course, no two time periods are exactly alike.
In the early 1970s there were other important factors that contributed to stagflation, which would have pushed unemployment above 7%, theinflation above 12% it’s a negative economic growth.
President Nixon it had recently taken the United States off the gold standard.
Due to the dollar’s central position in the world economy, the whole world was still rocked by Nixon’s decision. Indeed, central bankers have employed years to figure out how to avoid inflation which would have arisen from the fluctuation of currencies.
And the economies back then were much more dependent on oil.
The largest American companies by market capitalization, in 1973, were the industrial giants: General Motors, Exxon Mobil, Ford Motor Company and General Electric.
Today there are other giants such as information and service companies such as Apple, Microsoft, Alphabet (Google) and Amazon.
The energy intensity of the US economy (how much energy each dollar of GDP requires) has been halved since 1983, according to the Energy Information Administration.
In 2020, the United States became an oil exporterachieving substantial energy independence: and it is in a much more favorable position than that of European countries.
The rise in the price of oil today has less impact on the economy than in the 1970s. But, while the effect is next to nil for the United States, it nevertheless remains very burdensome for Europe.
In 1973, the Fed lowered interest rates, thereby increasing inflation. And from this point of view, it seems that the Fed’s view today is exactly the opposite.
Hence: the United States seems to be able to withstand the consequences of the current difficulties with much more strength and capacity than Europe. Nonetheless, if the war in Ukraine persists, e oil prices will continue to riseeconomies will slow down, as they are already doing, and inflation will become a long-term enemy.
* from the Swiss Stock Exchange Institute
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