Medieval mapmakers supposedly wrote “Here Be Dragons” (Hic Sunt Dracones in Latin) to indicate unexplored regions. However, there are in fact no surviving maps that show this, apart from a single 16th century globe.
Somehow, the phrase remains well known today and the myth lives on, perhaps because it so aptly describes the combination of terror and wonder the unknown brings.
The global economy is very much in Here Be Dragons territory. Now that we can travel and congregate freely without masks and constant hand sanitising, it is tempting to forget how deeply the Covid pandemic continues to distort economic activity directly and indirectly. Directly, in the sense that China still maintains a policy of locking down wherever the virus appears, including entire cities. The indirect impact lingers in disrupted supply chains, changed consumption patterns and work behaviours, and massive fiscal stimulus in rich countries (especially the US) and resultant excess savings that still sustains spending.
The net result of this being the biggest global inflation surge in 40 years and a cost-of-living crisis in many parts of the world. Central banks have responded with aggressive interest rate hikes, especially the US Federal Reserve. Higher US rates and safe-haven flows have seen the dollar gain 18% on a trade-weighted basis this year, putting upward pressure on inflation and interest rates in all but a handful of countries, and tightening the screws on borrowers with dollar-denominated debt outside the US. On top of all this, the brutal Russian invasion of Ukraine has seen energy prices go haywire as gas supplies are weaponised. Fighting climate change has taken a back seat as coal has become the go-to alternative. This moment has been aptly described as a polycrisis by economic historian Adam Tooze. Covid has worsened inequality in many countries, widened pre-existing socio-political divisions and generally made people angrier. There has also been political fall-out, with more likely to come.
Terra incognito
It will take time for a distorted economy to find its balance, and by implication, for inflation to settle. Last week provided a reminder of that as the latest US consumer price index release showed headline inflation at 8.2% year-on-year in September. This is a marginally lower rate compared to the previous three months, but the core inflation rate that excludes food and fuel prices increased to 6.6%, the highest level since 1982 and twice the historical average of the series since 1957. And though it should ease in coming months, it is clearly a far way off from the Fed’s 2% target.
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