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Summary
Energy conservation slogans that echo those of the 1970s oil shock should make us roll our eyes. America had plenty of well-meaning but ineffective campaigns back then. What ultimately matters is the macro policy response of governments and central banks.
We have been here before. In the 1970s, US President Gerald Ford urged Americans to combat escalating energy costs in response to the Arab-Israeli war. His Whip Inflation Now (Win) initiative encouraged people to grow vegetables in their yards, car pool and use cold water in the laundry. ‘Win’ badges were churned out and Ford loved pinning them on lapels. Even ex-Beatle George Harrison got one during a White House visit.
The exercise was more public relations than serious policy. But half a century on, Asian leaders are asking people to again adapt their habits as oil and gas prices jump due to conflict in West Asia: Work in short sleeves, ease up on the air-conditioning and skip the elevator, they are advised. Now, as then, these measures are not a substitute for effective monetary or fiscal practices. At best, they represent a short holding pattern.
Cutting back is one of the first things human beings can control. But their role will be a minor one if the current conflict, which began with an attack on Iran by Israel and the US, is prolonged.
What is needed are hard decisions on budgets and interest rates. Fiscal bosses and central banks will be reluctant to deviate greatly from their path before fighting erupted on 28 February. They might get lucky and not have to do much, but it’s better to plan than hope. Forthright indications that they will do what’s necessary is a minimum.
The duration of the conflict—which the International Energy Agency rates as the biggest ever oil-supply disruption—will determine the path of the world economy, on which Asia’s export powerhouses hinge.
If there’s a conclusion soon, as the White House has suggested, the impact won’t be huge. Inflation, which policymakers have wrestled down from its post-covid high, need not flare dramatically and a sharp global downturn could be avoided. The current economic expansion withstood US tariffs imposed almost a year ago.
Despite Asia’s impressive financial and commercial advances since the 1973 war that produced the first oil shock, the region remains dependent in significant ways on events far away. This is a necessary wake-up call to the Asia-rising narrative.
There are important differences between now and the 70s. The US today is the world’s largest oil producer and a net energy exporter, thanks to the shale boom. Most central banks enjoy significant independence that was rare then. And while inflation jumped after covid, it never reached the heights of half a century ago.
Central banks, nevertheless, need to call this moment correctly. A slew of officials are slated to meet this week, including the Federal Reserve, European Central Bank and Bank of Japan.
At this early stage, expressing an absolute commitment to containing inflation should suffice. Actions can follow—if required. Panic, alarmism and a response that strikes investors as knee-jerk have no place. Only the Reserve Bank of Australia, which has been loudly fretting about inflation for some months, is forecast to hike rates imminently.
One thing ought to be apparent: For now, rate cuts aren’t on the cards. And the duration of pauses is likely to be shorter. Bond markets have sold off on fears that inflation will reignite.
In Europe, there’s serious talk from officials about lessons of 2021-22, when rates were perceived to be slow to rise. The concern is legitimate, given the ECB’s primary mandate of price stability, but tightening too hastily can risk economic growth. A growing number of economists predict that the BoJ will lift borrowing costs in April, much sooner than expected. Further rate reductions by the Fed anytime soon are hard to justify.
A generation of central bankers grew up with the moral of the 1970s deeply entrenched: Policy was indecisive in the years after the Yom Kippur War. But what would’ve been the ideal approach at the time? Hindsight is clearer than foresight, former Fed Vice Chair Alan Blinder wrote in his book, A Monetary and Fiscal History of the United States, 1961-2021. Blinder notes that the term ‘supply shock’ wasn’t popularized until later that decade. And inflation wasn’t the only scourge; the 1973-75 recession was a nasty one. Misery spread well beyond the US.
Ultimately, back in the 70s, there needed to be clear-sighted monetary and fiscal settings that recognized the new order. Ford wore the Win badge himself. When it came to George Harrison, the Beatles’ guitarist returned the favour with a button that said ‘Om.’
The 38th occupant of the White House tried valiantly to set an example, but the global economy didn’t get very far.
Today, central banks and finance ministers need more than gimmicks. Even if all things must pass, substance has rarely mattered more. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian economies.
English (US) ·