Inflation at the beginning of economic megacycles

The history of the global economy shows that periods of transition from one economic megacycle to a new one are almost always accompanied by intense inflationary pressures, geopolitical upheavals, social tensions, and profound changes in the production model. According to the 56-year economic megacycle approach, the period 1968–2024 has ended and a new megacycle has begun in 2024, which is expected to shape the global economy until 2080.

Inflation appears as one of the first and strongest symptoms of this transition. Although the conditions differ between the beginning of the megacycle 1968–2024 and the beginning of the new megacycle 2024–2080, the similarities are striking. In both cases, inflation functions as a readjustment mechanism of the economic system, revealing the limits of the previous growth model and accelerating the transition to a new productive and technological regime. A period of persistent and painful adjustment.

A) Inflation at the beginning of the megacycle 1968–2024: The late 1960s marked the end of the postwar economic model that had been built after World War II. The United States was burdened with the costs of the Vietnam War while simultaneously financing large social programs. The increase in public spending led to fiscal imbalances and put pressure on the Bretton Woods system.

In 1971, Richard Nixon's decision to abolish the convertibility of the dollar into gold was a historic turning point. The dollar's decoupling from gold allowed for broader monetary expansion, but it also paved the way for higher inflation. The 1973 oil crisis dramatically worsened the situation. Oil prices quadrupled and inflation spread throughout the West.

The 1970s were characterized by the phenomenon of stagflation: low growth, high unemployment, and high inflation all at the same time. The United Kingdom saw inflation approaching 24%, while the United States faced double-digit inflation rates. The main consequences were:

Α1. Erosion of purchasing power: Households saw their savings lose a significant portion of their value. The real purchasing power of wages declined and social discontent increased.

Α2. Crisis of trust in institutions: Citizens began to question the ability of governments and central banks to manage the economy. Political tensions increased in many countries.

Α3. Rising interest rates: Tackling inflation required drastic monetary tightening. The high point came with Paul Volcker, who in the 1980s raised the Federal Reserve's interest rates to as high as 20%, causing a short-term recession but ultimately crushing inflation.

Α4. Restructuring of production: Businesses were forced to increase their productivity. The need for more efficient production led to the gradual adoption of information technologies that dominated the following decades.

Α5. Birth of the uptrend: The crisis of the 1970s acted as a catalyst for the transition to the age of computers, the internet, and globalization. The result was the period 1996–2024, during which global GDP more than tripled.

B. Inflation at the beginning of the new megacycle 2024–2080: Today, the global economy is in a similar transition phase. The structures that supported the growth of recent decades are gradually being exhausted. Globalization is slowing. Supply chains are being reshaped. Geopolitical conflicts are increasing. Public debts are at historically high levels. At the same time, artificial intelligence, robotics, quantum computing and new materials technologies are heralding a new industrial revolution.

Inflation has resurfaced since the pandemic, fueled by the war in Ukraine, energy turmoil and geopolitical conflicts in the Middle East. Bond markets are already reacting by demanding higher yields and questioning the sustainability of public debt. Prices shape inflation, inflation determines monetary policy. Monetary policy determines credit conditions (the movements of interest rates). Credit conditions determine who prospers and who struggles to survive.

The consequences of the new inflationary wave differ in some ways from those of the 1970s.

Β1. End of the era of "free money": From 2008 to 2021, most developed economies lived in an environment of extremely low interest rates. The new period is characterized by:

• higher interest rates,
• increased borrowing costs,
• liquidity restriction,
• more expensive financing for businesses and states.

Long-term government bond yields are now at levels not seen in decades. A bond yielding 1% when inflation is 5% means a 4% loss in purchasing power per year, effectively a 4% tax on the wealth of bondholders.

Β2. Fiscal sovereignty: Unlike in 1980, public debt is much higher today. The US debt exceeds 100% of GDP and interest payments already exceed defense spending. This limits the ability of central banks to drastically raise interest rates without creating a debt crisis. The US debt is about $30 trillion with an average interest rate of around 3,5%.

Β3. Pressure on incomes: When energy prices rise, they increase pressures on transportation costs, which in turn push down price levels and inflation expectations. These expectations shape the decisions of central banks and bond markets. When oil markets are squeezed by a lack of supply, inflation expectations rise; when inflation expectations rise, bond yields rise; when bond yields rise, stock valuations fall; when stock valuations fall, pension funds, sovereign wealth funds, and households feel the pinch. Persistent inflation reduces the real disposable income of households. The biggest impacts are seen in:

• in housing,
• in energy,
• in food,
• in transportation.

Social discontent is growing and feeding political polarization. Debt, taxes, and inflation shape our lives, so we are the ones who pay the price when the economy falters. When governments borrow beyond their means, when they impose financial burdens on citizens, and when money itself loses trust, collapse follows. The consequences of a fragile economy are manifested in unemployment, inflation, social unrest, and the rise of strong political leaders who promise order at any cost.

Β4. Capital reallocation: Higher interest rates change investment choices. Capital moves:

• from stocks to bonds,
• from speculative investments in productive projects,
• from consumption to savings.

Β5. Accelerating technological transition: Just as IT was the productivity solution after the 1970s, so too is artificial intelligence emerging as the key answer to inflationary pressures. Governments are realizing that increasing productivity may be the only way to make high public debts sustainable without extreme taxation or social cuts.

Similarities of the two transitions: Despite the different technological conditions, the similarities are remarkable:

Comparison of economic megacycles

Inflation is not just a macroeconomic problem. At the beginning of an economic megacycle, it functions as a mechanism for transition from the old to the new economic regime. In the 1970s, it destroyed the balances of the post-war model, but at the same time created the conditions for the information technology revolution and the explosive growth of the period 1996–2024.

Today we are at a similar historical turning point. Inflation is exposing the weaknesses of the previous model based on low interest rates, over-leveraging and globalization. At the same time, it is accelerating the transition to a new economy based on artificial intelligence, automation, energy restructuring and the geo-economic restructuring of the planet.

If the historical pattern of previous megacycles repeats itself, then the period 2024–2052 will be characterized by intense upheavals, inflationary pressures, geopolitical conflicts, and structural reforms. But it is precisely these upheavals that are likely to lay the foundations for the next great period of global growth and prosperity, which could unfold in the period 2052–2080.

This development has intensified, and is expected to intensify, geopolitical tensions, increasing the likelihood of conflict and pushing states to higher defense spending, which is often financed through new borrowing. At the same time, it has accelerated the use of economic pressure tools, such as sanctions and trade restrictions, while strengthening protectionist tendencies and the move away from the globalization model that dominated the previous decades. At the same time, there has been an increase in bilateral investment and business agreements, as well as a significant inflow of foreign capital to the US as the holder of the most stable currency. In addition, uncertainty has led to increased demand for gold as a safe haven, while the international appetite for holding US government bonds, dollars and other financial assets has shown both downward and upward trends.

At the same time, in most developed economies, there is a strengthening of political forces, both from the left and the right, which present radical solutions as a response to the accumulated economic and social problems. However, the expectations created often prove disproportionate to the actual possibilities of implementation, with the result that these policies do not achieve the expected results and their actors gradually lose popular support and are eventually removed from power.

True prosperity is not measured solely by the assets one possesses in times of stability and prosperity. It is revealed primarily by one’s ability to maintain economic viability when supply chains are disrupted, prices are soaring, and political uncertainty is prevalent. Substantial economic freedom is not simply the possession of income, but the ability to adapt and survive in the face of developments and mechanisms beyond our immediate control. Great powers and empires experienced this reality through energy crises and oil market upheavals. For citizens, the same experience is usually manifested through inflation, shortages of basic goods, energy shocks, and the gradual realization that the financial system does not operate solely by economic rules, but is deeply influenced by political decisions and geoeconomic/geopolitical pursuits.

The next generation economic system must take into account the need for sustainability, social cohesion and transnational cooperation, without ignoring market dynamics and, above all, the sweeping changes that artificial intelligence will bring.

All this is developing alongside a conflict between civilizations, mainly in the form of antagonisms between democratic free societies and authoritarian oppressive civilizations that continue to deprive their people of prosperity, and continue to convert whatever wealth they manage to acquire into military equipment to extend their influence, their ideologies, and their religions to their former imperial territories. The world changes according to the megacycles of the economy and they change everything, bringing many “bad” situations. However, as Nikos Kazantzakis said, “bad” always triumphs in the beginning but is always defeated in the end.

photo klimkin, https://pixabay.com