Get ready for the austerity decade. Forget all thoughts that the economic storm of the past 30 months is about to blow over. We’ve had what Mervyn King once called the NICE period of non-inflationary constant expansion but now we face a long DRAG – deficit reduction, anaemic growth. The lessons of economic history, the current configuration of the economy, and inescapable long-term challenges that have to be faced provide the same message: it’s payback time.
Let’s start with a trip down memory lane. The post-war era has been characterised by three distinct phases in the global economy. There was a 25-year boom that ended with the quadrupling of oil prices in the autumn of 1973 during the Arab-Israeli war. There was another long boom – very different in its shape and in the division of the spoils – that also lasted for a quarter of a century, between 1982 and 2007. In the middle, there was a nine-year period in which policymakers grappled with stagnating growth and rising inflation.