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The year policymakers misread everything

It's been a troubled year for the global economy — and the next could be just as bad.

business Updated: Dec 27, 2011 23:13 IST

It's been a troubled year for the global economy — and the next could be just as bad.

We know far less about how the global economy works than we think. The past 12 months were supposed to see an acceleration in recovery from 2008-09, but have in fact been characterised by a slowdown.

Policymakers give the impression when making decisions about interest rates, money creation and budget deficits that everything is being carefully calibrated by experts who know what they are doing. But 2011 demonstrated that what policymakers do not know is more important than what they do know.

One thing they completely misread was inflation. Strong growth in India and China increased demand for fuel and raw materials, leading to a hardening of commodity prices at precisely the moment central banks were flooding their economies with newly minted electronic money. Perfect conditions for the speculation that pushed oil, gold, food and industrial metals.

At that point, the smart money was on central banks taking early action to head off inflationary pressure. What actually happened was that food and fuel prices rose more quickly than wages, eating into spending power and weakening activity.

Europe, of course, has been the big story of 2011, beating Standard & Poor's stripping the US of its triple-A rating: through a mixture of arrogance, incompetence and bad luck, the Continent's sovereign debt crisis has deepened and spread in 2011, and has the potential to send the global economy back into deep recession.

Nothing has worked so far, and the next few months will show whether the single currency is a dud that can be repaired, or a dud, period.

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