Inflation, financial crises and a new cold war. The next era of financial stability

Since the stagflation of the 1970s and 1980s, central banks have been directed to only care about inflation. When, with the EMS collapse of 1992, financial markets started to be punctuated by crises, mainstream economics’ explanation was that the crisis has been caused by the fetters that public authorities have imposed on the markets, and, more generally, that crises were caused by the under-development of finance. After 2008, also the more laissez faire economists had been forced to reevaluate the financial stability as a goal for central banks. In the subsequent decade the globalization process has paused, and then, pandemic, trade wars and the conflict in Ukraine have imposed a new turn: now the stability is crucially connected to geopolitical issues. After decades of hyperglobalization, the world is now on the brink of a fragmentation due to the struggle for global economic hegemony between the western bloc led by the US and the eastern bloc with China as a leading player. However, the rise of the blocs shows their mutual weaknesses: each bloc needs the other, and only by bearing enormous and probably unsustainable costs in the medium to long term they can decouple. The rebalancing of global power hegemonies will inevitably lead to a national retrenchment of the strongest states, also taking advantage of the weakness of their own links in the chain of alliances. These trends will continue also when the military conflict in Ukraine will end, because the war was an effect more than the cause of the quarrels between the blocs. We try to provide an understanding of the fundamental dynamics of the new nature of financial stability. In particular, we discuss the put the second cold war as the main determinant of financial stability in the coming years. To deepen this idea, we discuss how global supply chains have been transformed by de-globalization, we debate the outcome of the new situation in terms of inflation and income redistribution and what role will be given to fiscal and monetary policies. Finally, we analyse the connection between the new era and the speed of the green transition. In this analysis, we use the interwar period as an example of the total ineptitude of liberal democracies to deal with crucial political and economic issues, as it was clear, for instance, with Weimar inflation and post-1929 unemployment, concluding that we should learn from the mistakes of the past with also a strong turn in the economic theories. The reflections of Keyne, for instance on the Versailles Treaty, on the international monetary order and on the gold standard, could be a fundamental starting point for this turn.