Courtesy Reuters

The Continuing World Economic Crisis

In some ways, the world economic scene in 1980 was a rerun of 1979, with rapidly rising oil prices, a business slowdown in the industrial world, balance-of-payments trouble in developing countries, too little stability in financial markets, and too much inflation. But there was a significant change, too, in 1980, above all in the perception of the world's economic troubles and what to do about them.

The most important change was the growing recognition that since the early 1970s the industrial world has been caught in a low-growth trap. One element of the trap that was particularly evident in 1980 was the volatility of financial markets. It has frustrated the efforts of governments to stimulate demand and create the conditions of rapid growth. Another perception is that the stubborn persistence of inflation cannot be overcome by a policy of reducing money growth gradually. Still another new perception is that real energy prices will continue to rise rapidly and indefinitely because the world's demand for energy is less responsive to high prices than was earlier thought. Above all, governments are coming to acknowledge that persistent high inflation in the United States and some European countries is the single most important feature of the world economic crisis and the leading cause of inadequate growth.

II

The year ended as it began, with the U.S. financial markets in disarray. Between early January and late March, short-term interest rates had climbed over four percentage points, before sweeping credit controls imposed by the Federal Reserve broke the interest-rate spiral. The now-familiar drama was repeated at the end of the year with most interest rates surpassing the record highs they had set in March.

These sudden financial explosions have much in common with the liquidity crises that used to trouble the United States before World War II-but with an important difference. In the past, money was in short supply when the Federal Reserve tightened credit or when gold flowed abroad. As a result, market interest rates climbed sharply. In 1980, by

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