End of the "nice" period

The Governor of the Bank of England, Mervyn King, has declared the “nice decade” to be over. In Mervyn King’s own words: ‘For the time being, at least, the ‘nice’ decade is behind us. The credit cycle has turned. Commodity prices are rising. We are travelling along a bumpy road as the economy rebalances. Monetary policy ‘cannot, and should not try to, prevent that adjustment.'

If the nice period is over, what do we call the current period, "naughty" or "nasty"? Many economists have written about the great calm over the post 1990 period. When analyzed closely, the answer for this period of calm was good monetary policy but that only represented 50% of the explanation. The other key reason was just good luck. There were few major supply or demand shocks like we are currently seeing.

The current economic environment is looking more like the 1970's. We have commodity shocks though this time it is coming more from the demand side as emerging markets growth continues. We are also seeing accommodating monetary policy in response to the shock which is also similar to the 1970's. Growth is also slowing in the US.

While some may argue that the story is different, inflation can only be slowed if there is a change in inflation expectations which translates into higher interest rates and slower growth. While we have moved beyond the classic Keynesian story, a 1970's environment will only be checked with a slowing of credit and a rising of rates.