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Category: Glint's Helpful HInts

Glint’s Helpful Hints: ‘Soft’ and ‘Hard’ Landings

Economists often resort to metaphors in their analyses. Discussion about whether we are in for a 'soft' or ‘hard’ landing is a good example of thi...

9 June 2022

Gary Mead

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Economists often resort to metaphors in their analyses. Discussion about whether we are in for a ‘soft’ or ‘hard’ landing is a good example of this.

Soft and hard landings originally refer to an air or space craft landing – is it bumpy or smooth? Obviously the preference is for a smooth landing. The terms have been adopted by economics/business/finance to describe how an economy might slow, or land, or revert to some stasis. Will it ‘land’ with a thump or more gently? Here too the preference is for a smooth landing.

The terms are closely linked the level of inflation. If inflation is higher than desired, an economy is said to be ‘overheating’ (another metaphor).

Economics is as much an art as a science – there is no ‘right’ figure for inflation for example. At Glint we have mixed feelings about inflation: inflation by definition erodes the purchasing power of fiat currency but equally that erosion can be an incentive for people to seek alternatives to fiat currency, such as gold.

At 8.3% annually in the US, 9% in the UK, 7.8% in the European Union (EU) – and 15.6% in Lithuania – inflation is relatively high, the highest in four decades in some of these markets. We can debate why inflation is racing but for the time being the question is what central banks/governments might do to try to bring inflation down to levels they regard as more tolerable, which is around 2%/year. The conventional measure for reducing inflation is to push up interest rates but if this is done too aggressively then the risk is that the economy overall (employment, productivity especially) comes to a juddering halt – it lands in a hard fashion. But doing nothing against inflation this high is not an option for central banks – they are nervous that it might spin out of control.

Central banks are therefore looking for a ‘Goldilocks’ answer (yet another metaphor) – reducing inflation without creating greater levels of unemployment, or cutting productivity; neither too hot nor too cold. Most are pushing up interest rates slowly, gently, a little at a time. Only Turkey seems to think that cutting interest rates can combat inflation – and Turkey now has inflation above 70% a year.

What’s the right answer- what is most likely to result in a ‘soft’ landing? This is economics – there are as many answers as there are metaphors. Only time will tell.

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