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AT the peak of the 1980s’ US inflation, Paul Volcker, then the Federal Reserve (Fed) chairman who stood at a towering height of 201 cm, made the extreme decision to hike interest rates to 20%.
Not only is he the tallest Fed chairman in US history, he also held the record for hiking interest rates to levels unmatched till today.
The main objective was to use the force of monetary policy to blunt inflationary pressure which was out of control.
Due to the drastic policy decision taken by Volcker, the US economy slumped to a two-year recession and the unemployment rate surged to 10%.
However, by the time he left office in 1987, the inflation rate had normalised to 3.65% while the annual gross domestic product (GDP) growth rate was healthy at 3.5%.
Many are now anticipating a potential repeat of history, especially with inflationary pressure persisting coupled with the hawkish stance taken by the current Fed chairman Jerome Powell when making policy decisions.
While there is possibly still room to go with the latest US inflation rate in May coming in at 8.6%, levels unseen since 1981, the US Fed and central banks around the world are taking proactive steps to move ahead of the curve to curb inflation.
In the face of uncertainty, rate hikes and potential recession ahead, global markets have been on a free fall.
All asset classes are badly impacted with barely any safe haven apart from the US dollars.
Bridgewater Associates founder, Ray Dalio once said “cash is trash”, but it would appear that cash thus far, has been the safest instrument.
Cryptocurrency, the favourite “asset class” of the new generation of investors, on the other hand, has suffered terribly.
At its peak, the top ten cryptocurrency had a combined market capitalisation of US$2.3 trillion (RM10.13 trillion) in November 2021.
Currently, it stands at US$757bil (RM3.33 trillion), which means US$1.5 trillion (RM6.61 trillion) in market capitalisation has been wiped out.
To put it into perspective, that amount is 15 times the size of Singapore’s annual GDP.
With so much liquidity soaked up from the capital markets, it is still insufficient to rein in inflation.
This is because the central banks globally had injected much firepower into the economy during the fight against the pandemic.
It wasn’t just a single country or economy that did it.
It was a global effort, including Malaysia.
Today, as global markets start to correct, our local markets are not spared from the sell-off as well, despite our stock market barely rallying in the past two years.