The global economy may be more groovy than previously thought. While rising energy prices have led to talk of a possible return to 1970s-style stagflation, Michael Hartnett, a global macro-strategist with Merrill Lynch in New York, believes the emerging environment has more in common with the era of big governments, rising war cycles and counter-cultural movements that were hallmarks of the 1960s.
That decade, he says, was accompanied by a softer form of inflation more in keeping with the consumer price data emerging today. But on the social front, the period was also characterised by disillusionment with war in Vietnam, a search for inner meaning after an era of prosperity and growing frustration among investors who began to see an industrial system in decline.
'The story is more like the 1960s, where inflation was a bit of sleeper,' he says. 'You have a world that is moving away from the raw capitalism that was quite pervasive and the high returns you saw, such as in the 1950s.'
He says many of the trends that brought prosperity in the nineties - globalisation, declining trade barriers, an emphasis upon small government - could be about to go into reverse, with growing emphasis on labour rights, growing budget deficits, and fairer trade now entering the political agenda of industrialised countries. He expects the cycle of institutional protectionism will strengthen slowly, but is a long way from the wage and price controls that became features of the seventies.
'There are a lot of reasons for inflationary impulses,' he says. 'We just worry that the world has grown used to and is projecting into the future an inflation rate in the OECD of 1 to 2 per cent. We think that is wrong. We think that over the next three to four years [it will] rise to 3 to 4 per cent.'
He says the unfolding environment will force a revision of investor expectations accustomed to the booming nineties, with annual returns of 10 per cent or less to become the norm.