Stephen King: Wealth, war, riots ... are we back in the Summer of Love?

The discord of the late 1960s paved the way for the economic difficulties of the 1970s

The 1960s were one of the most successful decades in modern economic history. Global economic growth ran at double the rates that we see today. For the most part, inflation was well-behaved. Unemployment was low. And economic success turned impossible dreams into reality. The apotheosis was, perhaps, Neil Armstrong's 1969 "one small step".

So, if we'd never had it so good, why was it that so many felt so uninterested in, or disconnected from, these rising levels of wealth?

After all, the 1960s may have been economically successful, but they were also the decade when protest movements took off and when the voice of disaffected youth began to be heard.

Whether it was California's Summer of Love in 1967 or the Paris riots in 1968, something changed. At the time, it was easy to argue that there was simply too much marijuana and LSD being passed around, a view summed up in Timothy Leary's "Turn on, tune in, drop out".

But the late 1960s were also a time of immense social and political upheaval: the Vietnam War, China's Cultural Revolution, the 1967 Six-Day War, and, in 1968, the assassinations of both Martin Luther King and Bobby Kennedy. Summer of love? More like decade of violence.

Arguably, the discord of the late 1960s paved the way for the economic difficulties of the 1970s.

Policymakers failed to understand the inflationary dangers associated with printing dollars to fund the Vietnam War. They failed to recognise the signs of a slowdown in the growth rate of productive potential - and the real wage resistance that accompanied it - instead trying to keep growth going through demand-side pump-priming measures.

And they failed to recognise the degree to which economic interdependency had become a defining characteristic of progress: the collapse of the Bretton Woods system of fixed but adjustable exchange rates, itself a response to excessive dollar creation, was one of the final nails in the coffin of ongoing price stability.

The 1973 oil price shock was, in this sense, only the icing on an already poisonous economic cake.

Once again, we find ourselves in a position where, economically, things seem to be just tickety-boo. Global growth has accelerated to a pace not seen in decades, and, in many parts of the world - notably China - millions more are being dragged out of poverty than ever before.

Yet we have a war in Iraq - sorry, guerrilla insurgency - that isn't going quite so well.

We have growing strains elsewhere in the Middle East, notably in the West's relationship with Iran.

French youth has been enjoying a good riot.

Commodity prices are rising rapidly. The dollar has, once again, been showing its vulnerable side, helped along by a pro-devaluation administration.

And central banks have, for the most part, pursued a pro-growth policy, confident that inflation isn't likely to rear its all-too-ugly head.

The only difference is that people are wearing fewer flowers in their hair.

Given these recent events, it's easy to suggest that inflation is about to make a grand reappearance.

Certainly, commodity prices have been strong, and oil prices in particular have been extraordinarily robust.

I doubt, though, that increases in these prices alone are sufficient to suggest that we're returning to the bad old days of the 1970s. After all, globalisation - specifically the introduction of cheap Chinese and Indian labour into the global economy - has made it a lot more difficult for Western workers to demand wage increases as compensation for higher petrol prices or gas bills.

The more accurate conclusion to be drawn from the late 1960s is, surely, that economic progress cannot be isolated from political change.

Societies are not just interested in the most efficient allocation of resources. A pure capitalist might argue otherwise, but pure capitalists are mostly theoretical constructs: the rest of us live in the real world.

Irrespective of the degree of economic success and new-found prosperity, the late 1960s were a time of change, of frustration, reflecting a desire to reject middle-class mores and embrace a counterculture, whatever people thought that was.

Societies lost sight of a common cause: groups in society worked against each other, undermining the coordination that, doubtless, had contributed to economic success in the first place.

Similar strains are emerging today, but this time they're not so much a reflection of problems within countries, but rather problems across countries.

If the dismantling of trade barriers was one of the secrets behind economic success in the 1960s, the 21st-century counterpart is, surely, the freeing up of capital flows.

As the volume of capital flowing around the world has increased, so the opportunities for previously economically disenfranchised populations have grown.

Without capital flows - the result of deregulation, political realignments and collapsing communications costs - it's doubtful that either China or India would be enjoying the economic progress they've made in recent years.

This more efficient allocation of resources could, in theory, make some people better off and no one else worse off. Yet, apart from the obvious social limitations - environmental costs, abuse of workers' rights - there's no guarantee that the adjustment to this brave new world will not be without some degree of pain. Those Western workers, for example, who lose out to cheaper competition from China or India will, presumably, be none-too-pleased.

Moreover, because these higher capital flows are, for the time being, associated with a widening US current account deficit, the issue of ownership is becoming increasingly important.

Most economists worry about the US current account deficit because of, first, America's growing dependency on savings from elsewhere in the world, and second, the growing debt-service burden that America will have to find to pay its foreign creditors.

To my mind, though, the key issue is, increasingly, not so much whether the deficit can be funded, but rather what the US is prepared to sell to fund the deficit.

Flogging off Treasuries is easy enough, but should foreign investors prefer to buy US companies, there's likely to be a much bigger strategic problem.

It was bad enough selling the Rockefeller Centre to the Japanese in the 1980s: now, the Chinese, Russians and assorted countries in the Middle East increasingly have the ability to fill their shopping trolleys with hitherto US-owned companies.

Somehow, I doubt that the US administration, and particularly US Congress, would be happy with the idea of a fire sale of US assets to the rest of the world, particularly to regimes that the US would regard as potentially unfriendly.

Because of this, the limits to the growth of the US current account deficit may, ultimately, be political, not economic: selling Chrysler to the Germans might be acceptable, but imagine a world where China was interested in buying General Motors or Boeing.

Economically, we're living in prosperous times. Current growth rates across huge swaths of the global economy are impressively high.

China and India may still be poor countries, but they offer a beacon of hope to other, even poorer countries, that have struggled to emerge from ongoing economic despair.

Prosperous times can also, however, be anxious times.

Sometimes, political change enhances our collective economic prospects - the collapse of the Berlin Wall is a good example - but, on other occasions, political change can work against economic progress.

The whiff of protectionism that emanates from both Washington and Brussels is a reminder that we cannot take this latest period of economic progress for granted.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com