Has inflation come to stay?

The year goes. There is hardly a month left to finish the academic semester and, between bridges and Christmas holidays, also the year 2021. A complicated year in which, increasingly, I perceive in my colleagues a fatigue that has been fed drop by drop. Since 2008 we have had to explain many things.

If it was true that, as the Government affirmed, the crisis was something of the ashes of always; once admitted the bump, if it was opportune to ask for the rescue; why the Spanish recovery was so slow; if coal, diesel, cars, flights had to be abolished; when the pandemic hit, the depth of the abyss into which we sank as country after country closed and global economic activity crumbled; if vaccines were going to fix the economic problem; what happens now with the microchips and with the containers; if we should rejoice that the United States is losing positions to China and if it is really losing them; if the current crisis is one of supply, demand, or both; yes, really, we have to buy Scotch whiskey and gifts for these Christmas holidays, because we are going to have (more) scarcity; whether there’s going to be a two-week blackout sometime next year, as it’s been in the news.

And, above all, in this last month, we have to explain what is happening with inflation, its causes, consequences, its duration and its potential danger. All very tired.

For me, it is especially tiring to convince the Spanish of two issues that, moreover, are related and are fundamental to understanding the crisis in which we live.

One is the relationship between the real economy and the monetary economy. Since the halt in economic activity around March 2020, the eyes of economists have been directed to broken value chains and global logistics shoulder to shoulder.

Just the opposite of what happened during the crisis of 2008 when attention was concentrated on the monetary factors that triggered the catastrophe. In both cases, economists have had to remember that supply and demand are two sides of the same coin and if you pinch one, it also hurts the other. In fact, the pandemic crisis is a clear example of the ‘pincer’ crisis: supply and demand. Another thing is that it is the offer that has taken the worst part, as is happening.

The pandemic crisis is a clear example of the ‘pincer’ crisis: supply and demand

The fact is that, in 2008, after the financial crisis came the tsunami of the real economy, especially in the countries least protected by sound economic policies. That is to say, for economic policies that eliminate burdens and dependencies: decent public accounts, healthy banking, energy independence, employment, stable currency, free trade.

It was not the case of Spain. Rather the opposite: high unemployment, energy dependence, growth in public spending (to the great delight of the grateful stomachs on duty) and so on. Banking was cleaned up by the work and grace of the European Union.

What happens now? We have a high and growing inflation that is attributed by many economists, exclusively, to factors related to the real economy: the old “cost inflation”. And I’m not saying no, but something will have to do with the enormous injection of money injected. It is true that in 2008 there was also access to European soft loans or the quantitative easing American.

But, at least in the European case, that money fell into the hands of the banks, which were not actually creating money, so that they could buy sovereign debt. The impact on families and businesses was very little. So what happened was debt inflation.

This time it has been different. As the economist, professor at the University of Buckingham and director of the Institute for International Monetary Research stated last Friday, John Castaneda, in the year 2020 in the United States, “the monetary growth rate reached 25% annual growth, the highest since World War II.” Are we going to rule out that inflation has monetary causes.

The other issue that is difficult to explain is, precisely, that the monetary variables, although they cannot be seen, exist. It’s like going to a huge hot desert with a group of hikers and explaining to them that subterranean rivers run under the burning sand. They don’t see the water. It would be difficult for them to realize the effects of this phenomenon and its manifestation in the desert.

If the environment were different and the riverbeds were above the ground, the hikers would see it, feel the humidity, hear the sound of the water downstream. In the same way, monetary variables are not seen, they are quantified, but they are not touched or perceived as the accumulation of containers in the port of Los Angeles is perceived.

You notice that you don’t make it to the end of the month because prices are so high. But monetary inflation is not that. That is the effect of monetary inflation, which consists of the loss of currency value. And this consequence does not occur overnight, as several economists have anticipated since Richard Cantillon to the present day.

That is why it is especially difficult to point out to ordinary mortals, that we cling to the tangible. The monetary economy that I like so much is arid and unappreciative. It is easy to blame the financial markets, the banks, the money for whatever happens.

Those who study monetary phenomena, such as Professor Castañeda, for example, warn that inflation is not a passing phenomenon. In Europe, it could exceed 5% in the next two years and in the United States, it will probably be much worse.

His argument: “quantitative easing by central banks have triggered money growth at rates incompatible with price stability and macroeconomic stability.” For the optimists: then do not say that it could not be known.

Photo: Telekom


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