One of the most fearful economic concepts among economists is the stagflation. This concept is used to describe a economic cycle characterized by a high unemployment rate, accompanied by a high rate of inflation and almost zero growth of the economy.
This is a combination of elements that make dealing with this problem particularly complex, since correcting one of the problems (for example: reducing inflation with less taxes) can increase the unemployment rate (especially if it depends mostly on the State). ).
This is why economists, and especially politicians, seek to avoid this type of situation so as not to fall into a circle of decisions that could generate compromising situations.
history of stagflation
Stagflation is not a new or unknown problem. It is simply a problem that many economic specialists have refused to recognize historically, especially those linked to Keynesianism.
In general, Keynesian Economic Theory describes the macroeconomics of countries as a cCommitment to stability between unemployment, inflation and economic growth, an idea that John Maynard Keynes, its creator, already defended in 1924. In his analysis, Keynes defends that: "A commitment where the State can intervene and manipulate economic variables is the way to boost the economic development of nations."
Thus, for example, a State could issue large amounts of money to generate greater economic dynamism and employment (generally with state intervention), but such intervention would ultimately translate into an increase in inflation, a decrease in purchasing power and finally a greater tax pressure on citizens (more taxes from the government). Condition).
The first appearance of the impossible
Despite the fact that the signs of stagflation were described in Keynesian Economic Theory, its greatest defenders and exponents believed that its arrival was impossible. The main argument to defend this idea was: that the State could fix this situation with its wise intervention.
With this idea and with the door open for the printing of money at large, many States worldwide stopped following the neoclassical theories of economics and applied to their economic models, more heterodox ideas such as those defended by Keynes, Marxism or Fascism. (in full expansion at the time).
Thus, at the beginning of the XNUMXth century, the Keynesian academic current was gaining more strength and finally exploded the first case of stagflation of humanity: the Great Depression of 1929. During this event, global trade fell by 50%Unemployment shot up in some countries to 30% and inflation exceeded 50% per year in many of them (not counting the inflation suffered and accumulated during the period of the Great War).
Despite this first experience, Keynesian ideas continued to thrive with some notable successes, such as the United States' New Deal (which allowed it to get out of the Great Depression and its disastrous consequences) or the Marshall Plan (which helps Europe rebuild of World War II). Of course, all of this came at a price: the constant inflation and the continuous devaluation of the currencies of those countries that followed this scheme.
In the end, John Maynard Keynes presented his entire set of economic ideas in 1936, making clear the alignments of Keynesian Economic Theory, finally embraced by many countries and which would start a stage in which we still find ourselves.
The poisoning of the economy
As a consequence of the Great Depression and the rise of the Keynesian economy, states became concerned with guarantee their rights to intervene in the economy and to save themselves from problems like the Great Depression, without realizing that it was precisely the ideas of the Keynesian current that led them to that problem.
As part of this race to guarantee the rights of the State to freely interfere in the economy, laws and organizations were created to facilitate this intervention. The Bretton Woods Agreements in 1944 were the main promoters of such changes, which were embodied in the creation of the International Monetary Fund (IMF) and the World Bank, in which Keynes participated in its founding.
Since then, a common phenomenon can be detected in the global economy: the constant devaluation of money, an event that increased after the Fuel Crisis of 1970. This was an event that prompted the United States to abandon the gold standard and after what he went on to use the dollar standard on a global scale. Along with all this, the huge problem of oil and energy supply affected global markets.
In fact, from this point on, the process of recessions, hyperinflation and economic crises has increased, to the point that the Financial Crisis of 2008 left us the most important lesson: stagflation is a fact in which irresponsible economic policies, accompanied by and supported by an economic theoretical vision like the Keynesian one, simply exacerbate this bad situation even more, an event that many know as “the poisoning of the economy".
Stagflation today
After the Financial Crisis of 2008 and currently, with the pandemic and the financial crisis produced by it, it has left many countries in the world in the midst of technical stagflation.
For example, in Spain the year 2020 was a bad year with a drop of about 11% in its GDP due to the pandemic. This is a clear example of an economic recession, although its origin may have been fortuitous. But 2021 was not a year of recovery, not even with the massive printing of money given by the European Central Bank, since Spain's GDP only recovered 5% compared to the previous year, and at the same time, printing of money caused the CPI in Spain to reach 6,5%, erasing the growth obtained: full-blown stagflation.
The same situation was repeated in the United States. Following Joe Biden's inauguration as president, measures were taken to provide economic relief to the people, with tens of trillions of dollars being printed for those measures. As a result, inflation in the United States has risen to 7% in 2021 (with peaks of up to 21% in some sectors) and in 2022 those levels were maintained. In both cases, the reality of employment is not very different, with sharp drops and temporary recoveries in employment levels.
Causes of stagflation
Among the most recognized and accepted causes of stagflation in the economy, the following can be highlighted:
- Sudden increases in the cost of raw materials and energy. The sudden increase in the price of raw materials or energy is a direct blow to the economic dynamics of the countries, especially if they are in vulnerable situations of access to said areas and that is a strong cause of stagflation. For example, a country that depends on energy imports to guarantee its industry will be severely affected by an increase in its price, and with this, it will begin to enter the cycle of stagflation generation if it is unable to face that reality.
- Bad financial management. Because most countries apply Keynesian economic policies, they strongly intervene in economic dynamics (state interventionism, not capitalism, much less free market) and end up generating schemes that lead to stagflation. Poor management in this sense exacerbates bad situations and leads to situations of excessive stagflation. A clear example of this can be seen in what is happening in many EU countries (hit by the huge money printing of the ECB and their inability to deal with the economic, social, labor and geopolitical situation of their nations). Another very clear example is Venezuela, where its hyperinflation was accompanied by high levels of unemployment and emigration.
- The use of fiat currencies. Perhaps the best example of causes of stagflation can be found in fiat money. Giving a country the possibility of printing money freely and at ease is a machine for generating poverty and endemic stagflation. Countries like Venezuela or Zimbabwe are a very clear example of this. The first one has taken 14 units from its currency (1 Bs from the year 1997, is equivalent to 1×10^14 Bs today). The second has a similar reality. In Europe, we can see the best example with the enormous printing of Euros by the ECB and the impact that this has had on the general price inflation that has been experienced in the Union.
The really bad thing about these three situations is that States can do little to break the vicious circle of stagflation once they fall into it. Control the prices of energy and raw materials (to avoid cause one) is counterproductive. This is because many times these materials are not produced in the region (so they cannot control it) and control their by-products, they only make them disappear or stop being produced, generating shortages and runaway price inflation.
If the economy is poorly managed at the political level, solutions are often avoided precisely because of the political cost they represent. For example, reducing the issue of money, cutting aid and subsidies is an effective measure to clean up spending, avoid deficits and regulate the economy, but for governments these are measures with an enormous political cost that practically nobody wants to accept.
In general, only the most superficial problems are "solved" using the ticket printing machine (falling into the third cause of stagflation). With this, they only prolong the problem for a while longer, and end up making the impact in the future more profound and inevitable, thus falling into the second problem and finally, into the first and affecting the rest of the countries due to global economic relations.
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