Since the 1990s, economists have talked about the Great Moderation. Central banks had managed to contain inflation of goods and the world economy was growing at high rates. In 2008, the bankruptcy of Lehman Brothers woke us up from our reverie of the Great Recession. We undervalue asset inflation and that all previous growth had been financed with debt. Investors were spooked by the unknown, financial markets crashed, and the real economy was falling apart like a sugar cube in coffee.
The crisis was a humbling experience for economists because of our ignorance of the financial phenomenon. Ben Bernanke, followed the advice of Irving Fisher and decided to refloat the debt. He bought financial assets to inflate their prices and made the balance sheets stable again. The risk was avoiding deflation and prices remained contained for the next decade.
The pandemic caused a global crisis just as violent but of a different nature. Central banks applied the same recipe for success in 2008. Science has made it possible to cut the pandemic in half the time thanks to vaccines. And ultra-expansive economic policies have led to a much stronger recovery than in 2008. World exports fell less in the previous crisis and took 33 months to regain their pre-crisis level. In 2020 they plummeted in March and April, but by April 2021 they were already 10% above pre-pandemic levels.
Demand is faster than production and inflation is back. The most evident in the prices of raw materials, especially excluding oil that today have cheaper substitutes with the sun, air and gas that were not competitive in the inflationary crisis of the seventies. The scholastics of my beloved university in Alcalá already warned us of the dangers of inflation 500 years ago. When it is volatile, it increases business uncertainty and contains investment and job creation. But above all, inflation is the most unjust tax that human beings have invented, which especially affects the poorest. The same people who ask central banks to continue buying debt as if there were no tomorrow, are asking for Soviet planning systems for electricity or housing prices. But everything in life cannot be.
Inflation dynamics are incipient and we are still far from the risk of rampant inflation, especially in Spain with the highest youth unemployment rate in the world. Nor in Europe, with an aging population, like Japan. But the US data is already starting to be worrying. The contagion has already reached core inflation, which in the last two months has grown at its highest rate in decades.
The labor market still has a margin with the unemployment rate at 6% and the activity rate lower than in 2008. That is why the increase in wages in recent months has increased the workforce. But President Biden has already told unions that it is time to raise wages. And after ten frozen years they will be highly motivated to do so.
Before you start raising interest rates, it’s time to say when and how the Federal Reserve is going to start reducing its debt purchases. It already did so in 2014 and caused a financial crisis that forced them to rectify. Central banks’ fear of markets is much greater than that of inflation. The problem is that debt and asset inflation is much higher than in 2008 and the reaction of investors is just as unpredictable as hurricanes.
Spain is one of the countries with the highest public debt in the world and we need to issue 25% of GDP in public debt every year to pay the pensions and salaries of civil servants. This is our great vulnerability, much higher than in 2012 when we had to ask for an international rescue. And no political party, neither the unions nor the employers seems to remember it. We will see.