The international economy, except China, is facing a dangerous virus that means leaving the nuclear button of interest rates to the central bankers, again, to generate fear and unemployment, trying to preserve a greater good: price stability .
It is true that we had become accustomed to living in a world without inflation, partly motivated by the pandemic, which had silenced the governing councils of the monetary institutions, making it seem that the rise in prices was a phenomenon to be extinguished. What had been banished is the belief, now resurrected, that the amount of money in circulation was responsible for the increase in prices, in a display of magic and shamanism that we hope will disappear from economics textbooks.
But reality has been twisted, and of course unrelated to the amount of money in circulation by the monetary authorities, and we have come across inflation figures that have not been seen for decades, 9% in the EU, but also in the US, Canada or the UK. This phenomenon, which was thought to be temporary due to the war in Ukraine, is consolidating in the short and medium term as a result of factors that have nothing to do with monetary policy, but central bankers don’t care. The old neoclassical recipes continue to be used, although the end result is to cause unemployment and financial imbalances, always to the most vulnerable incomes.
The first to react was the US, with very aggressive rate hikes up to 2.25%, the effects of which have already been felt as GDP fell in the first two quarters of 2022, what is known as a technical recession, curiously in a context of practically full employment. However, the rise in fuel and energy prices continues to hit a large part of the planet, affecting families and industries, without the protected rulers of the large corporations being able to put a stop to what is clearly a spiral of margin inflation. and from pricing systems close to a scam.
Energy has unleashed a domino effect that has been transferred to another essential sector, food, whose basic products have suffered increases of up to 500% in the last four months, without being justified by the increase in fuel prices. In a context of widespread wage moderation, except for specific cases in Germany thanks to its great union pressure, the world is moving forward with massive losses in purchasing power for workers and pensioners, although some enlightened people want to exclude them from those affected, responding to arguments that are certainly miserable and unaware of the reality of this group, particularly in Spain.
The result is an enormous extraordinary transfer of income to energy and food companies, in addition to intermediaries, from consumers and electro-intensive companies, that is, a silent impoverishment applauded by those who refuse, on the one hand, to raise wages, but also to those who deny specific taxes or price controls that could mitigate and distribute the efforts of unjustified price increases. The reality is that oligopolies are in good health in the Western world, supported by the supposed guarantors of fairness, the different governments, who hide behind the artifice of market freedom to allow the massive extraction of income from consumers and companies. more vulnerable.
Along with this misappropriation, the serious logistics and supply problems reinforce the bottleneck in the supply of numerous products, especially industrial products, which increase expectations that inflation will not subside in the short term, since it has installed in the subconscious of companies, which take advantage of the situation, and consumers who are defeated by the lack of an alternative. If we add to this the financialization of a large part of the pricing of agricultural raw materials, whose prices in financial markets help to widespread inflation, we may be facing the perfect storm. It is true that part of these prices have fallen in recent weeks, but they have not yet been transferred to final prices.
With this scenario, the ECB has decided to raise interest rates by 75 basis points, leaving intervention rates at 1.25%, which is the largest increase in the same meeting since it was created. The arguments in the statement are modeled on those of the Federal Reserve or the Bank of England, although with nuances, attributing the measure to the deviation from the 2% inflation target and, above all, announcing that it will continue to raise rates over the next few years. months, with an expected destination point of 3% towards the summer of 2023, without explaining that monetary policy actions take between 12 and 18 months to have an effect on the relevant variables, that is, growth and employment. In its same statement, it also ratifies that it will maintain the reinvestment of the sovereign debt purchased in the past and could continue financing peripheral countries in the event of speculation with the debt of these countries, which gives an idea of the panic that the ECB has that a situation of economic and political instability is unleashed in the countries most affected by this average, among which is Spain. In another aspect, although not declared, it also tries to correct the devaluation of the euro that generates imported inflation, something that it will hardly achieve if the FED continues its mad race towards the economic abyss.
Notable impact for the Spanish economy
The impact on the Spanish economy will be notable, although it will be long-lasting, and will be felt among the most vulnerable incomes, unless an income agreement is reached that mitigates the loss of household purchasing power. It is feasible that the numbers of evictions could accelerate and also worsen, even more, the access to housing, both for purchase and for rent. The acceleration of rental prices by rentiers, both private and institutional, is surprising, encouraged by tricked and partial statistics from real estate portals, whose statistical reliability should be nipped in the bud by government authorities. The effect of the RD, which capped rental growth until December, is clearly a joke and reveals the lack of adherence to effective control of the measures approved by this government.
The increase in the cost of debt for the most indebted and those who invest to rent will undoubtedly be the mechanism that the ECB introduces into the equation to justify this movement, so far from the logic and the origin of the problem. The loss of housing, or the inability to face the shopping basket are the key elements to understand the rise of extreme right-wing parties and the difficulties that the European institutions will have to explain the inaction in the face of a supply shock of this magnitude. The contributions of the Spanish government, although timid, are going in the right direction, both the Iberian exception and the control of some food prices. The legislative excuses, both from Minister Planas, who defends the proper functioning of the food price chain, with increases of 500% in some cases, and the growing aporophobia of Minister Robles, are signs that those hidden powers of which both President Sánchez speaks, he has them in the Council of Ministers.
The conclusion of this abrupt move by the ECB, well received by banks and electricity companies on the stock market, is that monetary policy and the macroeconomy itself remain anchored in the Pleistocene and are not capable of implementing mechanisms appropriate to new phenomena, such as climate change or the situation of oligopolies and growing financialization of the world economy. Aside from this monetary failure, which also stems from a lack of understanding of how money works, what has been shown in this episode is that the EU is a stagnant entity, run by lobby of all kinds, especially financial and energy, which only contemplates legislating to harm the most vulnerable sectors, always leaving large corporations safe, abandoning all interest in breaking oligopolies and above all the mechanism for setting electricity prices. Only the lure of a great European citizen revolt, which will not happen, could serve to drastically change governance in the EU and in the ECB itself.