When the sky on the international scene is sky-high, the Brazilian economy sometimes flounders, due to our idiosyncratic obstacles to growth. About these we will not discuss today. The subject is the stormy sky that characterizes the world economy.
From a longer time perspective, the world economy has been hit three times since 2008. First came the great financial crisis, the result of poor regulation in almost the entire developed world; soon after, we had the debt crisis in Europe, which had its origin in a distortion of incentives arising from an ill-fitting monetary union, implemented at the turn of the century. The world then reached 2020 with stupidly high debt and exhausted monetary policy. There was no room for shocks, but then came Covid and then the invasion of Ukraine.
The response to the pandemic scare was unprecedented. Back in the cauldron of the second quarter of 2020, with GDP collapsing, the perception was of an end-of-the-world scenario, of total and unrestricted collapse, with a high probability of a reissue of the Great Depression of the 1930s.
Central banks have gone deep into the unorthodox way, acquiring private assets to stimulate credit and expanding the amount of money as much as possible. Tax authorities have increased their spending in unprecedented ways. Due to these stimuli and also the nature of the adverse shock — a pandemic does not significantly affect the growth potential of the economy, despite paralyzing it in the short term — from the end of 2020 onwards, the economic recovery took place at a speed not expected.
With the arrival of vaccines in 2021, the pace doubled, but by and large, governments followed in panic mode, stepping on every accelerator pedal they came across. Result of this calibration failure: a brutal rise in inflation.
This scenario was already quite clear in the middle of 2021, that is, a year ago. With the Russian invasion, the prices of several commodities rose even more, adding alcohol to the inflationary fire that was already gaining muscle. In short, central bank lethargy, coupled with Putin’s insanity, has caused global inflation to jump from just under 2% there in mid-2020 to close to 9% in a mere two years.
Fighting inflation is almost always a costly, difficult process. That’s precisely why we attach so much importance to keeping it under control, caged. The last time the beast broke out of its cage, in the early 1980s, international interest rates had to go above 10% to get it back to a more civilized level. Even if today the need for adjustment is less, the fact is that back then the public debt represented a mere 30% of GDP. Today she is 100%. A higher interest rate, even if not so high, will give fiscal policy a headache.
The markets are realizing this scenario; are beginning to understand that inflation so entrenched will not go away without sacrifices. This uncertainty in itself already affects investments and consumption, even before the bitter medicine of high interest rates is administered. For emerging countries like Brazil, the consequences are lower domestic growth and currency devaluation. In other words: weak economic activity and continued inflationary pressures. The worst of both worlds.
Mauro Rodrigues (Economics professor at USP and author of the book “Under the magnifying glass of the economist”) and the Por Quê?
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
