Inflation, Recession… And What Can Actually Be Done

inflation board

Miguel Navascués | Although there seems to be no awareness of it, the current problem in the world economy is of cosmic proportions, a problem for which we have no close antecedents. We have huge pockets of liquidity, originated to alleviate the contraction of the pandemic, now that inflation is rebounding with great vigour, and a recession that is already being announced in some indicators; what some translate as an unavoidably hard stagflation, with rising unemployment, falling GDPs, inflation…
It is too easily admitted that inflation is and always will be a monetary problem. Beware. This is true as long as one refers to the process of price rises, at constant or rising rates. For it is true that without a constant increase in money, an inflationary process cannot be sustained, and would be aborted as soon as liquidity stops growing. Ergo, it is relatively easy to cut off an inflationary process as soon as expectations about the Central Bank’s tolerance are broken. If it is believed that it will indeed cut its liquidity issuance short, the public would shift its expectations towards increasingly subdued inflation. Of course, a dry run on the money supply would create a vicious recession, as the Fed did in the 1970s.

This time inflation has unleashed its forces, reaching levels not seen since the 1980s, and we cannot blame monetary policy alone, which had been deployed to cope with the sharp contraction caused by the pandemic. The rise in GDP showed that the policy was the right one. Especially in the US, which took less than a year to return to original levels of output and employment. Why is (hyper)inflation threatening now?

We have gone through a pandemic that has distorted key parts of production, pushing up commodity prices whose influence is passed on to all stages of the chain, from the extractive to the final consumer good.

This was expected to normalise over time. But there was something else. During the pandemic, those in power continued to accelerate their energy clean-up programme, with new protocols and dates that exceeded all prudential limits, given the critical context in which we were living: “old” energy sources were phased out as if a smooth transition to “renewables” were assured, which is not the case at all.

Par dessus le marché, Spain, in a show of cocky self-sufficiency (when it is one of the most energy-dependent countries), has said NO to the EU proposal that nuclear and gas energy be considered ecologically viable for the time being. But for Spain it’s a no. And it is planning to close its nuclear plants in operation by 2035.

All this can only destabilise the energy supply and drive up prices as high as the market, if not the black market. This is putting the country’s economy at the mercy of the horses. That is why I said that monetary policy could not be blamed for inflation: that there are roots in world markets that are extremely destructive. In other words, it is not only pandemic and war that have distorted the energy supply; politicians’ rash actions, incomprehensible voluntarism, have reduced indispensable energy sources to zero, making it very difficult now to restart industrial processes cancelled in mindless optimism.

We are now faced with the following dilemma: (1) either be orthodoxly monetarist, ordering central banks to cut, or even reduce, the money supply and raise interest rates, with all the expected consequences of a fall in GDP and employment to the highest levels known in the pandemic, or (2) pursue a supply-side policy that does as little damage as possible to activity, with tolerable inflation higher than the 2% we have become accustomed to. And that forces us to look at and reform what is possible in global markets.

As Bion Lomborg explains, “Solar and wind advocates claim that batteries can be a key factor when the sun is not shining and the wind is not blowing. In reality, all of Europe’s batteries combined can barely store enough energy for 1 minute and 21 seconds of the continent’s average electricity demand, after which we are back to relying mainly on fossil fuels.

We need a cure of realism and humility to straighten out the arduous path we have to follow to arrive at a good conclusion. Without putting the world economy at serious risk of collapse for lack of absolutely necessary energy.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://