Understanding + the economy I Back to the 70s, by Joan Vila

The signs that the economy is giving they are not too promising. Although the administration tells us that the economy is growing (and that, therefore, we must be happy because it will go well) and although Caixabank tells us that the current consumption level is much higher than in 2019 before the pandemic, the clouds What do you see in the economy? they are very black, about to storm.

In other articles I have been explaining the mess that has been generated in the world economy as a result of pandemic stoppage. Stopping production and consumption forces many economic actors to find their lives, change the scene, do alternative things in order to survive. This fact and the collapse of maritime traffic have suddenly stopped the globalization, making that many products cannot go from one place to another with the ease with which they did and having to manufacture closer, increasing prices. Suddenly the benefits of globalization, with the drop in prices that it brought, vanish. Suddenly, the world economy must reinvent itself in a few months.

To this must be added the gas crisis, due to a non-forecast of the increase in consumption when everyone stops consuming coal. The increase in gas affects an electrical system that is still beginning to energy transition And you need it more than ever to balance your system for many hours a year. Now the system is more variable than before because, to the fact of the variation in demand, we must add the variation in renewable generation, still half.

Finally, we add that the model of the world economy showed signs of exhaustion, with central banks injecting liquidity into the system so that it does not stop growing: without continued ‘Quantitative Easing’ the world’s economies would go into recession, a sign that the system is exhausted. The world economy is sick, it does not know how to live without being doped. The Spanish debt is already at 120% and someone talks that it will reach 190%, something that today seems completely impossible without it bursting.

With all this, the result has been an increase in inflation in November 5.6%. But industrial prices have accumulated a growth of 32% since the beginning of the year, increases that are will transfer the consumer in the first quarter of next year. Current inflation is the result of rising prices for domestic electricity and gasoline, but consumer industrial products have not risen yet because distributors force manufacturers to keep prices stable throughout the year. Because of this, many producers lock in the prices of their raw materials and energy during the same period, usually in the calendar year. So, in January, these manufacturers will have to pass on the increases in their costs to the prices of the products, passing on increases of 50 to 70% in raw materials, 100% in gas and 300% in electricity. In many cases, the increases will have to be 50% on the final product. The same will happen with many electric prices domestic companies that certain marketers had insured at a fixed price, with increases of 300%. The transport He also goes on saying that he wants to raise prices. So, during the first quarter of next year, we can see an increase in inflation like we have not seen since the oil ‘shocks’ of 1970. Starting with the first oil ‘shock’, in 1973, inflation rose to 17, 9%, and the momentum of the second reached 26.4%, making there 11 consecutive years with inflation above 10%, which is the value we can see in a few months. In Spain the impact was serious because, in addition, there was the change of the Franco regime and the economic measures were not quick or adequate, with many problems to be solved.

The situation has a certain aroma to the one of then. Any episode of inflation requires a control by the regulator, taking money out of the system and raising interest rates to cool the economy. The governor of the Bank of Spain has already warned that if an inflationary spiral is entered, with an increase in wages to compensate for the rise in prices, the result will be fatal because they will have to raise interest rates and the public debt will not be able to put up with this new expense.

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This is the scenario before us. You have to know that the situation in the 70s was resolved during the 80s suffering, with a significant mortality of companies and solving it with less oil consumption. The world economy has specialized in hiding part of the actions that must be carried out based on a higher indebtedness: thus consumers should not suffer any restrictions. But the economy is relentless, two and two still add up to four even though you have temporarily changed the calculation base. Today the world no longer has a journey with debt and it will be necessary to reduce the consumption of energy and of all products.

These days the price of electricity in France will move around € 550 / MWh and in Spain it may be € 300 / MWh. Possibly, with the arrival of spring, prices will fall by half, but they will still remain at a level between double and triple what they had before the pandemic, so we will have to reorganize the way we consume in the economy. It’s a somewhat ugly start to the frugal new economy. But what did we believe, that we would make the journey voluntarily and effortlessly? It has never been like that, and men are forced to move by certain circumstances that must be those that should be derived from politics. But if politics does nothing, because it does not want to or does not know, the economy interprets it in its own way and shows difficult scenarios. You will do well to review how we lived in the 70’s, recycling more, buying less, traveling nearby, enjoying more local leisure, being much more with friends. One is also happy like that, surely much more, I remember.


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