Although the most widespread explanation of the present inflationary tensions that plague a good part of developed economies is that we have run into transitory bottlenecks in various parts of our production structure (microchips, gas, coal, transport, containers, well-trained workers …), what It is true that the generalized and simultaneous appearance of bottleneck it is usually the symptom of a prior problem: excess spending in relation to the elasticity of the production structure.
Keynes himself, in Chapter 21 of ‘The General Theory‘, was aware and recognized that the increase in effective demand could provoke inflationary tensions before even reaching full employment of workers, especially due to the existence of bottlenecks:
“As production increases, a series of ‘bottlenecks’ will be reached in those cases in which the supply of certain goods is no longer elastic and their prices increase to whatever level is necessary for demand to deviate towards other directions (…) In short, apart from the critical point of full employment to which money wages have to increase yes or yes as a reaction to an increase in nominal effective demand (an increase that would be fully proportional to the increase in the cost of the basket of goods that workers consume), we have a whole series of semi-critical points in which money wages increase as a reaction to an increase in effective demand, but they do not do so in a way that is totally proportional to the increase in the cost of the basket of goods that workers acquire “.
“We have a series of semi-critical points where wages increase in reaction to an increase in effective demand.”
In other words, it is not enough to say that we are running into bottlenecks. The crucial thing is to explain why we have reached a situation of imbalance between the aggregate supply (of each sector) and the aggregate expenditure. And in this regard it may be that part of the explanation connects with the legacy of the pandemic: that is, the suspension of investment (and reinvestment) in many industries throughout 2020, as well as changes in demand patterns and the short-term inability of a rigid supply to readjust to them. But if part of the inflation is linked to the negative supply shock caused by the pandemic, by necessity the other part will have to be linked to one of the largest global programs of fiscal and monetary stimulus in the history of mankind: yes, in the middle of a conjuncture in which the pandemic reduced the potential production capacity of many sectors or it altered the desired patterns of specialization, governments have dedicated themselves to promoting aggregate spending —whether public or private— in order to speed up the recovery, then it is logical that these bottlenecks are only getting worse. Therefore, it will inevitably be necessary to attribute to public stimulus policies a portion (pending quantification, but in any case a portion) of the responsibility for the unusually high inflation that we are experiencing.
Of course, the bet and the hope is that this situation will normalize as time passes and we redirect productive factors to increase the potential supply of certain sectors. Although aggregate supply tends to be inelastic in the short term (when we are close to production potential), in the long term it is clearly elastic. But, in this regard, two precautions should be placed on the table.
First, if bottlenecks are getting more and more widespread, not all of them can be solved at the same time. Therefore, it will be necessary to prioritize which of them are relatively more urgent than others and, to do so, the current climate of overabundance of spending and credit laxity is not the most appropriate. As long as we continue to feed public and private disbursements, we will not socially discriminate between more or less urgent investment items (we will continue to spend on everything) and the productive readjustment will be delayed, that is, inflation will continue. To prioritize it is necessary to start restricting spending (saving) in the less important sectors and this is not very compatible with maintaining the current fiscal and monetary pumping.
As long as we continue to feed disbursements, we will not socially discriminate between more or less urgent investment items
Second, and as we warned a few months ago, if inflation expectations get out of control – either because economic agents expect inflation to continue to accumulate or because they distrust the ability or willingness of the monetary authorities to regain control on your currency – then we can begin to experience endogenous and independent inflation from which to be derived from the bottlenecks: that is, a purely monetary inflation whose origin is found in the fall in the demand for money (certain currencies become worse stores of value and agents look for alternative reserves in which to preserve intertemporally your heritage).
The latter would be the worst possible scenario as it would reverse the macro trend of recent years: if since the beginning of the 2008 crisis we have experienced a deflationary era (or, rather, very low inflation) it has been because the global demand for money has been growing steadily (both because of the lack of investment opportunities in many Western countries and because of the enrichment of developing countries), but if the demand for money were to fall appreciably, then its value would depreciate sharply and inflation – as we say, purely monetary type – would rise until we managed to reduce the money supply sufficiently (something that would not be easy to achieve after so many years of quantitative easing) or until we revived the demand for money (restoring confidence in the stability of the value of money). currency). In both cases, we would need strong increases in interest rates that would not immediately guarantee a control of inflation but a stagflationary collapse. We’d better try not to get into that wolf’s mouth.