Every dealer knows exactly that something “rare” ???? it happens with the international movement of goods. Obviously we have big problems in the global production and distribution chains. Manufacturers are not keeping pace with orders, producers of raw materials are not keeping up with demand, ships get stuck in ports, and containers fill up. You could say that we are currently experiencing a “logistics” crisis. of globalization. With the pandemic, the machine suddenly stopped. However, stopping the machine is not the same as turning on the machine. It is not easy to produce at the same pace as before. Sloth is hard to beat. Recovery takes a while, of course. What does it all mean? Bottlenecks, delays and inflation.
When we speak of a situation of low production and high inflation, we speak of “stagnation”. The crises in Latin America are generally crises of stagnation. However, crises in industrialized countries are often deflationary crises. This explains why Latinos always associate crises with inflation and Americans always associate crises with deflation. The nature of the respective crises is fundamentally different. The same goes for the strength of the currency. Developed countries worry if the currency gets too strong as it affects their exports. On the other hand, Latinos who suffer from excessive devaluations always consider a strong currency to be an ideal. Everything is relative. It all depends on the context.
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The pandemic led to a sharp drop in demand. That created a deflationary picture. This led to a decline in corporate incomes, which in turn led to a significant increase in unemployment. To avoid a deeper deflationary crisis, the US Federal Reserve began to inject liquidity into the system to stimulate a recovery in demand. This process is known as “reflation”. Let’s say prices drop 10%. A 20% increase is required to return to the starting point. That 20% is technically not inflation. In fact, it is “reflation” because price stability is sought.
Now, at the beginning of the pandemic, we had deflation, then reflation, and at this point we are already registering inflation. Now the danger is not a recession. In fact, it is a widespread overheating of the economy. The big question: why isn’t the Federal Reserve taking liquidity from the system? Well, because there is still a lot of unemployment and more production is needed. And production is boosted with high prices. If I produce apples and the price of apples goes up, I will surely be motivated to increase my production. Paradoxically, this increase in production lowers apple prices.
What do people talk about when Jerome Powell, director of the reserve, speaks of “temporary” inflation? Well, it means that sooner or later the production and distribution chains will wake up and get back to normal. Could you wake up in a deflationary framework? Unlikely. This is why the Fed is sticking to a loose monetary policy given the apparent inflation rate above the historically accepted target. Does that mean we are in a Latin American-style stagflation crisis? No. This means that we are in the middle of a complex economic recovery process. Of course, if production doesn’t recover, this is where things get complicated.
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The logistics crisis means inflation. If the situation is temporary, we are talking about a necessary evil that is important in the recovery process. If it becomes a permanent phenomenon, it means that we are falling into a stagflation crisis. There are two factors: firstly, circulating liquidity and secondly, a crisis in the globalization process. In this case, the Federal Reserve would be forced to withdraw liquidity, which would lead to a collapse of the world markets.
Another scenario could also be envisaged. Economic overheating could be related to slower than expected growth. In this case, the reserve would also be obliged to withdraw liquidity from the system in order to stabilize prices. Finally, we have the scenario envisaged by the reserve. Yes, we will have inflation above traditional targets. But that will be temporary. Because the production and distribution chains will recover. At some point, the withdrawal of liquidity would be necessary, but that would not necessarily mean a collapse of the financial markets. Economic growth could serve as a counterbalance. This, of course, is the ideal scenario.
Here is an important detail. At the moment, not everyone is very convinced that the scenario set by the reserve will be successful. So we have a lot of volatility in the markets because of these uncertainties. Concerns about inflation come and go. When concerns are great, investors have chosen to protect themselves by investing in productive assets. In particular, we are talking about what is commonly known as the “value” sector. When concerns disappear, investors will regain confidence and return to invest in the growth sector. (Technology, etc.) In this case, Bitcoin and the other cryptocurrencies are more related to Tesla than to Coca-Cola. In other words, Bitcoin is an adopted son of the “growth” sector.
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Now two key elements: globalization and technology. Here are productivity’s great allies. These are essentially deflationary elements. This implies that in a global and technological world, injections of liquidity are necessary to guarantee economic growth. The financial markets benefit from this. On the other hand, economic nationalism and technological decline have the opposite effect. In that case we would have stagflation. It’s what some economists like Nouriel Roubini have called: a lost decade.
Talk about technology and globalization as a potential salvation. But there is a third element to consider: a significant increase in consumption. We need to remember that humanity is going through a pandemic. All restrictions and all deaths related to the health crisis will surely awaken a new will to live in the population after the pandemic is over. That could mean an increase in consumption in the form of travel and leisure activities. We could have crazy 20s after the pandemic. What impact would that have in such a complex environment? Well, we’ll see. What will be will be.