The current extraordinary inflation and actually started stagflation is the result of a tremendous macroeconomic mistake of the state economic policy of developed countries and, first of all, the USA. A huge part of the respected academic and expert economic community has kept the U.S. and European governments from making such a mistake - but, as we see, in vain.
The government's mistake is not new: the attempt to moderate multifactorial market processes and form "conditional behavior" of agents for the illusory purpose of leveling the negative phases of economic cycles. This is the cornerstone of every leftist doctrine, from Keynes and Marx to pseudoscientific concepts like modern monetary theory (MMT).
The deep motives of such actions are determined by the electoral interests of the electoral elite and are described quite adequately by the Theory of Electoral Cycles. The essence of the error - in the expansion of state paternalism and hypertrophied macroeconomic stimulation of processes in an open market economy.
Against the backdrop of obvious supply-side disruptions associated with covid constraints - cascading supply chain breakdowns and declining labor, the state has decided to stimulate directive-blocked demand in unprecedented amounts. Such actions, even without taking into account other extraordinary exogenous and endogenous factors, look like absolute absurdity and a road to collapse.
Stimulation of demand by the state was implemented through a combination of fiscal and monetary interventionism. Direct payments to the population led to inflation of exchange-traded assets. Support for loss-making and inefficient enterprises to save jobs and the adoption of huge infrastructure programs were combined with maximum monetary easing through zero-funding rates and large-scale programs of direct injections of liquidity into the banking system through the redemption of public debt.
The result of such pumping demand on the background of obviously problematic supply was a cascading deterioration of the situation. The consumer intension, limited by covid lock-ups and a lack of output, was disintegrated by extra-injections of actually free and unsecured liquidity that is, by another state monetary leverage. This led to a sharp imbalance in the price relationship between supply and demand, with the growth of final consumer prices on the background of explosive post-consumer demand and supply unable to meet it.
The deplorable state of production, in addition to negative covidual logistical externalities, was intensified by a sharp decline in labor force and inability to fill vacancies - labor employment declined sharply due to imbalances in households' disposable incomes, liabilities and savings. This naturally increased wage inflation, which, together with other factors of production inflation, such as logistical gaps and shortages of components, contributed to a sharp rise in producer prices.
The final and extremely significant factor in production inflation has been the rise in commodity prices, primarily energy prices. This process has three main causes: a) asset inflation, partly artificial and created by the government, b) geopolitical tensions in Eastern Europe, d) the forcing of the green agenda and the compression of traditional energy sources without sufficient development of alternative sources.
The growth of exchange-traded assets, particularly commodities, is a consequence of excess liquidity in a troubled economy, with financial agents and investors absorbing liquidity in exchange-traded assets as a more reliable and promising investment segment than the real sector. Geopolitical tensions, or rather problems in countries that are key exporters of energy and agricultural commodities, are also a consequence of the Western economies' conciliatory and irresponsible policy towards resource autocracies, consisting in an increased dependence on their raw material exports.
The forcing of the energy transition against the background of a tougher ideological conflict between the two socio-political poles, with insufficient funding and development of alternative energy sources has led to vulnerabilities in the energy supply of some Western economies, primarily members of the European Union.
As a result of the complex of all the factors and sequences mentioned above, globalization is torn in different parts of the cycle, and this is not a short-term process. This also means that the agenda of economic security and economic sovereignty will supersede the agenda of efficiency growth. The disruption of global production and logistics interactions and the clustering of production and logistics exchanges will inevitably lead to significant shifts in economies and growth rates. That means inflationary pressures and lower effective growth rates, i.e. stagflation.
Monetary tightening in such an environment is incapable of sanitizing the economy for a new growth cycle. This is a systemic shift where previous measures do not work in their usual mode: monetary tightening will certainly deflate consumer activity, but the structural problems on the supply side will only be exacerbated by this monetary tightening.
At the same time a decrease in efficiency is inevitable, as fiscal stimulus in the form of social and infrastructure programs have already been adopted and the effect of squeezing business by the state - both through fiscal tightening and through direct expansion of state business - will reduce opportunities for private business, especially against the background of rising costs of funding, which will affect the quality of economic development and the rate of long-term growth.
The political electoral interests of the power elites under conditions of geopolitical aggravation, growth of risks and uncertainties, dictate to them the obvious but vicious goals - short-term efficiency in exchange for long-term development. As we know, short-term efficiency is possible only through a simplified and somewhat complicated action, which is directive state expansion.
The problem of this policy is very clear: the free market and its self-regulating mechanisms are not compatible with crude exogenous regulatory political interference. It is state intervention that multiplies the risks and negative effects of market cycles, it is state intervention that expands their volatility, it is state intervention that generates the effect of spiral reproduction of economic inefficiencies: the previous mistake can only be corrected by the next, even bigger mistake.
