What will happen to the economy?
Nobel Prize-winning economist Paul Krugman has a simple – but very meaningful – definition of what the economy is. Krugman says the economy is people and what people do. So, if we want to know what will happen to the economy, we will have to understand what will happen to people. At the same time, it dawns on me that my mother – the wisest woman I have ever known in my life – used to tell me, don’t worry about the future and don’t worry about the past. Something sensible. That thought that I have made into a lifestyle accompanied by my life purpose has been honed over time and, in these last few months, has been exacerbated by being closer to the Almighty. I have learned that for the past, we ask for mercy, for the present for wisdom, and the future for providence.
So, tying the two deep thoughts together, a more spiritual one – the last one mentioned above – leads me to think that the title of this opinion would not make sense as we would be worried about the economy’s future. However, the wisdom of the present and mercy for the past are tools we could use to have providence for what will happen to the economy. If the economy is people and what people do, or better as I can tell, is how people behave, we could philosophize a bit about what the economy’s future would be given current conditions without losing sight of the lessons learned.
The truth is that we have enough data on how we are doing economically. It is also true that we are amid uncertainties, and this is reflected in the behavior of us citizens. Therefore, it is essential to understand the current state of the art of the economy. Galloping inflation, which seems to be relentless, activates the monetary policy administered by central banks. The way to control it technically is to increase interbank interest rates in such a way as to restrict citizens’ consumption. Therein lies the first intersection of the two components of Krugman’s definition. It is the consumption behavior of citizens that will allow – in large part – the results of monetary policy decisions to yield positive results. The curious and, at the same time, paradoxical thing is that to the extent that the cost of money restricts consumption, it represents a decrease in the income of some in a market economy. Here is when we must bring up the other Nobel Prize winner in economics, John Nash, who has already gone to the eternal east. Nash argued that negotiations and trade should be understood as the concept of equilibrium for noncooperative games, i.e., that both sides should win. In this sense, some businesses and producers will be affected by monetary policy restrictions.
With the inflation outlook clear, the question is: How can we all win? On the one hand, producers and traders will have to look for options to continue not only selling their products and services but also to improve their profitability without losing sight of the fact that we are in a marathon, not a 100-meter sprint. On the other hand, we have the consumers who are calling the shots. The restriction of consumption is not by mandate of monetary policy but by better managing their liquidity. That is to say that if we consumers understood that our finances depend on ourselves and not on the governments, then surely monetary policy would be more educational, preventive, and predictive instead of reactive as it is.
So far, we have talked about inflation and some of its impacts. Other aspects of inflation have been left for another opinion column. Still, the next one will be its impact on financing and the possible deterioration of the credit portfolio. The devaluations and revaluations of currencies against the US dollar will also be part of another opinion.
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