Home » Hríb, Mojžis: Why inflation is ruining our lives | Opinions | .a week

Hríb, Mojžis: Why inflation is ruining our lives | Opinions | .a week

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Hríb, Mojžis: Why inflation is ruining our lives |  Opinions |  .a week

in addition to creeping inflation, there have also been sudden changes in the form of the collapse of large banks. Last week it was Silicon Valley Bank, this week Credit Suisse. Should we be worried about further collapses? Are these just isolated cases, or are we seeing the beginning of a domino effect? And how will our wallets feel?

We expect answers to similar questions from economists. And we will get those answers from them, it’s just that they are not always comprehensible. Often it even seems to be a kind of strange indirect proportionality that the more learned the answers are, the less understandable they are. Why is that so?

are the details of the devil?

There can be basically two explanations. According to one, economics can reliably explain almost everything, but it is a complex science that cannot be understood without many years of study. According to this explanation, economics is something like a quantum theory, the explanatory potential of which is enormous, but accessible to only a few. The second explanation for the frequent incomprehensibility of expert economic explanations is exactly the opposite. According to this explanation, only some relatively general and, in principle, not very complicated statements are really reliable in economics. Reliable detailed predictions (and often backward explanations) are not possible because many relevant facts simply cannot be taken into account. And if you do not take into account all the relevant facts, you can hardly get reliable predictions or explanations.

What is interesting is that sometimes we can arrive at exactly the same results within these two very different views of economics. Let’s take as an example the question of whether it is necessary to be afraid and withdraw your savings after the collapse of two large banks. It is certainly possible to read in many well-founded articles all kinds of reasons why the collapse of Silicon Valley Bank does not represent any reason for us to panic, and why even after the collapse of Credit Suisse there is no need to immediately run to your bank. However, one does not need to have a PhD in economics to be able to predict that this is exactly what the recommendations of the majority of articles will be. After all, no sane person should cause panic and run to the banks. Until panic breaks out, it is quite irresponsible to encourage it.

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On the other hand, an equally interesting fact is that even within economics, which is considered a relatively reliable science, it is possible to arrive at completely contradictory results (which does not happen in physics). In an interview with Juraj Karpiš on this topic, for example, we can read that while he predicted high inflation in 2021, the European Central Bank was preparing for deflation. Missing the exact number can happen, but missing the sign is still a little strong coffee.

How is it possible that such mistakes occur? In the next article on this topic, we can read about the birth of American government bonds and what role in their success was played by people’s trust, which could not be predicted in advance. These are precisely the relevant facts that we often don’t know, and at the same time they are absolutely crucial for the result.

“The world of today’s political debate has been completely reduced to a competition to see who will help people more.”

By the way, people’s trust in unbacked money is a fundamental element in making it possible to produce this money with seemingly almost no limits. In reality, however, it cannot be done completely without restrictions, because sooner or later it will shake that very trust. When and how this will happen is very difficult to estimate. You can safely bet that this will happen one day.

So let’s try for a moment not to believe in an overly optimistic view of economics and try to understand today’s inflation without great details – as a simple consequence of obvious facts, within the framework of a more cautious approach to this science. If we do not try to understand everything, but only the basic trend, we may be able to understand at least to some extent the causes of today’s inflation, even without a formal economic education.

pandemic, war and our demands

Everything is unpredictable and complex in the economy, but the basic rules do not change much. For example, if we were to raise corporate taxes to one hundred percent, we would destroy people’s motivation to do business because we would make it impossible for them to make a profit. And it’s the same with money – if there is more and more of it in circulation, while there is no increase in goods, prices will inevitably rise. Is this the case with today’s inflation?

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Today, almost every European politician says that the current inflation is partly due to the pandemic and much more due to Putin’s aggressive war. This seems like a reasonable statement – during the pandemic, it was necessary to save companies and people from state budgets, and the subsequent Putin war caused such an increase in energy prices that it could not help but be reflected in the prices of almost everything.

But is it really so? Was today’s inflation really inevitable?

The answer to this basic question depends only on how we look at our claims. If we claim a world in which we must not live in crisis even during crises, then the current inflation was inevitable. If, on the contrary, we recognize that during crises our life will be more difficult and we are ready to bear it, then the current rate of inflation may not have been there at all.

JAKUB KOTIAN/TASRApril 21, 2022, Bratislava: Prime Minister Eduard Heger and Minister of Finance Igor Matovič at the presentation of unaddressed financial aid, i.e. another pro-inflationary measure.

Back in the early 1990s, just after the fall of communism, we in this part of the world understood that the transition from collapsing socialism to a free society would inevitably hurt us. But it was a crisis that we were willing to suffer for the sake of a better future. In Czechoslovakia it was called radical transformation and temporary tightening of belts, in Poland it was the Balcerowicz reform and later in Hungary the Bokros package. In all three cases, politicians convinced the public that there is no easy way to catch up with the advanced West and that if we are to at least step on it, we must humble ourselves.

Today we live in a completely different mental world. When the crisis of the world‘s big banks came in 2008, we said they were too big to fail. When it later became clear that European nations were running too large deficits, we said they would be saved by printing money, and we wrapped it up in quantitative easing. When the pandemic came even later, we said that large companies and individual families must be saved again, even at the cost of state deficits. At that time, the pan-European Recovery Plan was also created, consisting of an astronomical sum of money, which was supposed to help the states to new development. And when Putin’s war came and energy prices rose, we said that prices should be capped, households should be subsidized and people should be protected in every possible way. Again at the cost of state deficits.

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It cannot be argued that each of these solutions was completely wrong. But it can certainly be argued that all together created a bitter inflationary cocktail that we are unwittingly drinking today.

The contemporary world of the West – including Slovakia – is a world of demands that must be satisfied even at the cost of unsecured money and debts. We no longer recognize that a crisis means a temporary tightening of belts, we now want to live during crises the same as before them. This paradigm shift in our behavior was brought to perfection by a recent public debate – the moderator said quite seriously that despite benefits and aid packages, people do not feel that they are better off than before. This is today – we want to be better off during the crisis than before it.

And the politicians listen to it – the world of today’s political discussion has already been completely reduced to a competition for who will “help the people” more. Of course, it is always easier to hand out and increase deficits than to cut and make temporarily painful reforms. However, today’s crooked world, which is the answer to our unrealistic demands, has already hit us hard – it is one of the key reasons for the current inflation, which is crushing our demands to dust. Because if in the last crises we wanted to avoid immediate painful intervention, today inflation irreversibly takes away from our savings and paychecks such a large part of their value, which austerity packages would never take from us.

With the current inflation, we are significantly impoverishing ourselves, because we have stopped recognizing that it is necessary to be modest in crises. I guess we’ll figure it out together now.

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