The Governor of the Bank of England, Mervyn King, has just recognized that the country faces an “unattractive” combination of economic contraction and high inflation.
Managing Director of the International Monetary Fund, Christine Lagarde, said that there is no “place to hide” from the slowdown in advanced countries. In its inflation report, the Bank of England estimated that the cost of living could be higher in the next eighteen months than the estimate in August, which points to an obstacle in deploying a new monetary stimulus.
King said that the panorama for inflation was the primary reason the authorities decided not to buy bonds from the British government in November, “We are faced with an unattractive combination of a switched-off recovery and above-target inflation” he said.
Nevertheless, he reiterated that there are limits to what the monetary policy can do in order to reactivate an economy that faces tough adjustments through the financial crisis and in the midst of the debt problems of the Euro area, “but the Committee (for Monetary Policy) hasn’t lost faith in asset purchases as policy tools, nor has it concluded that there will be no more buying”, he said.
Britain just came out of recession in the third quarter, growing by one percent, but King warned that this was driven by exceptional factors and that the economy could shrink again in the last quarter of this year.
From Malaysia, where he launched an Asian tour, Lagarde said that a strong growth in the region within the next year could not be certain, although the IMF expected to expand 2% faster than the global average. “It depends on the actions of the global officials, especially the United States and Europe, and ‘action’ is the operative word” Lagarde added after stating that there is “no place to hide”.
The term ‘contraflation’ was used for the first time in the article “US towards contraflation and possible default”, published on the 3rd December 2008, which exposes causes and warns of a possible fall in cessation of state payments, or default.
Contraflation is a new phenomenon of capitalism conditioned by the great structural changes that are taking place in production relationships and forces, the means of production and trade on a global scale, accelerated by neoliberalism and its ‘toxic’ financial corruption. It is characterized by the growth of international market prices, initially due to the rise of raw materials (especially oil) driven by increase in consumption, demand and growth in the emerging markets, whilst the developed economies collapse.
This is now confirmed by all the global macro-indicators of research centres and international financial institutions which, in their latest forecasts, certify that the contraction of developed countries is a trend that will continue next year.
Furthermore, they allege that the emerging countries, or BRICS (Brazil, Russia, India, China and South Africa) led by China and India, will continue to grow. Also, in the case of China and India, the Organization for Economic Cooperation and Development (OECD), has just forecast that they will surpass the United States in 2016.
Contraflation will consist of a decline in economic activity and a deepening of ‘stagflation’: a term which emerged in 1965 to describe a phenomenon expressed at the beginning of the 70s. At that time, the Organization of the Petroleum Exporting Countries (OPEC) quadrupled the price of oil in response to the invasion of Egypt by Israel, also influencing the Vietnam War and the abandonment of the gold-backing of the dollar.
Inflation, interest rates and the unemployment rate reached double-digit figures by the concurrency of the rise in prices, unemployment and economic stagnation. If contraction is accompanied by high inflation or hyperinflation, it is the worst possible scenario, because of the impossibility of their management and correction.
Other factors have already begun to exert their influence on inflationary pressures: monetary policies, the depreciation of the dollar, extraordinary figures and unprecedented public debt, fiscal deficits, trade and balance of payment, as well as the flood of liquidity caused by stimulus plans, monetary emissions and financial speculation, among others.
On the other side of the coin is the contraction of the real economy, credit, and the consumption of industrial production due to the loss of competitiveness and the transfer of plants to the outside; the decrease in energy demand and trade, rising unemployment, lack of investment in infrastructure and military spending.
The expansive monetary and fiscal policies that are normally used to stimulate the economy exacerbate the inflationary component and the restrictions; in order to combat inflation, they tend to deepen and broaden the contraction.
Finally, from the data of the 70s (in which neoliberalism began), fundamental accumulated inflation to date, already exceeds it by 700% and, since then, wages have neither increased nor decreased in correspondence with it, thus making productivity and super profits increase through the over-exploitation of labour.
In this way, inflation is said to keep it under control, yet it is becoming a brake on the development of the system which is crippling it. The changes are not temporary or cyclical, but systemic and permanent.
There was talk of ‘U’ and ‘V-shaped’ recoveries (already discarded) and then a ‘W-shaped’ recovery (to illustrate a double drop), when recovery has not actually been achieved. But it will be L-shaped, because there will be no such recovery to pre-crisis levels, but the maintenance or consolidation of the contraction: when they reach rock-bottom, with each occupying its new place in the global economy.
Contraflation is a new phenomenon and irreversible from structural changes in the economy, trade, global finance and the global geopolitical scene. There is a restructuring in which all nations will occupy a new place, towards a single economy and a new international division of labour.
The – until now – advanced countries, must begin to understand that there is no ‘exit strategy’ possible within the neoliberal capital, nor with the old state capitalism or with another war.
*Santiago Brugal Almanza: journalist who specializes in international economy and law; he was a diplomat and member of the Economic Commission of the UN General Assembly.
(Translated by Caroline Gutierrez)