Is an economic cyclogenesis looming?

The conjunction of a new oil crisis that could raise prices to $ 80 a barrel with the excessive strength of the dollar could cause an economic cyclogenesis of unpredictable results. Thus, the main developed countries have strategic oil reserves that they allocate exclusively for use in critical situations to guarantee domestic consumption for a couple of months, inventories that would have fallen below the average in recent months and coupled with a Increase in world energy demand (in February according to the IEA world consumption will exceed production by 2.3 million barrels), will cause the price of crude oil to climb to $ 80 / barrel and the runaway rise in prices. Uncontrolled inflation leads to the loss of purchasing power of workers and pensioners, the contraction of domestic consumption and the disincentive for saving and seeking income outside of productive activities, which could cause in the immediate future a productive desertification that would be unable to satisfy demand for commodities and subsequent stagflation.

Stagflation refers to the sum of runaway inflation and a scenario of economic recession (an economy enters a technical recession after two quarters of consecutive falls in national GDP according to the IMF) and is a term coined in 1965 by the then Minister of Finance British, Ian McLeod who used the word "stagflation" in a speech before the British Parliament. It is one of the most dangerous combinations for the economy, since both elements distort the market and shock therapy to combat economic stagnation has the secondary effect of increasing inflation. Thus, to encourage consumption and get out of the recession, therapies based on fiscal and monetary expansion are required, measures that in turn generate more inflation, which in the end becomes an explosive circle as it entails increases in the price of money on the part of the Central Banks that will cause the economic asphyxiation of countless countries with stratospheric Public Debt.

Regarding Latin America and the Caribbean, the contraction in world demand for materials is already causing the strangulation of their exports and the general depreciation of their currencies due to the strength of the dollar, which will translate into increases in production costs, loss of competitiveness, runaway inflation rates and spectacular increases in foreign debt. Thus, according to the ex-Managing Director of the IMF, Lagarde, "the strength of the dollar together with the weakness of the prices of products creates risks for the balance sheets and financing of the debtor countries in dollars", from which it is deduced that the The economies of Latin America and the Caribbean will be more exposed to a possible appreciation of the dollar and the reversal of associated capital flows, a phenomenon that could reissue the “Lost Decade of Latin America” (Decade of the 80s) aggravated by a notable increase in the social instability, rising poverty rates and a severe setback in democratic freedoms.

Risk of stock market crash on Wall Street?

The real possibility of a new stock market crash would go unnoticed by most Rating Agencies due to the disconnection with reality that would lead them to justify the irrational exuberance of the markets, thus fulfilling the famous phrase of the iconoclast John Kenneth Galbraiht . "There are two kinds of economists: those who have no idea and those who don't even know that." Thus, the "butterfly effect of the coronavirus" transferred to complex systems such as the Stock Market, would have as a collateral effect the impossibility of detecting a mediate future in advance, since the quantum models they use would only be simulations based on previous models (Theory of Minsky's financial instability), so that the inclusion of just one incorrect variable or the sudden appearance of an unforeseen variable (coronavirus pandemic) causes the margin of error of these models to be amplified in each simulated time unit, even exceeding the one hundred percent stratospheric limit, leading to a new stock market burst or crash.

Due to the "Trump effect", US investors were installed in euphoria after surpassing the ionospheric ceiling of 29,000 points in the Dow Jones, (recalling the stock market boom of the 20s, prelude to the stock market crash of 1929), so are unable to perceive the vertigo of altitude but the existing psychosis due to COVID-19 and its collateral effects on the world economy (reduction of 1 point in world GDP), will cause large investors to feel for the first time the evil of the This height will lead them to reduce their exposure to risk with the consequent downward effect on share prices and the revaluation of the sovereign debt with the US 10-year bond bordering on 1.5% of profitability. Likewise, the rise in inflation in the US (1.5% in January) will accelerate the rise in interest rates on the dollar, causing investors to distance themselves from equity assets and bears rising at the helm of the ship world stock market, leading to a selling psychosis that will eventually trigger the bursting of the current stock bubble.

Such an outbreak will have as collateral effects the consequent financial starvation of companies, the subsequent devaluation of the currencies of countless countries to increase their exports and as beneficial effects, forcing companies to redefine strategies, adjust structures, restore their finances and restore their credit. to the market (as happened in the stock market crisis of 2000-2002) and as collateral damage the ruin of millions of small investors still dazzled by the lights of the stratosphere, the financial starvation of companies and the consequent domino effect in the declaration of bankruptcies, the subsequent contraction of world trade, subsequent settlement to economic globalization and subsequent return to watertight compartments in the world economy.