Who Invests in the Future When Everyone is Saving?
The common sense of current German debates on state spending, wage negotiations, and monetary policy seems dangerous to me: everyone should save. The government should spend less and thereby extract money from the overall economy. Workers should accept real wage losses, save, and thereby extract money from the overall economy. And companies should save, not take out loans for investments - that is the signal of rising interest rates.
But this will not solve our problems. The main cause of rising costs is the supply shock: gas and electricity are more expensive, as a result, so are heating and food. Energy costs are shooting up due to exogenous factors. Is the right response really to beat down the entire demand through real wage losses and the entire economic and investment activity through high interest rate policies? I can hardly believe it. In the short term, massive real wage losses will not lead to a massive decline in demand for heating, energy, and food. Everyone needs light, heating, and food. Savings will be made on other expenses, which is why sustained massive real wage losses can hammer down the entire economy, leading to a recessionary spiral.
Furthermore, we need massive investments for the transformation of entire supply chains, the entire heating and energy infrastructure. In addition, massive productivity increases are needed in all sectors of the economy in light of demographic developments. Fewer people must earn more, otherwise, our economy will shrink. Further investments are needed for the climate adaptation of infrastructure (keywords: water supply, heatwaves, heavy rain).
If all of these investments come quickly and purposefully and are implemented in the real economy, if the transformation works, then we will have future-proof foundations for life and the economy and also a productivity advance. If this works, inflation is not an issue. Because the overall output of the economy is growing, the increased demand can be met. If the investment out of the supply shock, the climate crisis, and the new global political realities does not work, we have much bigger problems than inflation. Because then our entire previous way of life and economy is not future-proof. And if the economic system is shaken to its foundations, we have a fundamental crisis.