The world economy is trapped in a vicious cycle

Inflation destroys purchasing power, so countries tend to spend to mitigate its impact, which often exacerbates their debts and deteriorates their public finances.  

As a result, financial crises turn political when there is a shortage of funds to finance health, education, and security. These crises also turn into social issues, with exacerbated inequality and deep divisions between social classes. 

Things become more complicated and dangerous when all these challenges are intertwined with geopolitical tensions or wars, as the rise in military budgets debilitates the financial resources of public authorities and, thus, their ability to mitigate shocks.

Historian Adam Tooze, a professor at Columbia University in New York, explained in an article published in the Financial Times under the title "Welcome to the world of the polycrisis", that: "a problem becomes a crisis when it challenges our ability to cope. In the polycrisis, the shocks are disparate, but one reinforces the other so that the whole is even more overwhelming and difficult to manage. At times, things that once seemed imaginary become lived realities."

The WEF's current view of reality was conveyed as concerns and even pessimistic views by the majority of the 1,200 experts and decision-makers who were consulted when drafting its report. 

In their view, the global economy will witness continuous fluctuations and multiple shocks that will produce divergent paths. This diminishes any hope for common solutions to the crisis concerning all of humanity, such as global warming.

A more fragmented world

In summary, the analysis and perceptions of experts at the WEF are that the world of tomorrow will be less abundant and open and more fragmented and fragile. Talk of more complex geopolitical and geo-economic clashes, the like of which the world has never seen before, will increase. 

It will be both real and metaphorical wars that are the most effective in defining the path of tomorrow, not the economy. 

The contours of this pathway have begun to appear in the fragmentation of the world and the atrophy of globalisation, that was once the focus of the Davos philosophy half a century ago. 

There is a fear that social unrest and the resentment of those affected by crises, as a result of the reduced ability of governments to absorb shocks will create polarisation, which may challenge political systems and pave the way for populists to reach power.

The worst possible scenario is stagflation — a noticeable rise in inflation and unemployment rates, coupled with low, slow and adverse economic growth.

The only way to escape stagflation is to achieve better results in the three Rs, as investment fund owner David Rubinstein calls them: Recession, Russia, and (interest) Rates.