Exceptional Publications

October 30, 2022

On Thursday,  October 26, 2022, the ECB has raised three interest rates by 0.75 points. As a result, the primary rate rises to 2 percent, the deposit rate to 1.5 percent, and the 'marginal lending rate' to 2.25 percent.

In Total the increase is 2 percentage points up in just three months.

The goal is to tackle the high inflation that is hitting the 19-country euro area.

 Are we sure that is the right direction to solve this supply-driven inflation caused by very record prices of the Energy products such as oil and gas and by material scarcity?

Some argue that the inflation is driven also by a reviving demand following the Covid crisis but in my opinion this case concerns just a few industries and for sure it is a small part in the countries importing large quantity of oil and gas.

Moreover, if we go deeper, we will remember how the price increase started to come up  before the Covid outbreak and the war in Ukraine in many commodities due to their scarcity.

As an example we may take the aluminum whose price ramped up steadily until August 2022.

Now it is dropping, but we will be examining this aspect later on.

In addition, the large increase, as a matter of fact, concerning the energy product prices following the war in Ukraine, has been inhereted to a great extent by many products, in the first place the foodstuffs (in this regard the troubles about the export of grain from Ukraine played an important role as well).

As a result of this consideration, the inflation is 90% suppy driven.

A this point some questions turn up:

 Can we face the supply-driven inflation through the same tools used when it is generated by the demand side?

 Will they be effective in the current macroeconomic context where most national economies are plunging into a recession?

My doubts are strong enough.

Businesses will have to pay greatest interests when borrowing from banks and their intention to make any kind of investment, already low in a context of imminent strong recession, will be negatively revised.

Families and individuals will see the financial interests on loans and mortgages increasing, that will drop the consumption level together with the real estate turnover.

Not to say what will happen when some Eu's Countries are very indebted.

Economic crisis is worsening and won't allow to achieve a good basis of fiscal revenues providing sufficient resources to guarantee the usual public service level to their citizens.

In this case the increase in the interest rate will make the necessary resort to the Treasury Bonds more expensive.

The result in the medium term will be an increase in the tax burden to be levied on the citizens and a further worsening in the economic crisis due to a lower level of consumption and the consequent lowering of the output of the businesses.

Not to mention the probability of a consequent loss of Jobs.

In other terms the crackdown in the monetary policy and its current extent would be a further push into a recession, already looming large, very difficult to get out of in the short-medium term.

How to deal with the inflation if the traditional tools to tackle it could be more harmful than beneficial?

The answer is what we have been seeing for one month and a half about.

The lower demand for some products, foodstuffs in primis, has led the respective prices to start to decline.

One example?

The vegetable oil, whose price hit 2/3 months ago some record highs, decreased recently to a more acceptable level.

Another example that concerns a commodity?

Indeed!

Aluminum price as mentioned in the above lines has been steadily decreasing for 2 months after a large increase over the last 2 years.

The other metal prices have stopped to increase as well

Furthermore the container freight rates according to the respective indexes (Freightos Baltic Index for instance) dropped in October 2022 by 2/3, to the level of 2018, and that means the charge on the goods conveyed will be lower than ever.

All this is the result from the poor demand that followed on from all the issues concerning the troubles to get the materials requested and the adjustements in the supply chains involved that led to choose new suppliers or in some cases to a higher demand for substitute products when possible.

In the end, in the absence of a turning point in the current geopolitical situation that is impacting first of all the energy product prices, the answer will be the spontaneous market behaviour to curb the supply-driven inflation of this economic era.

Any kind of restrictive monetary policy should be very moderate in view of the imminent strong recession and even more in the very indebted countries that might plunge into a lethal situation.

October 6, 2022

The solution for saving gas and energy costs is simpler than you think!

In my opinion, it could be based on the simplest rule that we all know about the Economics, studied by all those who have attended just up to the high school.

This rule will be even more appropriate if we take into account the role that speculation and the negotiation mechanisms play on the respective markets.

Summing up, they anticipate and increase the expected effects both from a future increase and a decrease in demand for a product/service ever since the news of that future event starts to spread up.

In other words the application of the solution that I will be proposing could have positive ripple effects even greater than you think and that's vill be good regardless of some rules that explain the pricing of the energy by linking it to the cost of the gas on tha market.

What is it like?

Let's suppose that companies, whose products and services are not being placed on the market due to the lower purchasing power that consumers are undergoing in the wake of the increasing energy and gas costs and that is going to lower even more since the great economic recession is looming large, work one or two days less than usual.

This would lead to savings in gas and energy consumption without compromising anything because, as mentioned before the production at full capacity is not taking place.

In essence it would decrease a realistic excess production.

Nonetheless business managers should bee careful not to reduce production capacity, that is to say the assets available for the firms to match a future increase in the demand for their products that will restart in the medium term.

That said, returning to the reduction of working days and making it a rule for a great number of businesses of a country, for instance, the resulting lower demand for gas and energy would bring down the respective prices on the reference markets.

 Once more don't forget the market mechanisms, or whatever you want to name it, as mentioned before that would spread the price reduction effect. 

The most striking example of the latter consideration is the current trend of the price of oil which is downwards due to the fears of a global economic recession.

The OPEC, taking these predictions very realistically, in order to avoid to lose further profits, due not only to the decrease in the oil quantities required but also to the lowering of the price per barrel has just decided to cut the production that would determine an increase in that price.

Turning back to the solution proposed, after a short period the companies, because of the normalization of the costs of gas and energy that are going to be transferred in a lower amount to the prices applied on the market, would see an increased demand for the respective products from consumers that in their turn will benefit from the reduction in their gas and energy costs.

In the end, hoping also for parallel solutions, the price of gas and energy will stabilize at an acceptable level and the improved purchasing power will favor a positive rebound for the economy as a whole.

Well, as you can see it is a simple solution based on a simple reasoning at the base of which there are no big and complex technical processes but an idea that requires only some Country/Europe's regulations which causes the companies to change their work organization in order to create economic benefits for them and for the whole community.

As a countereffect, some firms could be tempted to lay off some of their workers as a result of the reduction of the working days to benefit even more from that situation in the short term.

The national/european lawmaker should regulate also that case...