Supply shocks and how to produce them (the failure of green)
I'm very happy to be back here, spending a little more time with you. The black sewer does not allow us to organize a debate, elaborate a thought, find and reference in its tumultuous whirlpools the useful material that would also be found there, but which is immediately overwhelmed by wave after wave of dung. The exchanges are too impromptu and rapid, the space is still compressed, even after the enlargement of the constraint on the number of characters (an enlargement which I have never been very enthusiastic about, like other enlargements, because I found the epigrammatic dimension interesting, while I find "er microblogging" unnerving…).
A few weeks of work here have reactivated the debate among you, allowing us to focus on our arguments and allowing the most curious to submit a lot of interesting material to us. These few weeks of work have also highlighted a rather peculiar and only apparently paradoxical phenomenon. In fact, it happens that, with a certain regularity, it is precisely the interlocutors who are theoretically most favorable to the "market", to "liberalism", who find themselves completely ignorant of the rudiments of that thing that "students" would call basic economic reasoning . Not a great science: simple common sense, that of any massai*. It is no coincidence that we coined the definition of "spaghetti-liberalists" here: because these heralds of the free market know nothing about freedom or the market, and to waste on them a category that is all in all endowed with its own intellectual dignity such as that of "liberalism" it seemed to us an insult to the history of economic thought, but also, more simply, an insult to thought.
Among the followers of this orientation, which has its most representative exponent in Oscar Giannino, we have here among us our friend Marco, who I am sorry to have disappointed . The fact is that his reasoning according to which "one currency is better than another if it has the lowest rates" just doesn't hold up! Whatever the market, the best price is the equilibrium one, not "the lowest". In fact, a price that is too low encourages excessive demand on the one hand, and deteriorates the quality of the product on the other (because to satisfy excess demand it is necessary to lower production standards: work faster, use less valuable raw materials, etc.).
This is particularly true in the credit market!
On the demand side, i.e. those asking for a mortgage, interest rates that are too low incentivize families to go into excessive debt to support their consumption ("Take today and pay in 36 installments starting from next Christmas!") and their investments real estate (with the creation of real estate bubbles which we have witnessed in Spain, but not only). Furthermore, too low rates on deposits or on other traditional low-risk savings investment instruments push families to take on excessive risks (because their search for more profitable financial products leads them to purchase much riskier products). The pensioner from Civitavecchia was killed precisely by this market distortion.
But also on the supply side (i.e. of the banks) a rate that is too low creates problems: in the meantime, it creates an incentive to recover on volumes what is lost on the margin, and therefore ultimately to grant credit in a way that is not particularly accurate (and hence, i.e. from the attempt to stem this distortion, the regulatory burden that the Banking Union imposes on credit institutions). Then, it tends to shift the banks' activity from that of savings intermediation (collection of deposits, disbursement of loans) to that of outlets for (risky) financial products, making life rather complicated for the many medium, small and micro-enterprises for such as bank credit could still be a (physiological) source of financing. There was no good in the fact that Greek or Italian rates were the same as German ones, and those who did not understand before that this was a gigantic market distortion have, in many cases, had to understand later.
Then there are also those who will never understand it, like Marco, but we still love him.
Today, however, I wanted to talk to you about something else that I don't think Marco will understand (which won't stop us from continuing to love him). I was thinking about it today,
as I descended towards Rome from the not-so-frozen highlands of Abruzzo, under a livid sky, whipped by a sharp, freezing drizzle. I kept mulling over one of the graphs I had commented on with you:
( here ), an overall surprising graph because it shows how the pass-through between international energy costs and national inflation was not altered in a dramatically significant way by entry into the Economic and Monetary Union: in the 1970s inflation at 20% with a 200% increase in energy prices, in the 1920s inflation at 8% with an 80% increase in energy prices…
From this reflection on supply shocks and how their consequences have not changed over time, despite the continuous and profound evolution of technologies and institutions, my thoughts went to a consideration made by Blanchard in his commentary on the Draghi report .
I'll copy it below:
In his homework Draghi must naturally say that "green" will be (or must be) a driver of development etc. etc. Blanchard explains to him dryly why he can't be. It cannot be because the fight against climate change conducted within the predominant paradigm (that of the climate-altering effects of CO2) is equivalent to transforming CO2 from a waste product (as a result of combustion) into a raw material such as oil (in how much producers have to buy the "permission" to emit it, or have to spend in another way not to emit it), imposing an artificially high price on it for the precise purpose of limiting its use.
It follows that green is a gigantic supply shock, which as such can only have recessive effects.
In short: "green" is a shift from equilibrium E to equilibrium E in the standard Keynesian model:
model that I explained to you here , not by chance in relation to the increase in bills (I would like to point out that, as the post predicted, the scientist did not want to remain in the government…).
Please note: I am not interested, and neither should you be interested here, in refuting or contesting the paradigm! We bow, we prostrate, we prostrate at the feet of the paradigm! It's fine with me (no!) to think that things are exactly like this, that my every exhalation act compromises the balance of the globe.
All right.
The fact is that, if we think like this, in economic terms we are transforming waste into a raw material, in short we are making CO2 something similar to oil, and therefore its desired, desired increase in price is in fact equivalent to an oil shock, as those of the 70s.
Some rather obvious consequences arise from this: meanwhile, for these reasons green will have an inflationary impact on our economy, an impact that is difficult to quantify (because I don't believe that the statistical basis for doing so currently exists, given that the regulatory framework itself is constantly evolving ), but which can be expected to be very protracted over time. We are in the hands, as Blanchard notes, of an unpredictable element: the speed of technological progress. Until this leads us to the Eldorado of superior and cheap technologies, the consequence of the self-inflicted supply shock will be a recessionary economic climate, a loss of household purchasing power and business competitiveness, while the vast rest of the world, not caring about the paradigm, it will prosper and flood us with its "dirty" products.
Basic economic reasoning .
How much longer will it take to understand that this political project damages our freedom ( as even Pan di Zucchero has accused it of today! ) because by distorting the most elementary economic rules it inevitably causes discontent that can only be managed in a repressive way?
The two things go together: market distortion and censorship of thought are two forms of coercion of freedom and they are the cause of each other, in a downward spiral whose end is not in sight, despite the developments we reported in previous post.
It will take a lot of patience and attention…
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2025/01/shock-di-offerta-e-come-produrli-il.html on Tue, 07 Jan 2025 19:00:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.