The 2022-23 Economic Crisis Megathread

[celedhring]

Spain's advance inflation data for October shows another big drop (from 8.9 to 7.3) for a third consecutive month. Most of it from falling energy prices. Non-energy inflation is flat, which I guess it's better than "skyrocketing" and hopefully starts to fall in the following months (it does tend to lag behind).

[Admiral Yi]

Spain's advanced inflation data shows another big drop (from 8.9 to 7.6) for a third consecutive month. Most of it from falling energy prices. Non-energy inflation is flat, which I guess it's better than "skyrocketing" and hopefully starts to fall in the following months (it does tend to lag behind).

Sweet, sweet fracked American natural gas filling the void.

[Zanza]

Gas price was briefly negative this week as the storage tanks are full and there is an over-supply.

[Zanza]

The Netherlands may be the first country to hit the limits of growth

The other morning I cycled around the Dutch town where I grew up. Behind our old house, the field where I spent half my childhood is now covered with homes. So is my old football club. My high school is now in a built-up area. At the local train station, the bike shed was full on a Saturday afternoon. When I got to Amsterdam, the business-traveller economy appeared to have broken down: endless waits for Ubers, nobody at hotel reception, restaurants closed at lunchtime for want of waiters. 

I know over-construction and understaffing are now global problems, but they are particularly acute in the Netherlands. The country has run out of space and staff. Sure, a recession may temporarily loosen the jobs market, but the problem was acute pre-pandemic and will simply resurface whenever growth resumes. The Netherlands is probably the first country to hit the limits of economic growth.

Other overdeveloped places such as the Bay Area, New York and Singapore may follow, running out of room for new workers and businesses. This raises the question: can a rich place be happy if its economy stops growing? 

With hindsight, the Netherlands was too well-suited to the era of globalisation. The trading nation with Europe's biggest port experienced 26 years of unbroken economic growth until 2008, then a world record. Now it tops ETH Zurich's KOF Globalisation Index as the world's most globalised country.

And so its population mushroomed. When the counter hit 14 million in 1979, Queen Juliana said, "Our country is full." In 2010, Statistics Netherlands said the population would probably never reach 18 million. Today it's 17.7 million and rising. The country has 507 people per sq km, nearly five times the EU's average. Worse, the quantity of liveable land will shrink due to a paradoxical mix of rising seas and droughts damaging the foundations of houses.

But the Dutch economy's demand for new workers seems insatiable. Eighty-four per cent of employers report labour shortages, one government study found. Recruitment signs are almost standard in shop windows. Employers even offer new recruits free holidays. 

One constraint on growth is that the Dutch enjoy the developed world's shortest average work week, at just 30.3 hours. Six workers in 10 – predominantly women – are either part-timers or temps. The government is planning a bonus for anyone going full-time, but many people prefer daytime cappuccinos in the local café, assuming they can get served. Why give up your relaxt life and permanent contract to alleviate understaffing in old-age homes? Importing more migrant workers isn't a popular idea. In June, the far right shouted down the minister who suggested recruiting youths from poor French suburbs.

And so every growth opportunity hits capacity constraints. I recently queued for three hours at Schiphol airport, global aviation's second-biggest hub, because it cannot find enough security guards. The foreign students flooding Dutch universities cannot find housing. Amidst an energy crisis, the Dutch are closing Europe's largest natural gas reserve because, in a packed country, drilling-induced earthquakes upset the neighbours.

Or take ASML, the global leader in chipmaking equipment. Based in a small town in the relatively quiet Dutch south-east, it's a pillar of the western alliance in the budding confrontation with China. ASML hires hundreds of new employees every month, but just try finding them homes and babysitters. And local treehuggers have delayed ASML's dreamt-of bike path to its headquarters.

Fantastically productive Dutch farms have made this tiny country the world's second-largest agricultural exporter. But many of its 15 million pigs and cows live next to protected natural areas, so their nitrogen emissions break EU laws. The government is enraging farmers by closing farms. In theory, that frees space for new homes, but who will build them and where would the builders stay? In short, to use Liz Truss's language, Dutch reality is an anti-growth coalition.

Even automation wouldn't fix sectors like old-age care and construction. Eventually the country might have to target "stabilisation of population size" by limiting labour migration, advised the head of the Dutch labour inspectorate. The new State Commission Demographic Developments 2050 – and Dutch state commissions shape policy – may agree.

Does a rich country need more carbon-emitting growth? "We focus far too much on purchasing power, but extra purchasing power barely makes us happier," says Sandra Phlippen, ABN Amro Bank's chief economist. However, she notes, we've seen in recent years how people in stagnant economies "become angry and unsatisfied". If the limits of growth are in sight, watch out. 

https://www.ft.com/content/4c56c9b2-f4ad-4956-9216-655acebd845d

Maybe a first glimpse of our economic future?

[Josquius]

I wish. The Dutch are great at development. Doing lots of land reclamation, building flats, and transit and cycling oriented development.
If other countries learned a bit from the Netherlands in development the world would be a better place.

[Zanza]

The French and German economies grew against expectations at 0.2% and 0.3% respectively in the third quarter. Economists now expect a contraction in the fourth quarter.

[Maladict]

Maybe a first glimpse of our economic future?

Maybe, maybe not. The government just signed off on a plan to build a million new houses over the next ten years. Whether that's a realistic goal, I don't know.

[mongers]

Some of the reporting on the 'Cost of Living Crisis' is a rather unfocused, there is a item on the bbc newsight about prepayment meters being forced on people, one illustration was a woman who now only had 60p of electricity left on the meter.
 
What they didn't enquire about was how she ran up a debt of 11,000 quid with the electricity company, did she not realise she was overspending a bit and should be taking action, maybe 'economise?

[Tamas]

Some journalist's mortgage is nearing the end of its fixed term, I recon

https://www.theguardian.com/commentisfree/2022/nov/02/the-guardian-view-on-the-bank-of-england-on-the-side-of-profit-not-people

[Sheilbh]

So I was on the Guardian Liveblog of today's BofE rise and in the round up of events before the BofE's committee met, they included a line from Lagarde that a "mild recession" is not enough to tame inflation - and, again, it just makes me wonder about how we're fighting inflation.

In the US (and the UK a bit) there is real inflation in the economy so I can see how traditional policy responses make sense. But I just don't think that applies to Europe where the big price rises are input costs due to global events. I don't see how rate rises or a mild recession can help - a big recession might cut consumption/demand enough but I'm not sure if that's the right answer here.

It feels to me like there's a war in Europe and Europe (including the UK) is in an economic war with Russia. There are huge supply shocks because of that. But we are following peacetime, standard economic policy and I don't know if that's sustainable.

It also makes me wonder given that other supply shocks - I think food inflation in Germany for example - are also coming from outside. Whether it's Chinese lockdowns, disruptions to food supply, climate impact on food production. I've said it before but I'm not sure that our monetary/economic policy model is the right one for dealing with the impact of Ukrain on European prices - but I think that's also more likely to be the near future. We will experience more and more supply shocks because of, if nothing else, climate. It feels to me a little bit dancing on the Titanic (or maybe like the inter-war years) of dealing with emergency situations with a policy framework for "normal times".

Maybe I'm wrong but I just still don't see the connection between European interest rates and Russia's invasion of Ukraine.

[Tamas]

As we keep going back to this, how does "normal" inflation get affected by the rate hikes? By the rate hikes reducing demand, don't they?

We talk about supply shock as if demand being higher than supply is somehow a separate case from demand being higher than supply.

[Sheilbh]

As we keep going back to this, how does "normal" inflation get affected by the rate hikes? By the rate hikes reducing demand, don't they?

Yeah reducing demand and, I think importantly, the bargaining power of workers. But there is no wage-price spiral. Wages in Europe are going up by about 5% and prices by about 10% - wages are chasing prices, not the other way round.

We talk about supply shock as if demand being higher than supply is somehow a separate case from demand being higher than supply.

It isn't. My point is if there are large external shocks - in this case, in my view, Europe in an economic war - the requirements are different. This is where I think wartime economics starts to come in where you're looking at things like price controls, profit caps, rationing etc.

For example we're seeing gas/energy intensive industries in Europe shutter or reduce production - I'm not sure that should just be purely market driven by price but also reducing demand, when it is the result of this sort of external shock. Europe responds correctly to the Russian invasion of Ukraine but accidentally de-industrialises certain doesn't strike me as necessarily a good outcome.

I think the same will apply to climate shocks - I don't think we can just keep cutting demand (and, again, possibly losing sectors of the economy) but instead will need a response that at least sustains the economy and in particular strengthens our resilience. In the immediate case, for example, it seems that investment in alternative energy sources which is capital heavy probably shouldn't be hit by big interest rises.

It feels like addressing, say, economic war with Russia, climate, Chinese lockdowns actually probably need cheaper money.

Edit: And I think the UK is in a slightly different situation and the US is in a very different situation.

[Zanza]

The Bank of England has warned the UK is facing its longest recession since records began, as it raised interest rates by the most in 33 years.

It warned the UK would face a "very challenging" two-year slump with unemployment nearly doubling by 2025.

Bank boss Andrew Bailey warned of a "tough road ahead" for UK households, but said it had to act forcefully now or things "will be worse later on".

https://www.bbc.com/news/business-63471725

 

[Sheilbh]

Yeah - shallow but long:

Some journalist's mortgage is nearing the end of its fixed term, I recon

Just read this and that is a very weird editorial.

Especially in the context of the Guardian which has for a decade written about low rates helping the financial sector (and it's part of the left's "Financialisation" theory of everything, but now flip around and say raising rates also helps the financial sector? But also it seems like their origin theory of it is the inflation target and not having a dual mandate like the Fed - but I'm not sure dual mandate Fed v BofE have had particularly divergent policies in the last decade or now.

FWIW I think there were more problems with the decade of QE - but the bit that seems missing in the Guardian piece is that I think the BofE (and all other central banks) were setting policy because fiscal policy was not being used the way it should have.

[Sheilbh]

So this isn't what I meant but a really interesting piece from Helen Thompson - whose book Disorder is really good on where we are in the 21st century. On the conflict facing central bankers and other policy makers between financial stability and inflation:

When finance and oil collide
Central banks are being pulled in opposing directions by energy inflation and market instability.
By Helen Thompson

During the 2008 financial crash Western policymakers learned to adapt to what then might have seemed like prodigious challenges. The remedies they devised are now exhausted. What comes next will require a near-total reinvention of policy for a much more dangerous world.

On 9 August 2007, which the former boss of the bank Northern Rock described as "the day the world changed", the international financial system broke down. The problem was that banks found themselves unable to borrow in short-term funding markets. Initially powerless to unfreeze these markets, the US Federal Reserve was forced to adopt a new set of policies. It began by offering dollar swaps to foreign central banks later that year. Then, in 2008, it launched the first of its quantitative easing (QE) programmes. Originally aimed at the American mortgage sector, QE soon became the second means by which the Fed managed global financial markets. Since then, at moments of serious economic volatility, most dramatically during the Covid-19 pandemic, the Fed has reached for the same playbook.

This post 2007-2008 monetary regime also inadvertently addressed the oil crisis that had destabilised the world economy since the mid-2000s. By 2005 global oil production was stagnant at a time when Asian demand was rising. The result was a massive surge in oil prices through 2007 and the first half of 2008. This pushed Western economies into recession, causing prices to crash through the second half of 2008. Freed from any concerns over inflation, the Fed drove interest rates down to zero. This created an environment of extraordinarily cheap credit for high-cost oil producers. Searching for returns anywhere they could find them, investors poured money into energy companies. The American shale sector boomed. The injection of a new supply of oil allowed the world economy to grow even as Asian demand kept increasing through the 2010s and total production in the Middle East, Russia and elsewhere remained largely static.

The political and geopolitical consequences of the new monetary remedies were significant. By inflating asset prices, QE turbo-charged wealth inequality. Those countries that didn't have access to the Fed's dollar swaps were acutely vulnerable. Ukraine's exposure in 2013 triggered the sequence of events that led from President Viktor Yanukovych's request for Russian financial support to his removal from power to Vladimir Putin's annexation of Crimea in March 2014. By 2015 the glut of oil supply was destabilising the most vulnerable net oil exporting countries, notably Venezuela and Iraq. Meanwhile the shale gas boom created fierce competition in Europe's gas markets between Russia's Gazprom and American liquid natural gas (LNG) exporters. This divided the EU between those, like Poland, which began to import from across the Atlantic and those, like Germany, which remained wedded to Russian gas at a time when Russia had seized part of Ukraine.

The re-emergence of the US as the world's largest oil and gas producer also incited counteraction. Russia constructed a gas pipeline to China and built up its own LNG export capacity. Moscow also reached a rapprochement with Saudi Arabia, and Russia's entry into the world's oil-producers cartel in September 2016 turned Opec into Opec Plus.

For all the turmoil after 2008, the monetary realm – dollar swaps plus QE – absorbed the economic shocks for most of the 2010s. The international financial system and oil markets were largely parallel worlds: profoundly connected in the deep plumbing of the global economy but separate on the surface. For the last few years, however, they have been colliding. As a result, the Fed has been pulled in two opposing directions, between responding to oil-generated inflation on the one hand, and needing to calm financial markets on the other.

This problem was first evident in 2019. At that time oil production declined without a concurrent fall in demand. Even if the US shale sector continued to grow it couldn't compensate for the underlying weak supply from the world's other producers. Under these conditions, energy-driven inflation was a significant risk. Already, in 2018, the Fed had raised interest rates four times to restrain inflation, and promised further increases for the following year. But even this moderate monetary tightening proved hazardous for the financial markets. Spooked, the Fed cut rates three times in the second half of 2019. That September it also introduced another QE programme.

The pandemic provided a temporary respite. The early days of the pandemic emphatically demonstrated that only QE and dollar swaps could stabilise the financial markets. With everyone in lockdown, and demand crashing, the supply of oil was not then a concern. But the world economic recovery immediately reintroduced the problem of oil. By mid-2021 a number of Opec Plus producers, including Iraq and Kuwait, were struggling to meet their quotas, pushing prices up. In August 2021 Joe Biden's administration asked Opec Plus to increase production, but Saudi Arabia was not inclined to assist a president who had shown no interest in positive relations with Riyadh. To compound the mounting inflationary pressures, gas prices rose sharply in Europe and Asia, an upshot of Putin's pre-war move to restrict gas supply to Europe and a sharp increase in China's gas demand.

In the summer of 2021, confronted with energy-driven inflation, some non-G7 central banks, including Brazil's, began to increase interest rates. By contrast, the Fed resisted any move until March this year. Whether or not this reflected reasonable judgement that the inflationary pressures were transitory, the Fed is simply constrained by the fact that monetary tightening is not compatible with financial stability. In the highly-leveraged international financial system, financial actors need permanently liquid bond markets to support their borrowing. As was acutely demonstrated when British pension funds found themselves on the precipice after the UK's mini-Budget on 23 September, any absence of liquidity risks disaster. While the Tory government's fiscal plans might have been considered reckless at any time, Kwasi Kwarteng promised a new borrowing spree when it had been evident for months that there was low liquidity in bond markets. Under these conditions, there is, quite simply, a limit beyond which central banks will not be able to raise interest rates without precipitating a systemic collapse – that limit is in sight.

By cutting rates or returning to QE, central banks will jeopardise their credibility as guardians of price stability. None of the recessionary fears for Western economies, weak demand in China or US sales from its Strategic Petroleum Reserve have killed energy inflation. Even before the formal cuts in production that Opec Plus announced on 5 October (due to take effect from November), the inability of several Opec members to produce to quota was keeping oil prices at a higher level than is acceptable to the Fed. Leaving aside diplomatic support for Moscow, Saudi Arabia is clearly unwilling to allow oil prices to crash to the levels recorded in the second half of 2008 and early 2009 during the last pre-pandemic recession. The Saudis now have a strong interest in maintaining a floor for prices at a higher level than what is compatible with the Fed's newfound determination to suppress inflation. Unlike after 2008, monetary policy cannot act as a shock-absorber for energy problems by financially incentivising more supply while the consequent energy inflation prevents monetary policy acting as a shock-absorber for the financial markets by incentivising interest rate hikes.

Even without Putin's war against Ukraine the underlying predicament – the collision between finance and oil – would exist. But Russia's territorial conquest has become an extraordinary secondary energy shock: in the middle of a pre-existing energy crisis the entire energy superstructure – who sells what fossil-fuel energy in what form to who and by what transit – is in turmoil. The competition for gas leaves Asian countries that can no longer access the LNG market, such as Pakistan and Bangladesh, without supply; meanwhile the European countries that have paid exorbitant prices for LNG labour under burgeoning trade deficits. Each outcome presents a currency risk at a time when almost all countries' currencies are weakening against the dollar and when depreciation against the dollar only increases the costs of oil and gas imports.

War always lets loose multiple contingencies, and Russia's war is no exception. But this war pursued by the state that has hitherto been the world's most important energy exporter is also pressing hard on pre-existing fault lines. In the energy war, Opec Plus's plan to cut oil production has been to Russia's advantage, just when Ukraine has been making military progress. It is hard to find a historical precedent. Where wars have been fought as both battlefield and energy wars, as in the Second World War, energy and military power have worked in tandem. In the Ukrainian theatre they are not doing so. Meanwhile, the international financial system's vulnerabilities can only be defended by actions that will intensify the inflationary problems caused by the energy war. Since the risks in bond markets are so acute, monetary policy in Western countries will soon be directed at financial stability not oil prices. It will be left to governments to confront energy inflation and energy scarcity in ways for which the last decade and a half has left politicians unprepared.