Category Archives: markets

I Wonder

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The ECB raised its baseline interest rate earlier this week, doing so, it said, in response to the jump in energy prices, which has driven inflation above 3% in the eurozone. Inflation in the rest of the economy—and it’s the same in the US and in the rest of the OECD-esque economies—remains largely muted and under control except to the extent energy costs percolate through them, impacting personal and commercial transportation and shipping, food production, manufacturing, and so on. It’s energy inflation that’s at the core of inflation in today’s overall economy, not a broad excess demand or supply deficiency.

So, I wonder.

When a central bank raises its baseline interest rate, it’s using, if not a cudgel, at least a two-handed sword to address a problem. That’s appropriate, when the problem is broad. But if the problem is narrow, a dagger would seem more appropriate (to continue the metaphor, or perhaps a scalpel, to soften the imagery a little).

Today’s inflationary problem seems narrow, for all its broad effect. It’s energy that’s causing the overall inflation. If raising interest rates is the way to combat inflation, what if a central bank were to raise interest rates only on basic energy production—oil, natural gas, and coal at their input stage, and solar and wind facilities at their component manufacture stage—while leaving its otherwise baseline interest rate unchanged for the rest of the economy?

Clearly that would take some restructuring of its baseline interest control, separating out energy from the rest of an economy. That might demand legislative support. But there’s no reason a farmer should have to pay a higher interest to borrow to get his seed for next year, when it’s core energy that is impacting the cost of his money and not a shortage of seed or a flood of farmers into the market for that seed. It’s the same for folks borrowing to buy a house or car and for those building houses and factories. It’s underlying energy, not a shortage of labor or a spike in buyers, that’s inflating the cost of their money.

On the other hand, raising interest rates on basic energy production would reduce the amount of energy produced. That would lead to reductions in the supply of all the things to which energy is central in their production. The demand for energy is pretty inelastic in a modern economy—it’s going to be produced, within broad limits, regardless of price, and that price increase still is going to percolate through an economy.

So I wonder (still I wonder). It seems to me that targeting the inputs to energy production—crude oil, natural gas coming out of the well, coal leaving the mine, metals arriving at the solar panel or windmill factory while leaving rates on the rest of an economy alone would reduce inflation growth in the rest of the economy while limiting supply deficiencies more than does raising interest rates all across an economy.

The Cost of Ethanol-laced Gasoline

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A number of corn State Senators, Chuck Grassley (R, IA), Joni Ernst (R, IA), Deb Fischer (R, NE), Pete Ricketts (R, NE) and Roger Marshall (R, KS), have written about the financial benefits of ethanol in our gasoline.

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average.

Compared to what, though? See below.

And

E15 is a net positive. We know E15 will lower prices at the pump….

Again, compared to what?

I won’t go into the production costs of cars whose fuel-related seals must be designed to handle the corrosive nature of ethanol, nor will I address the maintenance costs of cars burning ethanol-laced fuels, even with those corrosion-resistant (but only resistant) seals, nor why the percentage of ethanol in gasoline tops out at 15% before ethanol’s corrosive nature overwhelms even these toughened up seals.

I won’t mention, either, the increase in the cost of food, including meat, from the diversion of corn away from the grocery store or the production of animal feed toward the production of ethanol. I’m only going to mention the immediate fiscal costs to the consumer of ethanol-laced gasoline, taking corn-based ethanol, corn being the primary source today for ethanol production, as my illustration.

It costs $1.74 in 2001 currencyto produce a gallon of ethanol from corn, and it costs 95 cents to produce a gallon of gasoline.

A gallon of E15 gasoline consists of 85% gasoline, and 15% ethanol. According to my 3rd grade arithmetic, the costs embodied in that gallon are 85% of $0.95 plus 15% of $1.74, or a skosh under $0.81 plus a skosh over $0.26. That’s $1.07 per gallon of the hybrid fuel. Using my 3rd grade arithmetic again, that’s $0.12 per gallon more than for unadulterated, and much easier on the car, gasoline.

That’s not cheaper fuel for our cars; it’s much more expensive. Those Senators bragged that

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average. That could mean around $400 per year in savings for a US household—precious dollars that could be spent on other needs.

The irony in that isn’t lost on me, even if it seems lost on those Senators. Instead of those 30 cents per gallon (to take the middle of their range) in ethanol-laced gasoline, not having to spend that baseline of 12 cents extra per gallon at all, all year long, would save roughly $160 per US household—precious dollars that could be spent on other needs, like food, including meat, made cheaper by no longer diverting corn to making alcohol. (OK, a little mention.)

Yet Another Reason

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The European Union is moving toward passing legislation that would allow it to curb imports of heavily subsidized foreign products. The legislation doesn’t single out any particular nation; although, the Peoples’s Republic of China is infamous for such subsidies.

Those subsidies allow PRC businesses to sell their products at less than their cost of production in order to sell at lower prices than European businesses can due to their own, unsubsidized, costs of production. That allows the PRC to put those businesses out of business and to seize nearly all of the market share. In the aggregate, this cascades into steadily increasing PRC influence over European economies.

Naturally, the PRC wants to continue this domination, so it’s threatening countermeasures if Europe continues with the impudence of defending itself.

Chinese authorities could initiate anti-discrimination and supply-chain security investigations into the EU’s “overcapacity instrument,” a social media account run by China’s state broadcaster said Friday, citing unnamed sources.
If the EU advances the tool, China will take immediate action and deploy comprehensive countermeasures, it added.

Of course, that retaliation wouldn’t matter if Europe’s nations were doing no business with the PRC or with businesses domiciled there.

The PRC keeps providing reasons for discontinuing business with or within it. It’s time for the EU and for Europe’s nations individually to act on at least some of those reasons, for their own economic survival.

The PRC’s Economic Arsenal

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The People’s Republic of China is stepping up its economic war on us, adding additional weapons to its arsenal. Those weapons include

a blacklist for foreign firms it deems hostile, a law authorizing punishment of any company that helps enforce U.S. sanctions on Chinese targets, a rule ordering Chinese parties to ignore those sanctions outright, and expanded powers for its antitrust regulators to kill cross-border merger deals on national-security grounds.

Two responses come to mind. One is that Mark Zuckerberg, Meta’s boss and controlling shareholder, should simply ignore the PRC’s order to unwind its acquisition of Manus. Meta should, instead, proceed with what it has already collected via Manus. The unwinding is strictly a matter between Manus and its government masters. To the extent the PRC then takes economic or legal action against Meta, that should finally demonstrate even to Zuckerberg the lack of utility in doing any sort of business within the PRC.

The other response is that all the players should proceed as though the PRC’s threat to sue or its actual suing have no effect. Such suits, occurring as they will within PRC courts, can have no effect outside the PRC’s borders. In the event the PRC then acts against those intermediate businesses with operations inside the PRC, see above.

Mistake

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President Donald Trump (R) is pushing Congress to include in its next budget enactment a 50% increase in the US quota contribution to the IMF, a dollar increase of some $55 billion.

The mistake is in this:

the cost to US control over IMF resources, which Treasury conceals with its claim in the budget that the “equiproportional” quota increase “would be fully offset by a reduction in” the use of debt, “all of which will keep the IMF’s overall lending capacity constant.” What Treasury doesn’t disclose is the hit to US power when the IMF gets more of its resources from equity than debt.

That hit comes from voting on IMF lending which depends on the fund’s use of debt via New Arrangements to Borrow which it does in order to raise lendable monies. This is loosely akin to a bank’s need for extending savings accounts to customers in order to raise funds to lend to other customers.  It takes approval by 85% of IMF voting shares for the IMF to borrow, and the US has had, heretofore, 16% of the voting shares, giving us veto power over IMF’s borrowing.

So long as the IMF has to borrow to lend, the US can exercise a large measure of control over IMF lending. But the US quota increase would shift the IMF’s ability to lend to those quota funds, and with that shift, the US would lose its current voting veto power, IMF could lend without serios oversight.

One upshot of all this, if it is passed, is an increase in the People’s Republic of China’s ability to borrow from the IMF and thereby to prop up its own internal excessive borrowing. And helping out an enemy nation like that is a very serious mistake.