Incoming stimulus
equals incoming higher inflation
The UK got a new prime minister elect on Monday. While she is awaiting her appointment with the Queen, she has been busy drafting plans. First she wanted to make sure everyone knew that she was a stark raving mad lunatic when it came to policy in the Ukraine-Russia skirmish.
She followed this up with proof that she has no idea how economics, math, or physics works.
Truss intends to subsidize UK citizen’s energy bills to the tune of £130B which is roughly $150B. Of course this will provide very temporary relief. You don’t have to go far to find another example of a government subsidy backfiring rapidly.
Inflation Reduction Act promises $7,500 electric vehicle credits after Ford and GM raised prices
Ahead of the Inflation Reduction Act extending the tax credit of up to $7,500 for purchases of new electric and hybrid vehicles, Ford and General Motors announced price increases at similar rates.
Now the UK is looking to make this same mistake at a much grander scale. I expect energy to get much more expensive in the UK once this stimulus gets put into play. Their industrial and manufacturing companies are already experiencing a large strain to stay in business. I expect it won’t be long before we hear of major manufacturing businesses shutting down like I’ve written about in the rest of Europe.
Speaking of which, Europe’s top steelmaker has decided to close plants. The “exorbitant rise in energy prices” has lead to another major manufacturer to call it quits. They also emphasized a “weak market demand”, however, I believe that will be temporary. As more plants close, the few that remain open will struggle to keep up with demand and prices will squeeze higher.
Also getting squeezed higher is coal.
A month ago, David Hay wrote an article about Europeans switching to burning wood pellets. In it he asked a question that intrigued me at the time.
Ironically, a single uranium pellet, the size of a human fingertip, contains as much energy as a ton of coal. It would be fascinating to know how many wood pellets it would take to equal one uranium pellet. Unquestionably, from a fuel efficiency standpoint, it is yet another most unappealing tradeoff, one I’ve often addressed.
I couldn’t resist and found the answer. Roughly two tons of wood pellets is the equivalent of one ton of coal. European citizens have been stocking up on wood, wood pellets, and coal. I don’t believe this trend is going to end soon. We have barely scratched the surface of autumn and the market for coal is screaming higher. What do you think this chart is going to look like in three months’ time while Europeans are doing their best Jack Nicholson impression?
The UK wasn’t the only country to announce an energy stimulus package. Germany intends to spend €65B (which is roughly $65B). The efforts to stamp out inflation will fail as long as governments are stimulating demand.
Inflation has a self burn-out mechanism. If no more money would be printed or handed out, demand and supply would catch up to one another. Brendan Brown at the Mises Institute did a great job outlining how this would happen in an article back in April.
Inflations have an inbuilt mechanism which works to burn them out.
Government (including the central bank) can thwart the mechanism if they resort to further monetary injections of sufficient power.
Hence inflations can run for a long time and in virulent form. This occurs where the money issuers see net benefit from making new monetary injections even though likely to be less than for the initial one which took so many people by surprise.
Ultimately at some point the cost-benefit calculus shifts in favor of government not blocking the operation of the burn-out mechanism.
With the stimulus beginning to flow, inflation will not magically abate. This commodity super-cycle is just getting started. Also, if the EU was serious about their energy policies, they should look at what their actions are doing and try something different (like nuclear!).
It is amazing how each leader is succeeded by someone less competent and less aware.