The ECB is leaving the interest rates where they are, and some commentators have been criticizing the ECB for “not fighting inflation”, and I would argue that they did so naively.
Henry Thornton in 1802 made the same argument about a supply shock and a trade deficit not induced by a too loose monetary policy, but due to a bad harvest in “corn” supply of the country.
He argued that this temporary supply shock, which created a trade imbalance and a high level of prices, should not be fought with interest rates to try to stick to a rigid peg to Gold (as the trade deficit would weaken the BoE notes versus Gold and, as a result, versus all commodities).
He argued that raising interest rates would not change the internal supply situation responsible for the higher prices and probably would make it worse by making credit more difficult for farmers.
So Mrs Lagarde, Henry Thornton, seminal monetary thinker, the father of modern central banking according to the Fed, managing the feat to be praised by both the Keynesians AND the Austrians, WOULD HAVE GIVEN YOU AN A+
On the other hand @LLequeu, I am not sure your post would have been much appreciated; you would probably get an F-
https://x.com/LLequeu/status/2034819467918942291
So of course a bad harvest, a supply shock, will mean a trade imbalance.
But this trade imbalance is in no way due to a monetary policy that is too loose, that is resulting in monetary inflation, internal prices rising, loss of competitiveness in terms of trade, followed by a fall in the currency. So raising rates in that situation is the wrong remedy.
So the situation is temporary, and the remedy is limited private expenditures and more exertion and increase in individual industry. In short, tighten your belt and produce more to export more and to pay for those balances.
And to understand how to provide against this pressure, and how to encounter it, is a great part of the wisdom of the commercial state.
So Mr Leuqueu, how would the increase in individual industry, necessary to create the means of payment, be helped by higher rates, and how would a supply shock be mitigated by alternative sources of energy (think about the long-term cost of financing of a windmill facility) if the ECB were to raise rates?
In a supply shock, monetary tightening doesn’t just fail to fix the problem — it can delay the supply response that would fix it.
F- Mr Leuqueu, F-
And by the way, one of the easiest critiques of the post-1873 Gold standard is that it mechanically tied CURRENCIES to a fixed parity regardless of the reason for the weakening of the peg against Gold. And in the case of a bad harvest, the case from Henry Thornton is absolutely clear. Raising rates because of a supply shock?
No no no.
There are 4 dimensions: supply, demand, money up, money down, and a price increase is not necessarily due to loose money.
The tightening of rates would WORSEN the funding of supply mitigation (rooftop solar panels, funding of wind power or solar).
The tightening of rates DOES NOT help mitigate the imbalance and provide the means of payment by individual industry.
This section also highlights that Europeans have to pay for imports of energy by exertion and individual industry, with a price of fossil fuel which is CARTELIZED.
Is anyone doubting that OPEC is a cartel?
No.
Does anyone remember his/her antitrust economics and how a cartel’s objective is to extract abnormal surplus and a rent?
No apparently.
Is anyone then surprised that this abnormal rent results in lavish spending, Lambos in the Gulf, and recycling lavishly in biotech, AI, UST, what have you, that’s USD denominated?
And what happens when the energy is not paid for from abroad, creating a trade imbalance, but generated cheaper by paying in local currency for renewable power installation crews, and for wind equipment, which in the case of Europe is produced domestically?
The war is not in IRAN folks. Spain just blew up the cartel with its renewables. Minimal impact of the Iran war on its power prices.
https://x.com/FT/status/2034495454478508477
I’ll let you figure out the implications.