Submitted by Taps Coogan on the 25th of October 2019 to The Sounding Line.

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Daniel Lacalle, Chief Economist at Tressis Gestión and author of ‘Freedom or Equality,’ recently spoke at a Bloomberg event about where risk is hidden in the economy, why inflation is higher than it appears, and why central bank policies have failed to stimulate more capital investment. Mr. Lacalle notes that crises don’t happen in areas where people perceive risk. They happen where people perceive no risk, like the housing market pre-2008.

 

Some excerpts from Daniel Lacalle:

“We need to understand that the fear mongering about a recession or a crisis, why does a crisis happen? …Crises always happen in the assets in which we believe there is no risk. Never in the assets in which there is (perceived to be) too much risk. The reason why there was a crisis built in housing was precisely because lenders, borrowers, economic agents, all of us, believed that there was no risk in that asset. You don’t accumulate risk in assets of high risk. That is why there will not be a crisis made by Biotech, or a crisis made by Bitcoin. There will be a crisis made by an asset which we believe has no risk. Which asset do we believe now has no risk? …Sovereign bonds… If you believe there is no risk in sovereign bonds, then there is no surprise that right now there is almost $17 trillion of negative yielding debt in the world…”

“Let’s explain this to the generations that will see us in the future… What is negative yielding debt? Negative yielding debt is you pay someone to lend them money. Why would you pay somebody to lend them money? …Three reasons, not because your stupid. One: because you believe there is going to be a massive dis-inflationary process… Two: you believe that the price of that asset is going to be much higher than the loss of income that you get from the yield… Third: you believe that everything else is going to collapse… so you prefer to lose one euro out of 100 than to lose 50.”

“Think about it from the perspective of the borrower. The borrower is incentivized to take more debt. More importantly, because debt is cheap, the borrower is told over and over again by my esteemed colleagues… and by everybody else in the media and by everyone else in the mainstream that they need to spend… But guess what happens… Yes the cost of debt is coming down, but the cost of debt is not the only variable you look at when considering a (capital) investment… There is the cost of capital. What is happening to the cost of capital? The cost of capital is not coming down. Why is the cost of capital not coming down if interest rates are coming down aggressively? Because if you have a business that is going well and the business in front of you, that is not doing well, is perpetuated, is zombiefied, you don’t have an incentive to invest… You are subsidizing low productivity in order to penalize high productivity…”

“The central bank says, allow me to think about this: ‘I injected $20 trillion into the economy and there is no inflation.’ Is there no inflation? In the European Union the prices of housing have multiplied by three while at the same time that we said there was no inflation. Why? Because non-tradable goods go up and tradable goods come down dramatically. Is there anyone here that eats video cameras? If foods goes up and video cameras go down, there is no average inflation. But you don’t buy a video camera every day. In fact, you don’t buy a video camera at all, that’s why they are coming down. What we are seeing is a shift in inflation. Inflation is not happening in CPI, in consumer prices, yet all over the European Union you have demonstrations of citizens criticizing the increase in the cost of living. Is the ECB wrong? No. Are those citizens wrong? No, they are both right. We are just not understanding that the massive collapse in tradable goods does not mean that there is not a high increase in the cost of living for the average citizen. If the central bank and the government believe that there is no inflation but the citizen sees high inflation, who spends more? Nobody. Who takes more risk as a citizen? Nobody. It’s the Japanization conundrum. Who’s been to Japan? It’s not cheap…”

“I heard this morning that the European Union needs to spend more on green energy and renewables, on infrastructure. Great, great ideas. But if they’re great ideas and truly profitable and really attractive, why is the private sector not taking them? …Does the government… have more and better information than the consumer or companies about what is going on in the economy? Not necessarily. As such, it is very very likely that if you implement yet another stimulus the impact will not even be neutral… We are talking about a recession or the possibility of a recession in the Eurozone after the Junker plan has mobilized more the 400 billion euros of investment. We are not having a problem of pushing investment or pushing liquidity into the economy. We might be having a problem understanding what is thriving… which is how disruptive technologies are improving the democratization of consumption. Who has ever left here saying ‘I can’t take this anymore, food (prices) have come down?’ Who has ever left a service station saying ‘This is unbearable, gasoline prices are down?’ Nobody. So why do we want inflation? Inflation is taxation without legislation…”

Frankly, I couldn’t agree more with what Mr. Lacalle says. There is much more to the discussion, so enjoy it above.

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