Submitted by Taps Coogan on the 21th of October 2019 to The Sounding Line.

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Daniel Lacalle, Chief Economist at Tressis Gestión, recently spoke with DailyFX about the causes of persistently low energy and commodity prices. Specifically, Daniel Lacalle blames a feedback loop of overly accomodative monetary policy enabling and sustaining persistent overcapacity in many industries that keeps input prices low, causing low inflation, leading to more accomodative monetary policy. He also discusses China’s debt growth and the causes of European stagnation.

Some excerpts from Daniel Lacalle:

“What are seeing is actually this beautiful role of competition between the different sources of energy that have helped a country like the United States see the average household bill, both for electricity and gas, come down despite high growth of the economy and despite all the alleged challenges at a geopolitical level in the supply chain.”

“Central planners are looking at the economy… sort of with a rear view mirror…, how the price formations happen in the past. Therefore, they try to implement the same measures that have been implemented in the past in order to drive for a little bit of inflation or a little bit of growth. Those don’t work anymore because technology is working as a fantastic dis-inflationary factor… At the end of the day, monetary policy is dis-inflationary because it is perpetuating overcapacity…”

“Not just energy, we are seeing it in many other industries…, perpetuating the imbalances of the economy through very low rates and very high liquidity obviously leads to massive refinancing of existing capacity, of building new capacity for an alleged growth that doesn’t come, and with the idea that inflation growth is going to be higher. So you have these layers with, on one side the dis-inflationary effect of technology and on the other side, the also dis-inflation of large overcapacity because governments and central banks… push capital into the most… overburdened sectors… Therefore, prices never rise as much as they want. There is, of course a level of inflation, but it is definitely not the kind of level of inflation that they are looking to achieve.”

“Explain to me why Japanese citizens don’t spend as much as the government and central planners would like them to? Because, you know, it’s a rich economy. It’s got very low unemployment. It’s got very high levels of salaries. So why don’t they spend what you would want them to spend (posing the question to a Japanese economist)? …It’s because Japanese citizens don’t have amnesia. Japanese citizens know that there is a quid pro quo of this massive money printing and that is stagnation. And they know that they need to prepare for stagnation by being moderate in their consumption and in their investment positions, apart from demographics… Central planners basically want to make people forget the past… In the European Union, where we saw massive real-estate bubbles, it is extremely unlikely that people will go again borrow aggressively to buy a home…”

“When we look at the European Union economy, we need to understand what is the fundamental pillar of the economy and the fundamental pillar of the economy is the welfare state. Therefore, everything else is secondary, productivity growth, even employment, investment… The number one factor is welfare spending. When you have that and you have governments that have basically an incentive to continuously increase their weight in the economy, what the European Union as a collective tends to get to is to always decisions that are a minimum common denominator decisions. Minimum common denominator decisions, unfortunately never work to drive higher growth and higher productivity.,, It’s sort of like a class where you take out the A level students and everybody else agrees to pass the exam… (The EU) constantly looks to penalize the countries that do too well and penalize the countries that do too badly.”

There is much more to the interview, so enjoy it above.

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