Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.
This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.
While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.
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All across economics there's way too much interest in the demand side, not nearly enough in supply-side economics.
In Australia, there's a proposal to put a price cap on domestically sold natural gas, which we are a major producer and exporter of. Because the Europeans don't want to buy Russian gas (and someone influential is blowing up pipelines in pursuit of this agenda), they've been sucking out the gas from the rest of the world. The Australian gas industry is unhappy with the pipe caps and threatens to withdraw investment. 'Greedy companies making super-profits' on one side and 'Soviet style planned economy, Venezuela' on the other.
But nobody, gas companies excepted, is thinking about how to produce more gas! No matter how we or anyone manipulates the prices or export control orders, we cannot legislate gas out of the ground. We should've been producing more gas from the get-go, approving projects for export and domestic consumption. That directly alleviates the core problem, which is a shortage of supply. We could have a simple, quick regulatory system for gas production. Instead we have a very slow, expensive system where various interest groups get to wage lawfare against development. And so we get less gas. House prices are similar, that's the NIMBY issue in a nutshell. Power prices are another issue, nobody wants to build any new coal plants due to climate targets and so the price of power rises continually. There are costs to producing gas, issues with basins getting contaminated and so on. But there are also costs to having a giant legal mess of regulation constraining development for 6 years on a single project. It doesn't take that long to drill gas wells. There's plenty of gas in the ground.
A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else. Yet instead everyone is just focusing on reducing demand by raising mortgage repayments. It wasn't macro-economic reform that produced the industrial revolution, it wasn't central banks making steam engines and industry. It was actual technical development and the efficient allocation of capital that made people richer, something governments don't seem to appreciate. If they want to make the economy better, they need to do micro-economic reform to make it easier to generate wealth.
I think one cause of excessive amounts of capital rushing into financial schemes, apps and crypto is that the real world is chock full of regulations that make it too complicated to build anything. Want to build apartments, factories, railways, gas wells? You need permission, you need to consult stakeholders, you need to get environmental assessments, consult indigenous peoples, protect 'vulnerable' species, pass endless legal checks. If you want to make something in crypto, you can just get going, release your white paper, airdrop your tokens, get the software working. Now the cost of this is that there are a bunch of scams and shitcoins. But there is certainly no shortage of innovation, things happen quickly.
Near zero interest rates could have encouraged broad development across the whole of society. The US at least managed a fracking boom that is paying off nicely now. I think regulations channeled too much of this money into 'tech' and housing. Finance is a culture because much of industry has been crippled.
Is this feasible within a relevant time-window? Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation. Thus, decisions being made today about production infrastructure and investment shouldn't be based on today's needs for more/less gas, but on estimations of the need for gas in 3, 5, and 10 years. The price, on the other hand, reflects demand today, irrespective of future or past projections or investments. Thus, the two are far less related than one might ordinarily suppose. Insofar as they reflect a broad-based general trend in demand, yes, prices are a good spur to investment and future build-out. However, when there is a lag in build-out's ability to ramp up production in the short term, and the price spike is caused by a short-term or otherwise exceptionally unpredictable event like a natural disaster or war, then the price is likely not a good guide to what the future may require.
This is why it's reasonable to discuss price caps for this kind of black swan event; it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production, and no action taken today is able to reduce the price through increasing supply within a reasonable timeframe (or even one that reasonably guarantees the black swan effect's will still be applicable at the end of the preparatory period). Thus, it's proper to take into account the societal effects of a sudden and unearned windfall profit vs the costs to the citizenry who see prices spike uncontrollably.
Higher prices aren't just about encouraging quantity supplied, they are about reining in quantity demanded.
Higher gas prices mean consumers will attempt to avoid using gas where they can, and less-productive uses of gas in industry will fall by the wayside. This is as true of gas as it is of every product. This is an important function of prices in an economy.
Also worth pointing out: "russia invaded a country so we aren't taking their gas anymore" is not a black swan, being as it is an entirely logical outcome of modern Russian warmongering. "We could hardly have foreseen Russia invading their neighbors again" is unpersuasive.
But it only makes sense for potential suppliers to build ways to take advantage if they will be able to profit from such speculative preparations when prices spike.
I would amend this slightly - "Russia invaded a country NATO and the EU cares about, so the EU is willing to nuke their own industries to spite the Russians" really is a black swan. No-one cares about invasions or ethnic cleansings qua invasions or ethnic cleansings; no-one was calling for gas boycotts over Transnistria or Ossetia/Abkhazia or even Crimea. Hell, Azerbaijan is currently in the process of waging a minor ethnic cleansing campaign against Armenians in Nagorno-Karabakh (which they took in an offensive war earlier this year) and no-one serious in Europe is asking to shut down Azeri petrochem transfers - instead they're desperately trying to use them to try and make up the Russian shortfall.
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