The great hubris that lay behind the Great Moderation and Reset
Perhaps not many readers of this newspaper would be familiar with the term ‘Great Moderation’ as applied to the American economy. It was supposed to be an era ushered in from the 1990s. There was moderation in both output growth and inflation rates, and in their volatilities. Economic expansions were long and recessions short. In 1990 and 2001 as well. But, there was nothing moderate about what it brought in its wake. Big asset price bubbles, build-up of leverage and a widening of wealth inequality in the US.
Post-covid, there has been talk of a great reset. It has many elements. Important among them is green growth: an effort to decarbonize the world and attain net zero carbon dioxide emissions. Unsurprisingly, it has spawned an immediate energy crisis. If the Great Moderation globalized asset bubbles, the Great Reset is following suit by globalizing fuel shortages and soaring energy prices. This columnist wagers that the Great Reset will hammer the final nail into the coffin of the Great Moderation. Unfortunately, oil-importing economies could be collateral damage.
The price of diesel in India has crested ₹100. It has made the Reserve Bank of India think hard about withdrawing its accommodative stance, though it chose last week to retain it. Higher oil prices are both inflationary and contractionary. On top of this, India seems faced with a coal shortage and power generation has come under stress.
Woolly thinking and hubris have characterized the switch to greener fuel. The International Energy Agency (IEA), which is supposed to ensure energy security for the world, led with the call to eliminate the use of fossil fuels by 2050 in a road-map published in May 2021. That is the ‘Great Reset’ for you. Projections of rising global temperatures are being treated as precise estimates rather than as a range with uncertainties and assumptions behind them.
The IEA report was supposed to be discussed at the 26th Conference of the Parties (CoP-26) in November. In a cruel irony that will probably be lost on net-zero zealots, European governments are now desperately lapping up natural gas and coal at any cost, as Vandana Hari writes for Nikkei Asia. “Adding insult to injury, the EU’s own climate policy requires the purchase of carbon permits, whose prices have doubled since the start of the year, heaping more pressure on the cost to consumers.” (s.nikkei.com/3aon3z1).
Pension funds in Norway dropped hydrocarbon fuel companies from their portfolios. It prompted the economist Branko Milanovic to ask if Norway was the new East India Company. He called upon climate change activists to consider the trade-off between growth and climate change (bit.ly/3v1z1br). But then, that has never been the strong point of policymaking in advanced nations.
Enter China. It is difficult to have a global crisis without this country having some part in it. It is still under one of the world’s most restrictive covid lockdowns. Although production might have resumed, economic activity is still subdued and real-estate activity is decelerating. Yet, there is an energy shortage. Professors Alex Yang and Angela Zhang explain: “In early 2020, the Chinese Communist Party [CCP] initiated a sweeping anti-corruption campaign in Inner Mongolia to punish coal related corruption that goes back as far as two decades. Inner Mongolia is China’s second-largest coal producing province, accounting for about a quarter of the country’s coal reserves. This retroactive probe has since been applied to the entire country, deterring coal producers from overproduction to avoid a potential follow-on anti-corruption investigation. In March, China enacted a new criminal law amendment that criminalizes those individuals held accountable for mining-related accidents. Ahead of the CCP’s 100th anniversary this year, a large number of coal mines across China were shut down to avoid deadly accidents.” (s.nikkei.com/3FCcCGL).
Separately, we are told that “by the beginning of 2022, global oil demand would make new highs. Non-OPEC oil supply has fallen by over 2 mm barrels per day from its 2019 peak and [their] oil supply growth will turn negative as we progress through this decade. A structural gap will soon emerge between supply and demand. As early as [the fourth quarter] of 2022, demand will approach world oil-pumping capability—a first in 160 years of oil history. The ramifications will be huge.” (bit.ly/3BvBIEP).
What should India do? Oil producing countries like Mexico routinely hedge their price risk with derivatives. We should do so too. If we had bought call options or futures on crude oil last March-April, we would be investment grade already. Our governance structures and procedures must change to make this happen. If oil prices keep climbing in the winter months, two things must happen. The appropriateness of our current exchange-rate policies must be re-examined. And India’s fiscal and monetary policy stances must be recalibrated for the former to address growth and the latter, overheating.
Great hubris is the element common to the Great Moderation and Great Reset. The hubris of the West will ensure that price-hedging does not go in vain for India.
V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.
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