The law of unintended consequences

Currencies, Economic growth

There’s an interesting article on Bloomberg, suggesting that the US Fed’s dramatic interest rates reductions are ‘driving Asia’s governments back to controlled economies’.

Its argument is that by cutting rates, Bernanke is ‘limiting his Asian counterparts’ ability to curb inflation’. It goes on to argue that Asian banks cannot now raise domestic interest rates to restrict demand, as a ‘widening spread between US and Asian borrowing costs draws more foreign money into the region’, causing asset bubbles to appear.

The same effect will occur if they allow their exchange rate to rise too quickly versus the dollar. And Asian central banks certainly don’t want to encourage a repeat of the US housing bubble in their own countries. So they are instead being forced to impose price controls on essential goods, in a bid to restrain inflation.

As I noted on 10 January, China froze the prices of oil products, natural gas and electricity, as well as public transportation. 5 days later, just as the Fed embarked on its 2nd round of interest rate cuts, it added price controls on grain, cooking oil, meat products, milk, eggs and LPG. The rationale can be seen in today’s announcement that inflation hit 7.1% in January, the highest for 11 years.

The problem, of course, is that domestic price controls (which also now apply in many other Asian countries for similar reasons), reduce the incentive to cut back on consumption as world prices move higher. The same is true for oil and gasoline prices, which are subsidised across Asia and also in many OPEC countries.

Thus the law of unintended consequences applies. These subsidies mean that supply and demand will be much slower to rebalance. So the net effect is that as the Fed reduces rates to try to avoid a severe US recession, it is indirectly causing global food and energy prices to rise. And in the end, if inflation starts to spiral out of control, rate increases may become essential, even in the US.


UK nationalises Northern Rock


The UK government has today nationalised the country’s 8th largest bank, respo...

Learn more

4 issues driving today’s oil price


Quietly, oil has moved back to the $100/bbl level. This is quite different from ...

Learn more
More posts
Your A to Z Guide to the reality of Brexit after 31 December

(Picture credit Shutterstock) A.  Article 50 of the Lisbon Treaty set out the rules for leaving ...

Chemistry & the Economy webinar on Thursday

Please join me for the next ACS Chemicals & Economy webinar on Thursday, at 2pm Eastern Standard...

Pandemic redraws the map

  Companies have entered a new landscape where the coronavirus has accelerated major paradigm s...

What will happen if President Trump loses the election?

I spent from September 2015 onwards, during the last US Presidential election, trying to explain why...

Covid fears risk a Great Depression and major social unrest

Governments spent most of February/March ignoring my warnings here on the dangers posed by the Covid...

The state of the global economy in 2020

Last Wednesday, I gave the opening presentation for the ICIS PET Conference and looked at whether th...

Reality dawns for business as No Deal Brexit approaches

I warned before the June 2016 Brexit referendum that Brexit was all about politics, and Boris Johnso...

Global chemical industry – key trends for success in today’s New Normal

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more