The European Union has announced strict “energy efficiency” consumption reduction measures to cut 15% of gas demand as Russia threatens to shut down gas supplies. Some regions and cities have imposed aggressive heating and air condition limits as well as cuts in building lights. Does this work, or will it backfire?

Spoiler alert. It will backfire again. Interventionism always damages the ones they pretend to protect.

China’s Housing Market Slump Becomes a Real Issue

A few months ago, I wrote that the Chinese slowdown was much more than covid related and pointed to the challenges coming from the excessive weight of the real estate sector in the economy. A research paper by Rogoff and Yang estimated that the real estate sector constitutes 29 percent of China’s GDP. The problems coming from the slow-motion deterioration of the property sector have extended to the financial challenges of Chinese local governments and may create a relevant fiscal problem for the nation’s public accounts.

Sales at China’s largest housing developers fell 43% in June from a year earlier, according to China Real Estate Information, creating an alarming funding gap for local governments, where finances are heavily dependent on land sale revenues, and a significant problem for the financial sector and the government. China’s central bank has promised to mobilize a $148bn bailout to complete unfinished real estate projects as anger rises among property buyers that have not received their homes after advancing significant payments.

The disastrous era of negative rates may be ending, but it is not over. Imposing negative nominal and real rates is a colossal error that has only encouraged excessive indebtedness and the zombification of the economy. However, nominal rates may be rising, but real rates remain deeply negative. In other words, rates are still exceptionally low for the level of inflation we have.

Negative interest rates are the destruction of money, an economic aberration based on the idea that rates are too high and that is why economic agents do not invest or take the amount of credit that central planners desire.

The debate about recession risk is pointless. We are already in a recession. Real GDP (gross domestic product) in the United States declined at an annual rate of 1.6% in the first quarter.

The Atlanta Fed Nowcast shows a 1.5% contraction in the second quarter. But the underlying figures are scarier. According to the Atlanta Fed, “the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.5% on July 15, down from -1.2% on July 8”. That is an enormous negative change, -0.3% of GDP, in one week.

They go on to say that “the nowcast of second quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.9% and -13.7%, respectively, to 1.5% and -13.8%, respectively”.

Investment is collapsing, consumption is barely kept alive and if we look at other components, imports are soaring while exports rise less than expected.