“It would be wrong to cap the price of petrol”

In the weeks leading up to Russia’s attack on Ukraine, many players in the global financial markets remained calm. The Ukrainian and Russian economies were considered to be of insufficient importance for the crisis to cause major economic damage. That changed quickly. How do you assess the current situation?

In the foreground is the immense human suffering. But this conflict is also a shock from an economic point of view: Energy, an important economic resource, has suddenly become significantly more expensive. As a result, the prospects for economic growth have deteriorated further in an environment that was already characterized by uncertainty. This is reflected in the global financial markets. However, rising energy prices should not be equated with inflation.

Which is currently often done. Can you explain?

When people have to pay more than two francs for a liter of petrol at the gas station, it feels like inflation. But this is not inflation in the traditional sense. Inflation occurs when the price level rises over a long period of time and not when individual prices rise. Inflation is a monetary phenomenon associated with an increased money supply. What we are now seeing in energy prices reflects a tightening of actual or expected supply of oil, gas and coal. The global economy will have to reorganize itself through an additional offer or through the substitution of fossil fuels.

In various countries, the idea has arisen that the state could cap energy prices. What do you make of it?

We know from economic theory and history: price caps are counterproductive. They always have the opposite effect of what is intended. They prevent producers from offering more and consumers from asking less. In politics, there is often a lack of understanding that undistorted prices fulfill an important information function in the economy: if prices are restricted, consumers and producers have no incentive to contribute to remedying the shortage.

This means?

I’ll give you an example: if the price of oil rises, the incentive to ramp up this production elsewhere also increases. However, if the price is capped, the opposite happens: the incentive to produce more decreases or at least does not increase. The same applies to consumers: with a cap on petrol prices, they don’t realize how scarce petrol really is. If the price of petrol could rise, they would consume less and look for alternatives.

However, households with lower incomes in the euro zone are already heavily burdened due to the increased inflation and cannot easily buy an electric car.

Yes, rising prices hit low-income households hard. It would still be wrong to cap the price of petrol. The prices must be able to play. From an economic point of view, it would make more sense to give each household a fixed tax credit.

The Swiss franc once again lived up to its reputation as a safe haven this week, reaching parity with the euro. This dampens the effect of rising energy prices, while the export economy is likely to suffer as a result.

One has to distinguish between a real and a nominal appreciation. The nominal appreciation of the franc is due to different levels of inflation in the euro area and in Switzerland. If, for example, annual inflation in the euro area is six percent and in Switzerland only one percent, then an appreciation of the Swiss franc by five percent per year will not have any major real effects. But it is of course true that in times of geopolitical tension the Swiss franc often serves as a safe haven currency. This actually leads to a real appreciation, which puts a strain on the export economy. However, it should not be forgotten that imports will then become cheaper and the situation is therefore not so bad.

Do you see a need for action on the part of the Swiss National Bank (SNB)?

The SNB has good reasons to continue along the normalization path it has taken. I see no reason for opposing interventions.

In the US, the Fed has announced several rate hikes for this year. Does that still make sense?

Yes. We have more than a decade behind us with a very expansive monetary policy and very low interest rates. It is important that monetary policy returns to normal. Ultimately, it does considerable damage to the economy when central banks cap interest rates as the most important price. Investments will only be made in the right place if the interest rate can play its role as an indicator of the scarcity of capital.

Because of the war in Ukraine, many investors are probably wondering how safe and sensible emerging market investments are. what do you tell them

Investments in emerging markets are generally more risky than investments in industrialized countries. However, the expected return is correspondingly higher. The current situation shows how big the differences between emerging countries can be: Eastern European indices have lost almost half their value since the beginning of the year. In Latin America, on the other hand, stock indices have risen by more than ten percent. Basically, however, the investment strategy in a crisis should be the same as in a normal situation. Your own goals, scenarios and broad diversification are important.

What are you talking about?

In times of crisis, the effect of diversification is smaller because the prices of many asset classes are falling. However, as the example of the emerging countries shows, diversification still provides a certain cushioning.

Does it make sense to take advantage of price fluctuations in the current high volatility?

If you think you can forecast the prices of asset classes, sectors or even individual stocks, then you can. My knowledge from theory and from practice tells me that this does not work. If you get out when prices are falling, you typically miss the timely re-entry.