Plunging oil prices will starve the world of its economic fuel.Low prices mean no new oil, and no new oil means no growth.The world economy is slowing down and the authorities are worried. Besides the official gross domestic product statistics, we have further confirmation of this slowdown from the four big commodities associated with growth; oil , coal, copper, and iron ore. Japan, Italy, and Greece are all in recession. China is slowing down according to its official statistics, and even more according to the whispers.Germany, France and the Netherlands are all at stall speed. The U.S. is, according to the Commerce Department, doing just great at nearly 4% growth, but you wouldn’t know that from either the quality of the new jobs being created (which is low) or consumer spending (also low).The core of the problem is that we have a monetary system that is either expanding or collapsing. It has no steady state.So they continue to pump, and jawbone, and panic at every slight downturn in wildly inflated financial asset prices because those are their only major successes in this drama.The actual economy, the one that lives on Main Street, never really recovered, at least not compared to past recoveries. Growth, jobs and incomes all were anemic compared to prior recoveries. Capital expenditures by corporations were all but dead in the water throughout the “recovery.” And this brings us to the collapse in oil prices. Unless investment in oil production really accelerates from here, new production will be swamped by existing declines. But with oil down some 40% since June, new oil drill programs are being scrapped left and right. The bottom line, though, is that without growth in oil supplies robust economic growth is impossible to achieve.If oil prices do not recover and quickly, the U.S. shale miracle will rapidly turn into a shale bust. Worse, global oil projects are now on hold and those potential future supplies have been pushed out further waiting for higher oil prices. No new oil means no new economic growth. It’s as simple as that.This calls into question the sky-high valuations we currently see for stocks and bonds. The operative question being, what is the value of these stocks and bonds in a world without growth? To me the answer is simple; a lot less than they currently are.So the central banks are worried that their efforts to ignite new borrowing are not working, but The worry is that the bloated asset prices that were a product of this quest are going to run straight into the reality of diminished oil output. In short, the worry is that we are now well past the point where the next financial correction can be avoided. It’s going to hurt. The central banks have failed, perhaps honestly and with good intentions, but they have failed nonetheless. All because they were peering out just one of several portholes and thought they understood the world.
Posted on: Sun, 07 Dec 2014 18:29:52 +0000
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