The Truth About The Economy
The World economy in the 20th century was built on credit. Paying the interest required constant growth which in turn required cheap oil. The real problem is that cheap oil is gone. What none of the politicians is telling us is that we are going to have at best a steady state economy. That’s why QE3 won’t work. Jeff Rubin explains.
The Fed’s aim to stir the economy by printing more money is off the mark. Certainly boosting the money supply will have an affect, but it won’t be on domestic spending, as hoped, but on exports. Ben Bernanke’s explicit promise to keep interest rates at record low levels until at least 2015 will further devalue the US dollar, thereby boosting the competitiveness of American exporters. That will be helpful, but keep in mind that exports are a relatively small component of the US economy. The Fed would need to see truly phenomenal trade gains to achieve the results it seeks for GDP growth, let alone employment gains.
It’s an unlikely scenario given today’s weakening global economic environment. Moreover, the resulting currency appreciation against the US dollar among America’s major trading partners will only exacerbate their own economic problems, while also dampening their appetite for American-made goods.
So what’s the harm in the Fed trying? Inflation is the traditional argument against central banks turning on the printing presses. Whether widespread price increases will take hold this time around remains to be seen. There is, however, at least one price that another round of quantitative easing is bound to send higher—the cost of oil.
Since oil prices are denominated in US dollars, the lower the value of the greenback, the higher the price of oil.
What’s more, any policy that is seen to boost economic growth is immediately bullish for oil prices. Note the knee jerk reaction for oil prices following the Fed’s policy announcement last week. The price of Brent crude, the de facto world price, hit a four-month high, while the price of West Texas Intermediate was pushed near $100 a barrel.
While it’s true that we are finding new reserves, deep water, tar sands and fracking shale none of this is cheap to develop and recover. Rubin again:
We can’t grow our economies without burning more oil, but the growth we seek will eventually push the price of the fuel out of our economy’s reach. That, in a nutshell, is the quandary central banks are now facing. Unfortunately for the Fed, it’s about to learn once again that no amount of monetary stimulus is going to change that basic constraint on economic growth.
So when a politician of any party tells you they are going to bring back “the good old days” don’t believe them.
Cross posted at Middle Earth Journal