2/21/2013 3:15 AM ET|
Gas below $4, or Dow 14,000?
The bad precedents
Historically, when governments have turned to competitive currency devaluation as a last-ditch effort to boost growth and avoid tax hikes and spending cuts, the results haven't been pretty. Weimar Germany's efforts to inflate away war debts and rebuild after World War I come to mind. The abandonment of the gold standard in the 1930s, to cite another example, was followed by currency devaluations, protective tariffs, trade wars and a deepening of the Great Depression.
A few officials at the Fed and European Central Bank pay heed to history's warnings -- or at least say they do. ECB President Mario Draghi said earlier this week that he is aware of the challenges presented by a protracted period of near 0% interest rates, including the negative impact on savers and the risk of bubbles.
And I think a brave speech by Cleveland Fed President Sandra Pianalto last week underlines this point. She highlighted what's become patently obvious for those who are skeptical of optimism surrounding Dow 14,000: Aggressive central bank stimulus, like everything else in the realm of economics, is subject to the law of diminishing returns.
In plain English, the risks of more money printing are beginning to outweigh the benefits.
A look at the risks
Pianalto outlined four distinct risks that are rising:
- Credit risk. The danger here is that with interest rates so low, banks and other institutions could "reach for yield," using cheap money from the Fed to take on more dangerous investments as they try to boost their returns. The Fed's use of low interest rates in 2003 to 2005 resulted in this, magnifying the housing bubble as banks, and then investors, gobbled up higher-risk mortgages offering higher yields. This could fall down around them if the economy weakens and defaults increase.
- Interest-rate risk. This means simply that with rates so low, people aren't prepared for a surprise rise in interest rates -- which would send bond prices down hard.
- Risk of market turmoil. The big fear here is that financial markets could become distorted because of the Fed's large and growing stake in the Treasury and mortgage bond markets as it buys up bonds to push money into the economy. The risk rises as central banks around the world use similar strategies.
- Inflation risk. Finally, all of this cheap money could result in a loss of control of inflation. Gas prices are surging already, as shown in the chart below. Chinese monetary authorities earlier this week restarted a program to drain money from China's financial system for the first time in seven months -- ostensibly to address inflation worries.
No doubt higher gas prices, combined with higher taxes, have weakened consumers to the point that Wal-Mart Stores (WMT) executives called its month-to-date February sales a "disaster" in emails obtained by Bloomberg News last week. Foreign consumers are under pressure, too, with European car sales posting their worst January drop on record, falling nearly 9% from the same period in 2012.
We're already seeing these risks play out. It's starting with inflation, which I believe will damage the economy to the point that defaults rise and market turmoil increases.
The scary thing is what happens if this continues. Pianalto suggests the Fed should slowly reduce its bond purchases to reduce these risks as the economy strengthens. But what if it's too late? Already, 45% of the countries in the Organisation for Economic Co-operation and Development are in a technical recession, defined as two consecutive quarters of negative growth of gross domestic product. What will the Fed do if we follow them into a new downturn?
With monetary policy already at full throttle and potentially contributing to a downturn, where do the Fed, other central bankers and political allies go from here?
Should they pray harder at the altar of cheap money, or try something else? My hope is they will back off and look at our structural problems: inefficient and overpriced health care, substandard education, poor infrastructure and nervous executives withholding needed investments.
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All you needed to write was, "We're Screwed."
Supposedly, oil at $90 and above drags on the economy or $118 for Brent. Seemingly, the optimum for W TX is around $80. That being the price at which shale plays are booming and generating cash flow to fund drilling without taking on a lot of debt without dragging down the economy.. Drilling starts to decline at or below $70 in shale plays.
Although the focus is on gas prices because we see it on every corner and buy it frequently, by products, rubber, plastics, synthetics, glass, paint, cosmetics, chemicals drugs etc all experience price increases as petroleum derivatives. Together with gasoline, diesel, kerosene, all these combine to have a significant effect, in a negative way.
It will be interesting to see leading economic indicators if high prices for petroleum products persist for a quarter or longer. I am sure it will be Bushs fault. Interesting the mainstream media is giving Obama a pass on this when they just howled about Bush and Cheney when gas prices went up.
Time has come now and the Fed is in the Red, time to recoup and the market ain't gonna like it.
If you don't believe the seventies are back ,take a look and see what happens when you have cheap money too long, history unfortunately has a tendency to repeat itself. Not enough seem to learn from it.
Better get cash heavy or be a good rider on the way down. The time is nigh.
Instead of gun control laws how about putting some laws on these "players" thats flushing the 3/4 of the populations economy down the crapper while they pad they're retirement. Their philosophy is screw everyone and everything and take as much as you can.
OBAMA AND DEMOCRATS AND THEIR FING GREEN AGENDA HAS CAUSED THE HIGH ENERGY AND FOOD PRICES AND IF YOU
BIG DOPE LIBERAL OBAMANITES KEEP THINKING IT'S BIG OIL YOU ARE FING DOPES! HE PROMISED THIS 'CHANGE' AND HE'S
MAKING SURE ENERGY AND FOOD PRICES SKYROCKET TO PUSH HIS FAILED GREEN AGENDA! THAT'S FACT! OBAMACARE
IS ALREADY BROKE! THEY AREN'T TAKING APPLICATIONS FOR THOSE WITH NO INSURANCE OR PRE EXISTING CONDITIONS
CAUSE THE PROGRAM IS BROKE!!!! AND IT'S NOT EVEN UP AND RUNNING YET! YEAH OBAMACARE WILL BE GREAT! YEAH
OBAMA AND LEFT WING LIBERALS HAVE ALL THE ANSWERS! RAISE TAXES KEEP SPENDNING MONEY YOU DON'T HAVE GIVE
MORE FREEBIES TO LAZY ASSES AND ILLEGALS WHO WANT TO LIVE FREE ON THE HARD WORKING MIDDLE CLASS! YEAH
THAT'S A REAL GREAT PLAN! SOCIALISM HAS FAILED EVERYWHERE AND IT'S NOW TAKING DOWN AMERICA!
Bennie B is Busting his B^lls because yer' Boys in Washington ain't got a clue.
I drive 125 miles a day, roundly trippin' to the shop and back, and I'm paying $4.35 per Gal. as of this A.M. (@ ~35 mpg)
I'm outta equities; got a good part of the run back up, but this is crazy!
My wife and I are running savings for parents in our Roths; they were gettin' squeezed bad. I don't have to tell conservative savers what's up with ZIRP. It hurts!
Bennie's gotta roll out of the throttle here. Hold ZIRP a bit longer, but end the funny money.
Seems USA is going to financial h3ll either way: debt or (non-core; ha ha, my ^$$) inflation...
All the best.
Anyone that believes refiners will push capacity to the max in the name of providing cheap gas to consumers simply doesnt understand their business. I saw a news pundit, Charles gibson, try to get a refinery manager concede that for the good of the country he should push daily production to the point there woudnt be enough profit to do necessary maintainence but Gibson ignored his point because his agenda was to vilify theindustry as evil predators.
I grew up in the oil industy and most of my family was involved as service providers to the industry and worked in it all my adult life. While I dont know everything about it, I know a lot more than most. Media and the gas pump shape public perception which is mostly hype, lies or mis information. To imply as politicians often do and media, that drilling a well in 5000 ft of water is the same as an onshore well is ludicrous or that the required seismic and geology analysis required prior to seecting a drilling location is absurd.
Ignorance is the best friend of those trying to conjure up elaborate conspirarcies. Believe me, if oil companies could collude to gouge and manipulate prices, while not entirely innoncent , nat gas would have NEVER dropped below $7-$8 range.
Currently gasoline prices are about what they were in the 1930s adjusted for inflation-a miracle.
In europe it can be over $9/gal
"So what else is new" screams the crowd. Eventually we will get a period of inflation that will look the last one look like nothing. We will look back on $4 gas with nostalgia, just as I look back at the $0.30 per gallon price of my youth. All of us who scrimped and saved are being taken for fools, while you profligate spenders who are running up big debts will be able to pay them off with inflated bucks. The only consolation I have, is that I know how to get by on very little, and you don't.
In a just universe, Bernanke and his ilk would be tarred and feathered and sent to live under a bridge. In this universe, he will spend his declining years traveling about and giving lectures for big money.
Old Chinese Proverb: He who cannot live on a little, is forever a slave.
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