Thursday, January 22, 2015

Bill Mitchell — Fiscal austerity drives continuing pessimism as oil prices fall

The UK Guardian article (January 20, 2015) – Davos 2015: sliding oil price makes chief executives less upbeat than last year – reported that the top-end-of-town are in “a less bullish mood than a year ago” and that “the boost from lower oil prices is being outweighed by a host of negative factors”. The increasing pessimism is being reflected in the growth downgrades by the IMF in its most recent forecasts. A significant proportion of the financial commentators and business interests are now putting their hopes on the ECB to save the world with quantitative easing (QE). That, in itself, is a testament to how lacking in comprehension the majority of people are about monetary economics. QE will not save the Eurozone. But I was interested in this pessimism in the context of falling oil prices given that with costs falling significantly for oil-using sectors (transport, plastics etc) and disposable income rising for consumers (less petrol costs), the falling oil prices should be a stimulating factor. I recall in the 1970s when the two OPEC oil price hikes were the cause of stagflation. So why should the opposite dynamic cause ‘stag-deflation’ (a word I just invented)? There is a common element – fiscal austerity – which explains both situations.…
Bill Mitchell – billy blog
Fiscal austerity drives continuing pessimism as oil prices fall
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

1 comment:

Matt Franko said...

"The economies of Europe and Japan, which were heavily dependent on oil as the primary energy source were severely impacted by the rising prices. The US economy was less affected owing to its lesser dependence on imported oil.

The result, the US dollar appreciated by 17 per cent in the six months to February 1974, basically taking it back to the December 1971 value at the time of the signing of the Smithsonian Agreement. Further, the European currencies suffered major depreciation, as did the yen."

The exchange rates adjust to reflect the adjustment in the real terms of trade...

Financed trade inventories adjust in collateral value (due to external events like this oil price shenanigans) and the banks have to then make currency reserve composition adjustments in response in order to stay within regulatory ratios in the different jurisdictions....