Submitted by Jeffrey Snider – Alhambra Investment Partners
For most commentary on the recent and sharp decline in oil prices, there is a seriousceteris paribus to it especially from those that don’t recognize that there are much deeper financial forces. The following is excerpted as an example of the closed system approach, as if there is a world of difference that can allow “decoupling.”
What matters is what’s causing prices to decline: an increase in productivity or a decline in economic activity. Only in the second case is there a serious danger that the Federal Reserve should try to respond to. Similarly, rising prices can be a sign that monetary policy is too loose, but can also reflect declines in productivity.
This is a tangential explanation to the second stage of oil price excusing. Some will “predict” that though demand has fallen, “unexpectedly” of course, it will not remain so weak for so long. This alternate but associated justification is that foreign demand, and only in discrete locales that are unrelated, is to blame as the US surges forward unobstructed (5% GDP and all that).
There are, however, two wrinkles worth noting. One is that although the fall in the price of oil doesn’t appear to reflect any weakness in the U.S. economy, weakness abroad may be a factor. But that’s a reason to loosen money elsewhere, not in the U.S. A second is that there is a reasonable argument that monetary policy in the U.S. has been a little too tight even leaving aside this price decline. If that’s correct, then some added pressure for loosening, even if that pressure is based on a mistaken worry, might not be such a bad thing.
And thus the utter craziness of monetarism is on full display, in that after arguing that declining oil prices are good for American consumers, they are also suggesting that monetary policy is “too tight”, and thus oil prices are contradictorily “too low.” That betrays the central aspect of this orthodox embracing of lower energy prices as nothing more than a shaky rationalization – they still are not comfortable with low prices but accept them lest anyone get worried about what they really suggest. Orthodox monetary theory is, when stripped of its academic trappings, dedicated to high oil prices and low wages.
Ultimately, oil prices do not operate in a vacuum, nor even a financial one. If oil prices were on their own declining as they have, this argument might have more merit (stress and overstress “might”). However, these closed-system masters, as they fancy, never address financial reality. Oil prices signal economic weakness and bond markets second that. The US bond market is not purely dedicated to Russian economic foundering or Brazilian inflation, but rather growing quite concerned in historical context of US economic cycles.