Monday, August 23, 2004

Rising oil prices give central bankers a lift

While many of us look on in despair at the rising price of oil, Alan Greenspan and his friends are enjoying every minute.

Why?

Because rising oil prices are doing the job most central banks need to do but resent doing: raise interest rates and damp rising demand.

The dilemma for most central banks is how to achieve price stability while not jeopardizing economic growth. This is not an easy task and more often than not entails sacrificing one for the other, making central banks very unpopular when the situation gets nasty.

In the past year central banks around the world have been on tightening mode. Global economic growth was getting to the point where it might generate more inflation than necessary. Things needed to be kept under control. So central banks, armed with their interest rates, starting raising.

Higher interest rates always make central banks unpopular. After all, most people need to borrow money to buy a home, a car or whatever. Savers always look to alternative means of outperforming the saving rates a bank offers, so they aren't going to complain too much either way so long as the stock market is given a chance to provide them with a decent return.

The issue for central banks is how to keep everyone happy. How to make everyone better off.

The rising price of oil is a convenient scapegoat for everyone and this includes the central banks.

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It's important to remember that rising oil prices are not the same as rising inflation.

Accelerating inflation usually happens when the economy is growing out of control, not when oil prices rise (the 1970's was an exception to this rule).

Global inflation picked up in the past year, making central banks nervous.

Rising oil prices have come just at the right time. Why?

Higher oil prices will help cool demand and keep the economy from generating too much inflation.

It's easy to forget that a large part of the reason why oil prices have risen this far is because of increased demand from China, not to mention the summer driving season in the U.S.

Higher fuel costs will act to correct the pickup in demand, without causing central banks to break a sweat.

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We don't live in the 1970's anymore.

We are't experiencing the type of oil price shock that will tip the global economy into recession.

What we are seeing, however, is a convenient way for central banks to get out of doing their least favorite job: raising interest rates.

1 comment:

Ram Jam said...

True, but where do you draw the line on the price of oil? Surely anything above 50 dollars would then raise another alarming question. A total collapse of the car industry, a meltdown in public morale, a rise in theft, and a massive downturn in the purchase of Ferrarri's. This is not good. Fast cars are good for morale. You get a kick out of seeing a Lambourghini or Ferrarri at the traffic lights, rumbling away ready to kick into first gear and scream away. Speaking of screams, Edvard Munch's "Scream" was stolen from a museum in Oslo. Apparently he painted 4 versions, and 3 have been stolen. Smacks of a some type of film plot innit. Like something called.."The Last Scream" or like. Starring Julia Roberts, Vanessa Redgrave, Anthony Hopkins, and debut performance by Eddy Munch IV, the great great grandson of Edvard Munch who turned to acting after a failed period as arts student in Prague. He suffered a mental breakdown after trying to selling his masterpiece, "The Moan". Still, like Balthazar Getty, the great grandson of Jean Paul Getty, he has turned to the silver screen. And therein lies the link. Getty...Art. Perhaps the Getty foundation has laid claim to the "Scream". But are museums in the habit of stealing from one another? Perhaps. After all the last "Scream" was returned by a Scotland Yard detective posing as "The Man From Getty". These are interesting postulations. These are interesting times. Will the Fed raise interest rates despite oil prices rising which helps to dampen reasons for the Fed to raise rates in the first place as Wesley Fogel suggest earlier in his BLOG? Me thinks so. After all when oil prices drop, as is happening, and Russia increases output, and OPEC members, especially Venezuela which has come through an election based on the smooth flow of oil from its deep wells, then the global economy will release a huge sigh of relief. Economic production will roar ahead, and the sputtering employment figures in the U.S will show healthy signs of recovery, with more jobs, increased consumer demand and a higher ECI, or Employment Cost Index. All necessitating a resumption of tightening by the Fed. Goodnight.