The downside of falling oil prices

One would expect lower oil prices to be great economic news.  However there are a couple of problems which could make them the worst possible news  –  our economy does not cope well with deflation and this could indicate the start of a major economic decline.

Oil is such an important part of our economy that lower prices should stimulate economic activity to the point we would easily achieve full employment and all our economic problems would be solved.  Life may be a little more complicated. Most news reports suggest the problem is increased supply from U.S. fracking but there could also a decreased demand for oil.

The first complication is that our economy does  not cope well with deflation.  We can probably cope with falling prices but falling wages are a different matter.  Very few people would willingly take a cut in income.  A further and more serious complication is that most of our money supply is based on debt and it is likely the owners of this debt would want  to be repaid in full in deflated money.  Instead of having economic utopia we could have economic chaos.

The second concern about falling oil prices is with what is happening in the real side of the economy.  Too often we evaluate economics only in financial  terms.  Sometimes this hides problems.

Probably the most serious economic problem is that we have used up the most easily accessible energy and mineral resources.  There are lots of these left on the earth’s surface but they are so difficult  and expensive to extract that it is no longer viable to do so.  This is bound  to have a profound effect on our economy, reduce the potential for economic growth and maybe force us into negative growth.  It could be that high prices for energy and mineral resources have messed up the economy so that we can no longer produce as many goods and services as we  were.   It may be the recent high costs of oil has contributed to its own reduced demand.

If this scenario is correct or even nearly correct then we are in for some serious economic problems.  It could be that falling oil prices are a leading indicator of a crisis.

This has been a difficult post to write because one does not want to witness the human suffering that will come with a prolonged economic downturn.

One further observation: Although headlines show the price of oil has been falling the news has been slow to reach the owner of our local gas bar.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Can faith solve our economic problems or do we need to challenge economic theology?

Can our economic problems be solved with belief and faith?  If yes we should all increase our attendance at church or mosque or temple.  If no we may need to challenge some basic economic theology and those whose interests are supported by current economic beliefs.

I figure the basic economic problem is with energy and mineral resources.  We have used up the most easily accessible.  While there may be lots left in the earth’s crust their extraction is difficult and requires lots of energy.  This means there is less energy available for all the other things we are used to having and standards of living are falling, at least for some people.

Many of us find it difficult to accept that this is a problem.  We want to believe that economic growth can continue forever.  We have been indoctrinated with the work ethic and believe that our happiness depends upon having a job and earning our keep.  Unemployment causes a great deal of hardship

If the above theory is correct, then the problem is not one of returning to economic growth but one of adapting to a different situation.  This means questioning a lot of what we believe about economics.

At this point I should distinguish between what I would like to see happen and what I expect to happen.

I believe we should have a collective responsibility to ensure everyone has the opportunity for the same standard of living as most other people.  Some ideas about how to accomplish this are outlined in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.

What I expect to see is a return to the type of social order which existed before the industrial revolution where most people lived at a subsistence level and worked to support a very few in obscene luxury.

In the meantime the debate  of austerity as opposed to stimulus continues.  Austerity is probably necessary but the way it is being carried out is taking us to a feudal type of society.  Stimulus will use up even more of the available resources and bring us even quicker to a feudal society.  Hyperinflation is also a possibility.

When I read various reasons for the economic crisis and the few suggestions for dealing with it I think of people drowning in the middle of the ocean and thrashing about hopelessly.

Inequality: the buzzword and the norm

Gerald_G_Fairy_sitting_on_MoonIt appears the latest economic buzzword and current explanation for economic problems is inequality.

Historically inequality has been the norm for most large-scale societies.  Just think Roman Empire and Europe during  the Middle Ages.  Wherever societies have been large enough to have rulers who did not know all their subjects some people have used their strength to exploit others and most of the time the others were left just at a subsistence level.

Starting with the Industrial Revolution things started to change.  People became more efficient at extracting resources and making things which meant increasing prosperity.  A shortage of bodies in some parts of the world allowed more people to claim a share of that prosperity.  To some extent our income and standard of living is a function of the supply and demand for bodies.

It may be that this golden age of prosperity has not been experienced by all the people currently living on this planet and equality is still the norm for lots of places.

In the last few years things have been changing.  We have exploited the most easily accessible resources upon which our prosperity has been based and there are more and more people demanding a share of what we do have.

So there you have it.  We are returning to the norm where a few people are able to claim most of the available resources.  And some people will say we can overcome all economic problems if we can return to more equal economy.

The blackboard and the economic crisis

This week’s edition of The Economist has a series of articles focusing on the European financial crisis.

If we want to understand what is happening in Europe and the rest of the world I suggest we need to start by going back to the blackboard.

When my economics professors stood in front of the blackboard most of them drew a graph with two lines in the form of an x.  The macroeconomic professors usually labelled  one as representing the economy in financial terms and the other as representing the economy in  real or physical terms.  This is an important distinction which tends to be forgotten when we analyze problems away from the blackboard.  It is to easier to look at an economy in terms of its currency.

It is important to note that these two lines intersect so that what happens on one side will influence what happens on the other side.

So we need to ask if the current European crisis and if the crisis in the rest of the world is really a financial crisis or is it a crisis  on the physical side, in the resource base, which is showing up in financial terms.

There are some people who believe we are using  up resources at a rate which is  beyond sustainability.  If this is the case it is no wonder the people of this planet are dealing with a multitude of economic problems.

The Economist is pushing for policies which its  writers believe will restore growth.  It may be that instead we need to look for policies to manage negative growth.  The problem with policies to create more growth is that they will probably lead to even more using up of resources and will thus bring forward an even worse economic crash.

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