The oil crash has wrecked the plans of some seriously powerful people.
Take Putin. Only a few months ago he was bullying the West out of Eastern Europe, and it looked like nobody could stop him. Now, he must be more worried about riots on the streets of Moscow… or a palace coup…
Or take Wall St CEOs. The crash must be giving them a few sleepless nights. On Wednesday, I wrote about this – I called it ‘sub-prime 2.0. Basically, the banks have lent ‘frackers’, ie oil explorers, billions and billions of dollars to dig for oil. But now that the price has dropped, a lot of those loans may never be paid back.
Today I want to write to you about another small group who’re re-thinking things as a result of the oil crash, arguably the most powerful people on the planet.
I’m talking about central bankers. For the world’s central bankers, the oil crash is a game changer. And if it matters to the central bankers, it matters to you!
Deflationary headwinds may be good for some…
Consumers spend a lot of money on oil. Petrol and heating are obvious examples, but they’re not the only ones. Oil is used to make so many of the things we use every day. That’s why a falling oil price is deflationary – it lowers the overall level of prices in the economy.
And it is this – oil’s deflationary impact – which is important to central bankers. They’re obsessed with inflation and deflation.
So the falling oil price encourages deflation. But it’s not the only thing stoking deflation at the moment. Japan’s efforts to weaken the yen are already helping to spread deflation across Asia. Europe’s general stagnation has been pointing to lower prices on the continent for quite some time. And it’s not as if the US is suffering any sort of inflation; they’ve had falling energy prices for ages, courtesy of the shale boom.
Now, here’s the point. Deflation excuses politicians and central bankers’ guiltiest habit, the habit for money printing.
After all, what do people say is the major concern about money printing? It is of course inflation. But, by gum – we’re hardly suffering from inflation right now, even before the oil price slide. Consumer prices have been surprisingly stable for quite a while now.
Talk of deflation must have the authorities rubbing their hands in glee. So long as there’s the threat of deflation, central bankers can print money with impunity.
It’s all gone topsy-turvy
I mean, it’s not long ago that the oil price was sky high. And back then, central bankers (and their cheerleaders like Paul Krugman) were insisting that we should ignore energy prices when it came to deciding monetary policy. Back then they were saying we should focus on something called ‘core’ inflation: the inflation number which doesn’t include food or energy prices.
But now that energy prices are dragging the headline inflation number down, well, let’s just say, you don’t hear much about core inflation any more.
So there you have it. Just when everyone thought that the interest rate cycle was about to turn, it now seems we’re back to lowering rates. The Japanese are grimly sticking at it, and the ECB’s most recent statement prepared the ground for full on QE next year. And now that oil has handed them a ready-made excuse, I wonder how long it’ll be before the Bank of England and the Fed re-join the party.
No wonder more than 90% of respondents in Bloomberg’s monthly survey predict the European Central Bank will begin large-scale buying of government bonds next year, up from 57% last month. An announcement will most likely come in the first quarter, with any decision taken against the objections of some policy makers, the poll of 55 economists showed.
QE, or its cousin, is a great excuse to funnel money into the asset markets (that’s the part where you get richer!), while simultaneously lowering the cost of borrowing for profligate governments.
Easy peasy!