As Phil noted earlier, the oil theme he’s been writing about for a long time is finally catching on; here’s an excerpt from an article in TimesOnline, by Anatole Kaletsky.
They’re wrong about oil, by George
"Rip up your textbooks, the doubling of oil prices has little to do with China’s appetite.
Just as the credit crunch seemed to be passing, at least in the US, another and much more ominous financial crisis has broken out. The escalation of oil prices, which this week reached a previously unthinkable $130 a barrel (with predictions of $150 and $200 soon to come), threatens to do far more damage to the world economy than the credit crunch.
Instead of just causing a brief recession, the oil and commodity boom threatens a prolonged period of global “stagflation”, the lethal combination of high inflation and economic stagnation last seen in the world economy in the 1970s and early 1980s. This would be a disaster far more momentous than the repossession of a few million homes or collapse of a couple of banks.
Commodity inflation is far more lethal than a credit crunch for two reasons. It prevents central banks in advanced economies from cutting interest rates to keep their economies growing. Even worse, it encourages the governments of developing countries to turn their backs on global markets, resorting instead to price controls, trade restrictions and currency manipulations to protect their citizens from the rising costs of energy and food. For both these reasons, the boom in oil and commodity prices, if it lasts much longer, could reverse the globalisation process that has delivered 20 years of almost uninterrupted growth to America and Europe and rescued billions of people from extreme poverty in China, India, Brazil and many other countries.
That is the bad news. The good news is that the world is not as impotent as is often suggested in the face of this danger, since soaring commodity prices are not the ineluctable outcome of some fateful conjuncture of global economic forces, but rather the product of a typical financial boom-bust cycle, which could be deflated – especially with some help from sensible political action – as quickly as it built up.
The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 1980s, technology stocks in the 1990s and, most recently, housing and mortgages in the US. But surely, you will say, this commodity boom is different? Surely it is driven by profound and lasting changes in global supply and demand: China’s insatiable appetite for food and energy, geopolitical conflicts in the Middle East, the peaking of global oil reserves, droughts caused by global warming and so on. All these fundamental points are perfectly valid, but they tell us nothing about whether the oil price will soon jump to $200, stay at $130 or fall back to $60 next month.
To see that these “fundamentals” are all irrelevant, we have merely to ask which of them has changed in the past nine months…."
Read more.
