Economic Winds

The one certain economic truth that we have once again been absorbing is that the price of oil matters everywhere. I do not know what percentage of economic activity it represents today, but last time during the late seventies it was around 12% of the economy. It declined as efficiencies rose but it certainly is still in the double digit zone or just under.

That means, children, that doubling the price as we saw in the past year or so is oil’s attempt to claw a much larger share of the economy. Avoiding this, the rest of the economy restructures the pricing of other elements. Thus food prices climb sharply and the US dollar sinks. This last year has seen a rolling price readjustment throughout the entire global economy unlike anything since the late seventies.

So far the damage has been controlled because the price move has been only three to four fold of the previous base and has moved slowly. Also the real estate and credit collapse has tempered all lending which would only worsen the situation. This time lending activity is no longer fueling a rising market which suggests that any inflationary adjustment will remain appropriate.

Although it still feels ugly, we may just slide by with a soft landing for the global economy. If that in fact occurs, then we will have been blessed.

What bothers me most is that there exists any number of scenarios whose outcome would be catastrophic and no sense that these minefields are been navigated with anything approaching good sense. How is that retail bank deposit type money is been solicited by brokers who never had the secure capital base to profitably handle the business. We always knew better, yet greed has persuaded another crop of greenhorns to gamble with the global financial system.

Eventually some generation will truly lose it and the financial destruction could be fatal. I abhor this recurrent recklessness and the ongoing inability of the institutions to counter it.

I have lived to see far too many hard won rule books converted into a manual for grabbing cash when the money flowed. I most recall a new stock salesman preparing for the broker exam, reading the admonishment over guaranteeing price, time and profit, turning around and enthusiastically using the admonishment almost word for word to sell stock to the public. It is really easy to imagine a young MBA in an investment bank jumping on past abuses and repackaging them.

Right now enough fear has been introduced into the global economy to generate a true slowdown. The price shifts are doing their own magic and a full year of this should fill every warehouse. In a way the horses are once again responding to the reins. Since it will take years for the banking industry to get over this last drunken binge, they will be back to been conservative.

Five years without ten percent growth would allow massive consolidation and proper redistribution of resources and wealth. Perhaps China can democratize from the bottom up and perhaps India can start paying their civil service so that bribery can be suppressed. It is this that will matter for the next wave of global growth.

I have also seen many unlikely scenarios work out over the past forty years and know, that so long as we continue to avoid war, Korea will reunite and rapidly become richer and Tibet will establish home rule with honored seats in the parliament of China. I know that the seventh century will also be silenced in the Middle East, again unleashing another people’s resourcefulness.

Again the ashes of yet another price upheaval are blowing in the wind and we will prevail.