Mr. Rubin was one of the lone voices a decade ago warning of large rises in the price of oil. So he has some credibility in my book and his updates are worth reading.
A Recession Is Coming But Not Yet
"There will be many dress rehearsals in commodity markets before the next global recession. An example is last week’s dramatic and broad-based sell off that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers.
But is that time already upon us? If the monetary authorities in China and India continue to hike interest rates at the pace they have set recently, the next global recession may not be that far off. After all, these economies are today’s global economic growth engines. But when push comes to shove, the political masters of those central banks may soon temper their enthusiasm so they can battle inflation.
If the money-printing U.S. Federal Reserve Board doesn’t care about inflation why should the People’s Bank of China ? Compare income per capita between the U.S. and China and it is not too difficult to figure out which one should be more desperate for economic growth and, as a result, more willing to seek trade-offs against inflation.
In the meantime, there are several tactical paths China can take that at least give the appearance of holding inflation in check. Reducing the weighting of food and energy prices in China’s consumer price index would be one way. As long as the country’s headline inflation rate stays below 5%, markets won’t get too upset about what it is really measuring.
Having the People’s Bank of China step away from the U.S. treasury auction could be another way of keeping reported inflation at bay. A soaring Yuan, and hence tumbling import prices would provide a partial offset to building domestic price pressures such as what led to the recent truckers strike in Shanghai.
Of course, there could be other reasons for commodity market sells-offs in the future. But let us not lose sight of the forest for the trees. No matter how much oil prices and other key commodities such as copper and grain fall, look at the parameters in which they now move.
Even land-locked oil prices like West Texas Intermediate barely dipped below $100 per barrel. And Brent, the world oil price never made it below the triple digit price threshold.
How the goals posts have moved. Five years ago, those prices would have been all time highs. Last week, they generated headlines of plunging oil prices.
What hasn’t changed however is the intrinsic relationship between oil and economic growth. Ratchet down expectations for economic growth and quite naturally you lower expectations for future oil prices.
But that’s only because without burning more oil, there is no economic growth."
[url=http://www.jeffrubinssmallerworld.com/2011/05/11/a-recession-is-coming-but-not-yet/]http://www.jeffrubinssmallerworld.com/2011/05/11/a-recession-is-coming-but-not-yet/[/url]
PIGS Don't Get to Burn Oil
With OPEC tapped out, where will China find the oil to power future economic growth?
The obvious answer is it will take a big chunk out of the 19 million barrels the U.S. economy burns every day. And China doesn’t have to build a blue water navy or engage in an arms race to take a big slice of the U.S.’s energy pie . All it has to do is stop showing up at the U.S. Treasury auction, and Washington’s massive budget deficit will do the rest.
Despite all the bashing China takes in Congress, it’s big bad China that finances Washington’s massive one trillion dollar plus budget deficit. It has for some time. Almost two thirds of the Peoples Bank of China’s $2.85 trillion foreign reserves are in U.S. dollar assets.
These investments have not been an act of benevolence towards U.S. taxpayers. China’s central bank felt compelled to become the largest holder of U.S. Treasury bonds to keep its Yuan from rising and undermining the competitiveness of Chinese exports in the U.S. marketplace. But that was in a world of cheap oil.
We live in a different world now. Not only will triple digit oil prices sever those trans-oceanic trade links through soaring transportation costs but they will throw the U.S. economy back into recession. Contracting economies, particularly those also burdened with huge fiscal deficits, don’t make great trading partners.
Without access to the huge pool of Chinese savings, the U.S. is no more capable of financing its fiscal deficit than the PIGS (Portugal, Ireland, Greece or Spain) are capable of financing theirs. If China stops funding the Treasury market, Treasury yields will soar, pulling mortgage rates with them.
The Federal Reserve Board could always respond by switching the printing presses to overdrive and monetize even more of Washington’s deficit than it is already doing. But the more money the Fed prints, the lower the value of the U.S. dollar, and the higher the US dollar-denominated price of a barrel of oil.
That just puts the price of oil that much farther out of U.S. motorists’ reach, while a soaring Yuan would give China’s motorists a big currency-adjusted discount at their pumps.
Alternatively, China’s exit from the Treasury market might just prod Washington into real action on cutting its deficit. But if that path is taken the actions needed to reduce the one trillion dollar budget deficit will become as much a yoke around its economy as the PIGS deficits are on their economies.
PIGS don’t get to burn 19 million barrels a day of oil because their economies are shrinking. If China wants to burn more oil, all it has to do is walk away from the U.S. Treasury auction and take what the U.S. economy will no longer be able to afford to burn.
A Recession Is Coming But Not Yet
"There will be many dress rehearsals in commodity markets before the next global recession. An example is last week’s dramatic and broad-based sell off that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers.
But is that time already upon us? If the monetary authorities in China and India continue to hike interest rates at the pace they have set recently, the next global recession may not be that far off. After all, these economies are today’s global economic growth engines. But when push comes to shove, the political masters of those central banks may soon temper their enthusiasm so they can battle inflation.
If the money-printing U.S. Federal Reserve Board doesn’t care about inflation why should the People’s Bank of China ? Compare income per capita between the U.S. and China and it is not too difficult to figure out which one should be more desperate for economic growth and, as a result, more willing to seek trade-offs against inflation.
In the meantime, there are several tactical paths China can take that at least give the appearance of holding inflation in check. Reducing the weighting of food and energy prices in China’s consumer price index would be one way. As long as the country’s headline inflation rate stays below 5%, markets won’t get too upset about what it is really measuring.
Having the People’s Bank of China step away from the U.S. treasury auction could be another way of keeping reported inflation at bay. A soaring Yuan, and hence tumbling import prices would provide a partial offset to building domestic price pressures such as what led to the recent truckers strike in Shanghai.
Of course, there could be other reasons for commodity market sells-offs in the future. But let us not lose sight of the forest for the trees. No matter how much oil prices and other key commodities such as copper and grain fall, look at the parameters in which they now move.
Even land-locked oil prices like West Texas Intermediate barely dipped below $100 per barrel. And Brent, the world oil price never made it below the triple digit price threshold.
How the goals posts have moved. Five years ago, those prices would have been all time highs. Last week, they generated headlines of plunging oil prices.
What hasn’t changed however is the intrinsic relationship between oil and economic growth. Ratchet down expectations for economic growth and quite naturally you lower expectations for future oil prices.
But that’s only because without burning more oil, there is no economic growth."
[url=http://www.jeffrubinssmallerworld.com/2011/05/11/a-recession-is-coming-but-not-yet/]http://www.jeffrubinssmallerworld.com/2011/05/11/a-recession-is-coming-but-not-yet/[/url]
PIGS Don't Get to Burn Oil
With OPEC tapped out, where will China find the oil to power future economic growth?
The obvious answer is it will take a big chunk out of the 19 million barrels the U.S. economy burns every day. And China doesn’t have to build a blue water navy or engage in an arms race to take a big slice of the U.S.’s energy pie . All it has to do is stop showing up at the U.S. Treasury auction, and Washington’s massive budget deficit will do the rest.
Despite all the bashing China takes in Congress, it’s big bad China that finances Washington’s massive one trillion dollar plus budget deficit. It has for some time. Almost two thirds of the Peoples Bank of China’s $2.85 trillion foreign reserves are in U.S. dollar assets.
These investments have not been an act of benevolence towards U.S. taxpayers. China’s central bank felt compelled to become the largest holder of U.S. Treasury bonds to keep its Yuan from rising and undermining the competitiveness of Chinese exports in the U.S. marketplace. But that was in a world of cheap oil.
We live in a different world now. Not only will triple digit oil prices sever those trans-oceanic trade links through soaring transportation costs but they will throw the U.S. economy back into recession. Contracting economies, particularly those also burdened with huge fiscal deficits, don’t make great trading partners.
Without access to the huge pool of Chinese savings, the U.S. is no more capable of financing its fiscal deficit than the PIGS (Portugal, Ireland, Greece or Spain) are capable of financing theirs. If China stops funding the Treasury market, Treasury yields will soar, pulling mortgage rates with them.
The Federal Reserve Board could always respond by switching the printing presses to overdrive and monetize even more of Washington’s deficit than it is already doing. But the more money the Fed prints, the lower the value of the U.S. dollar, and the higher the US dollar-denominated price of a barrel of oil.
That just puts the price of oil that much farther out of U.S. motorists’ reach, while a soaring Yuan would give China’s motorists a big currency-adjusted discount at their pumps.
Alternatively, China’s exit from the Treasury market might just prod Washington into real action on cutting its deficit. But if that path is taken the actions needed to reduce the one trillion dollar budget deficit will become as much a yoke around its economy as the PIGS deficits are on their economies.
PIGS don’t get to burn 19 million barrels a day of oil because their economies are shrinking. If China wants to burn more oil, all it has to do is walk away from the U.S. Treasury auction and take what the U.S. economy will no longer be able to afford to burn.
