OPEC Presents: QE4 and Deflation
Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy, point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks werent able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.
The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, theyre easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC or rather Saudi Arabia has gifted us QE4, but the blessings of the low oil price stimulus will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up spending space will end up actually being spent. So in the end thats a net loss as far as spending goes.
The OPEC Q4? may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as were already seeing, those firms market values are certain to plummet. And, see yesterdays essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.
You cant force people to spend, not if youre a government, not if youre a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. Thats the perfect picture of Japan right there. Theres no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you cant force people to spend, you cant create growth either, so that myth is thrown out with the same bathwater in one fell swoop.
http://www.theautomaticearth.com/opec-presents-q4-and-deflation/