The world price of oil has more importance for world inflation than the rate of interest set by the U.S. Fed, by the European Union central bank; or by the Bank of England, despite the incessant chatter on business news networks about whether the Fed’ s policy rate or any of the other policy rates will rise or fall, by how much or how often. World inflation prompts higher rates but higher rates don’t always compel lower inflation. In reality, very high interest rates are needed to “fight inflation”.
From 1975 to 1980 the U.S. GDP implicit price deflator (the best measure of inflation in my opinion and certainly the broadest measure) never fell below 4% and real growth over that five year period was a cumulative 23.4% or about 4-5% annually.
Fed policy rates during the 1975-1981 period were extremely high:
1977 - 5.54%
1978 - 7.94%
1979 - 11.2%
1980 - 13.5%
1981 - 16.39%
The “fight against inflation” was a losing battle for that five year period as the economy kept growing at the historically robust rates mentioned.
Why?
Look to inflation adjusted world oil prices for a clue. From the 1973 oil crisis through 1978, world oil prices were flat and the availability of stable oil prices despite relatively high interest rates saw the economy keep growing and it was the doubling of world oil prices in 1979-1981 that brought down the world economy, not some deluded central banker believing monetary policy was the key.
Oil prices today in real terms are lower than their 1981 levels by 33% and still stimulate world economic growth. As economists wring their hands complaining that the 5.25% Fed policy is not doing enough to stem the rise of inflation in United States, they ignore the powerful stimulus of real oil prices at lows not seen for three decades. Cheap, reliable (and for that matter safe and devoid of any material affect on climate) energy from oil & gas will keep the world economy expanding unless tilted off its horse by fiscal, not monetary, insanity in most Western democracies. The fiscal insanity is reckless borrowing by American, Canadian and European sovereigns.
Leftist borrowing is out of control in North America as Joe Biden and Justin Trudeau try to retain power by borrowing more, buying votes, and giving speeches about how much that is helping ordinary citizens pay their bills, while central bankers are giving a consumer a nosebleed in terms of mortgage and credit card rates. The combination of over regulation of homebuilding and rampant immigration in advance of sufficient infrastructure to house, school and care for the newcomers takes its toll by driving the costs of homes, tuition and health care to extreme levels. The failure of a U.S. bond auction might happen and presage a deep economic decline. Until such event, world oil prices will enjoy the driver’s seat.
In the meantime, my take is that:
Oil prices will go higher despite OPEC doing its best to keep the world price of oil below US$100 a barrel. When energy prices get high enough, they will crimp economic growth and a cycle of falling energy costs, slowing inflation and rising unemployment will shift policy objectives to “having our backs” as leftist governments rush to further destroy their balance sheets to add student loan forgiveness, free or low cost child care, tweaks to health care such as dental care and pharmacare on the government’s tab, rent controls, subsidies to home buyers, promises of more home construction in a desperate attempt to remain relevant and hang on to power all the while exacerbating they problems they alone have caused. In the meantime, expect the U.S. Democrats and Canadian Liberals to run with their specious “climate change” rhetoric at shrill or even extreme levels since until their policy failures are bailed out by world oil prices they have little else to use to persuade people the problems are not their fault and they are the only solution.
We are heading towards a period of economic malaise and when it starts, there is one thing you can take for granted - the Democrats and Liberals will assure you it is not their fault and pretend they can solve the problems their silly polices caused, blame everything possible on Donald Trump, climate change or conservatives in general, and keep throwing your money at the problems that arise from their policies.
Wise words. Totally agree.
I´ve been reading your posts about Intel. I´m considering pulling the trigger :)
Oil is always been downplayed and the chickens will come to roost soon enough.