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The Nature Of Oil 'Stimulus' Is Strictly Imagined Math
Submitted by Jeffrey Snider of Alhambra Partners,
It is amazing the speed at which FOMC officials have embraced not falling oil prices but collapsing crude. The pace of the decline is being driven, contrary to the fracking miracle, by the fact that nobody seems to want to bid on the stuff. That is, as I noted earlier, a demand problem.
But officials like Fed Vice Chair Stanley Fischer and FRBNY President Bill Dudley are saying that these lower oil prices, due to lower demand, will end up boosting demand – big time. That is the essence of their argument, that recession is the latest “stimulus.” They are forced all onto one side, as in the price having already fallen without ever addressing, because they simply can’t, why prices have collapsed in the first place. Such relevant material is conspicuously absent:
Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, speaking at separate events yesterday in New York, both stressed the positive economic impact from the steepest decline in oil prices for five years…
He also said lower oil prices were “a phenomenon that’s making everybody better off.”
Again, “everybody better off” because everybody is already worse off. That is what happens when these policymakers are forced off script. I don’t believe for a second that anyone at the FOMC, or any orthodox economists, is comfortable with oil prices here. These are people that believe, to their very core, that “inflation” is the primary means to express positive economic growth. Lower oil prices, let alone this 40% breakdown, are anathema to the orthodox way of life. That is why they are forced into this Abbott and Costello routine of embracing the “tax cut” effect of lower prices while maintaining that they can still easily attain their inflation target that hasn’t been met in almost three years.
If we set that aside, however, and just focus on the “stimulus” aspect of energy prices, it is clear that this is something that has been modeled, meaning it is “valid” to the economist (statistician):
The lowest oil price in four years will provide stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities, according to Citigroup Inc.
The problem with regressions is the assumptions you make about independent variables and error terms (the essence of chaos theory and fractal geometry). The estimate provided above is another example of the greatest deficiency of econometrics, ceteris paribus. In other words, all else equal, falling oil prices are a boon to consumers. That is essentially the Fischer/Dudley stance acted out in incomplete math – incomplete because ceteris paribus doesn’t address, like Fischer and Dudley, why oil prices are falling in the first place.
Instead of providing a “tax cut” –like effect, oil prices are recognizing economic “anti-stimulus” (recessionary forces) which far overwhelm any crude (pardon the pun) benefit.
That does seem to be the case in US history, at the very least. Every time oil prices fall significantly the “stimulus” aspect of that is nowhere to be located. That is most evident during the worst of the Great Recession itself, as oil prices imploded, falling by almost 80% at the bottom. Despite that massive “boost” to consumer discretion, and the one that preceded it by two years, we saw the worst economic contraction in three-quarters of a century. The recent decline in oil, both WTI and Brent, is on par only with that decline having far surpassed anything else of the past decade (and about matching the decline in oil prices during the dot-com recession).
For an economist, ceteris paribus is meaningful; for the real world the rest of us inhabit, whatever small “stimulus” is provided by the collapse in oil prices is diminutive to the point of irrelevance by “whatever” is causing that decline in the first place. Some are still trying to make that a supply argument, but at least the bond market is not “buying” it.
Nor is China.
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In a system that extols the market, why can't the elite grasp that a price in the market has to be profitable to business and affordable to consumers? It is as if they assume the cost of providing any good is close to zero.
The COGS of producing hot air, the only real thing these academics have ever done,is zero.
Yea West Texas Crude dropping 90% in 1930 was a real booster to the economy. /sarc
Aaand...to pile-on a bit, there have been a few hundred TRILLION in Oil derivatives created and supported by 6 years of ZIRP.
That's a fact Jack !
Everybody has a plan until they get punched in face (or something like that) - Mike Tyson
a man who has never gone to school may steal a freight car; but if he has a university education, he may steal the whole railroad
No one is buying crude, because the guys who hand out free money told them not to.
Zero Hedge REALLY needs to get off the "sky is falling if oil (and Russian Revenue) is falling" daily fukkin' mantra.
WTF
the oil drop in and of itself may not be chicken littleable, but the derivative exposure daisy chain effect sure has the potential to be to 2015 what credit default swaps were to 2008/9. Ive been nudging tyler to cover that topic weeks before todays headliner
This Bloomberg article has a familiar ring to it:
"The pace of the decline is being driven, contrary to the fracking miracle, by the fact that nobody seems to want to bid on the stuff."
It's not about supply and demand of oil. It's because gold stopped bidding for oil in size. PhyAu-revaluation dead ahead!
Just need that 125 Yen for the asset domino trick.
banks need inflation - so they can pay their debt, low oil prices cause deflation...
not gunna happen soon enough to save their bacon
Read the Nor is [China]. link. Have to say that I don't get the point. Growth is positive. China's balance of trade in November was over $50B. Lower oil prices will make the bot even larger. What exactly does the author think China wants/expects? If China has overinvestment/malinvestment problems they are domestic in nature not usa/row originated. Anything else is just drinking the chinese flavored propaganda koolaide.
If the US doesn't consume as in the previous decades the Chinese have a problem. Now you get it.
At least its nice and cheap for the US' largest oil customer.
Oil prices were low and stable for decades until the bottom fell out of the petrodollar and OPEC decided to take on the Seven Sisters. Those now more than seven may be returning the favor.
Even if the most optimistic Fed-like MSM economists are correct about the new, lower, oil price as being a complete positive for the consumer (remember when we used to be "citizens" not consumers?) they have left a weakness open: What if the average citizen, aware of current threats against our standard of living, resolves to do something subversive with the savings...like saving it. Instead of spending witlessly, they might put that "savings" into quiet seclusion somewhere, as in cash or gold.
Terrorists.
Saving money, how unAmerican can you get.
Consumers are never mentioned in the Constitution and therefore have no rights.
The NWO america will be based on a new document - the Consumetution
This consumer just placed orders for some more MREs and gold. 2008 is still a recent memory and I don't think that there will be any escape hatches this time around.
"Oil Stimulus" is not extra income. Just because you buy something other than gasoline does not stimulate the economy, though it may stimulate other sectors. While most principals of economics are not "zero sum", this one comes pretty close and may actually be detrimental because chances are this extra income will spent on something from China and since oil import has decreased significantly, the net effect may be negative.
While stimulating other sectors does not, de facto, stimulate the entire economy, this too comes with a caveat. Instead of "trickle down", think "lawn sprinkler", where, if the money directed to oil had oversaturated that sector, then a more even distribution will nourish the starved sectors. Oversaturated sectors are not supposed to happen in a free and open market, so to the etent that it has been, the resulting "stent" will open the flow and benefit society.
Oil prices are headed down in the long term, but oil should find some temporary support in the coming days or weeks...
http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...
It's dangerous to try catching a falling knife....especially in a 3rd wave of a 3rd wave of a 3rd wave (from 2007).
That's just flat wrong. That's like saying lower interest rates are not stimulative because it's just a zero sum game - every dollar the borrower saves is one less dollar the lender earns. Does that make sense?
Whe oil prices decline, the marginal buyer of crude (the American consumer) benefits, and not only does that marginal dollar stay onshore, it remains with the guy who has a larger propensity to consume (remember Econ 1?) That marginal dollar when spent in the US economy becomes stimulative. Just like a tax cut.
That's a tough one and I suspect I'm just being defensive of my position but, in Adam Smith's world, interest rates (specifically, things like re-fi's) are an adjustment to the base cost of a single good and do not produce any more or any less of that good. However, if you go to buy a new asset with a new loan, the rate may induce a sale but it is that sale which creates a debt and that debt is no different than the Fed printing it, or a tree that grows it, as it is a leveraged lump sum payment in return for a promise.
Low prices = good
High prices = bad
Those that lived through the industrial revolution understood this.
The only ones that don't understand it are Zero Hedge and some of its readers. For those folks, the meme when prices are high is that high prices are bad. When prices are low, Zero Hedge switches to the low prices are bad meme.
Why? Because Zero Hedge's basic premise is that everything's going to hell in a handbasket. The idea that something - including oil prices - could somehow be conducive to growth undermines that premise.
AP,
You are wrong. A market is a meeting of producer and consumer. It has to work for both, so low prices can be very bad. It isn't 1890, dude.
Bob, the cure for high prices are...high prices. Those high prices were 'cured' when shale et al. added new supply; prices dropped as a result.
Conversely, the cure for low prices are...low prices. When prices drop too low, producers decide it's not worth the trouble and supply disappears - and prices rise again.
In addition to everything else, do I have to teach you basic economics too?
Once upon a time there was a magical unicorn named Pricediscovery...
W/O industry, lower gasoline prices are a marginal boost to the economic tread.
Lower petroleum prices is guaranteed to have no positive impact on the price of electricity, rent, ed debt/costs, medical debt/costs or automobile debt/costs, and little on food since there are other factors also contributing such as the massive ethanol for fuel fascist mandate.
Many people hoped that falling oil prices would save Christmas sales, this is not going to happen.
The drop in oil has been a the very least partially engineered. Up until now the reaction in "The Market" has clearly been rigged to reflect a benefit to the US consumer. It looks like the jig is about up on all of it.... retailers, airlines, transports are hanging up at all time highs except for a few hours of doubt last week... what a joke.