What effect would a strong oil rally have on the U.S. economy?

"You need to convince people not to hold money. You need to convince them that cash is trash.

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Hence the low low interest rates. Saving in a "Savings" account earns you .03% at most. A 5 year CD pays maybe, 3%.

The US banks will not let you hold foreign currency in our banks. Well, there is one that I hold, EverBank in NY, https://www.everbank.com/

I hold my "Cash" there in basket of currencies, in a Money Market account and CDs. But the minimum account allow is 10k or something like that, could have changed.

So the US GOV and FED are trying to force Americans to Spend.
 
Nothing personal, but your analysis is totally wrong. The fact that oil is traded in USD has no real impact on the value of the USD (Run in your head what happens if OPEC sells oil to Germany or GB. Is there a net change in dollar holdings in either country?).

Answer.

Actually it does. The reason you don't appreciate it is because it has happened for such a long time. You take it for granted because it has become the normal activity. If countries stopped purchasing oil in dollars you would soon no the difference. The price rise will have an impact on the 'relative' power of the dollar, this is something that has been acknowledged widely, some people say it is why they went to war with Iraq.

If impact of higher oil prices are being "absorbed by US competitors", why is the WTI/Brent-CL spread widening instead of tightening? I don't think we use WTI in Europe.

Answer.

Regardless of the Brent WTI oil spread the oil price increase offsets the value of the oil prices against the purchasing power of the US. It is almost a perfect hedge. Oil prices rise, purchasing power rises. The reason it is beneficial is because other countries do not have that hedge so relatively it is advantageous.

Also if you look at Libya most of the oil it sells goes to Europe. This is another reason that the situation is beneficial to the US if the oil supplier to Europe declines then it means the US supplies are more dependable. This is another relative advantage.

I never said it was a wealth increasing advantage it will make the US poorer. But relatively speaking it will make them more powerful. This is point I think you are missing. This is a relative advantage not an absolute or wealth creating advantage.

You also seem to regard economics as an us/them game. I.e. low growth for China (they are more vulnerable to oil price vol which you correctly state) is good for Americans and will cause high(er) growth for the US because they can compete better. This is completely backwards. Growth in China is good for growth in the US and vice versa, contraction in China will cause contraction in the US. Will the US contract less? Maybe (who knows) but then contraction becomes a certainty.

Answer.

If China grows the consumer demand is taken away from America. America wants to increase its exports, this is something America wants and is part of the reason a currency war is expected. You are also not taking into consideration the social and military impact a stronger China means. More money equals more power and more arms. This is a relative disadvantage to the US becomes less powerful. If you are right about the US economy collapsing the army is the last advantage it has. If China becomes stronger it will demean that fact.

Further disagreement is the relationship America and China have. It has debt fuelled consumption based on Chinese lending. The more powerful China becomes the more the US has to borrow from them to support the consumption in their own economy. In short America becomes a debt subject.

Further, your point on Americans "being able to buy more goods from around the world" is also totally backwards. Higher oil price -> Higher input costs (in China or US-based manufacturing and transport) -> lower purchasing power (unless wages increase along with price increase but that is unlikely with oil shock) -> prices may decline which at this point could easily cause a deflationary spiral. Alternatively the economy would just slow down as nobody could afford the products and companies (most of them) could not afford to lower prices and would thus become unviable and BK.

Answer.

Yet again this is relative if the oil price rises the number of dollars bought rises meaning more of other currencies have to given in exchange. Because this is only an American benefit it gives a relative advantage. This is widely acknowledged as a fact. I cannot believe you are disputing this.

If you look at the wording I do not say that they can buy more I say they can buy relatively more than other countries. Yes input costs rise but the Americans due to the oil currency hedge have a relative advantage over other countries.

You have completely missed the concepts I have explained and undermined acknowledged understanding. I don't think you understood the blog entry. You analysis would indicate that.

To answer your other comments (your personal attack) I am a macro economist. I do invent aggregate demand controls and banking systems and taxation systems etc. Once I wrote a prototype taxation computer programme for the Czech Republic. You would not understand the level of economic thinking I work on. No one has done the kind of things I do before that is why it is difficult for you to grasp.

You have not read any of my work. The fact that you have made a personal attack indicates that you do not understand the points I am making and have to criticise me in other ways. You start off with a few reasonable points that are based on a misunderstanding of my points, because I don't think you understood it, then you deteriorated into an ad hominem attack.

To anyone reading this, it would look like you are a poor debater at best and have biased personal beliefs. I don't want to make further criticism of you because it looks poor. I will say that from my understanding of what you have stated you are not economically well read.

The one thing you could have criticised me for is the inability for the article to communicate my point. I do however believe that this is down to your limitation not mine.
 
The personal attack was from me, not the other guy who you are responding to above. We are two people (or one very crazy fella who's had a fair productive conversation with himself on monetary policy).

I've read your stuff (from your other postings here). We've argued about aggregate demand 'control' before.

While I'm sure you are well versed in czech taxation code, that's not actual qualification for serious economic research. And, while I clearly cannot follow your economic thinking, I would put forth that I'm rather well equipped to understand 'mainstream' economics since my thesis director coauthored a very well known macro economic text with Bernanke.

And yes, since this is the internet, I could obviously be making this up. However, I rest assured that the few who come across this board with enough training in finance and economics will readily see the absurdity of your claims.

Meanwhile, I hope you find your Engles.



Quote from morganist:


To answer your other comments (your personal attack) I am a macro economist. I do invent aggregate demand controls and banking systems and taxation systems etc. Once I wrote a prototype taxation computer programme for the Czech Republic. You would not understand the level of economic thinking I work on. No one has done the kind of things I do before that is why it is difficult for you to grasp.

You have not read any of my work. The fact that you have made a personal attack indicates that you do not understand the points I am making and have to criticise me in other ways. You start off with a few reasonable points that are based on a misunderstanding of my points, because I don't think you understood it, then you deteriorated into an ad hominem attack.

To anyone reading this, it would look like you are a poor debater at best and have biased personal beliefs. I don't want to make further criticism of you because it looks poor. I will say that from my understanding of what you have stated you are not economically well read.

The one thing you could have criticised me for is the inability for the article to communicate my point. I do however believe that this is down to your limitation not mine.
More...
 
Quote from sjfan:

Perhaps you may take note that economists do not 'invent' models/controls. They propose models, tests them empirically, and draw implications.

You (via your blog and your posts here) sound more like an armchair activist with a cursory (ms)understanding of economics (hum... that's description suspiciously similar to Marx isn't it).

When can we look forward to peer-reviewing your aggregate demand model? (which, hopefully might lead to a partial or general equilibrium model - the kind of stuff that economists are actually interested in when modeling demand; but you, as an economist, surely know this already).
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I am a macro economist and can do those things. Just because other macro economists are limited does not mean that I am.

Your understanding of a macro economist is wrong. You are explaining a macro economic technician. You do not understand the concept of the operational application of financial tools and the use of them to influence the economy. You also do not understand financial innovation and creation of economic tools. This is because it has not happened in such a long time. The current credit based banking model has been around since the inception of banking but that does not mean another person cannot create a new model. Just because it hasn't been done for a long time is not a factor that makes it impossible.

My opinion of a macro economist is following. A musician plays the music, a conductor conducts the music giving the musicians directions on the emphasis of the sound and tone of the music and the composer writes the music or invents it.

In the same way, bankers use the banking calculations to enable trade, the central banks and treasury sets the variables that influence the volume of trade and flow of the economy and the macro economist invents the system or tools and banking calculations that the banker and the central bankers and the treasury use.

The composer and the macro economist are the two creative aspects of the system. They are the people that come up with the concepts and music and tunes or concepts, systems and calculations that the other components of the orchestra play along to.

Your understanding of an economist is incorrect. You assume they are statistical predictors of future outcomes.

If that is the correct explanation then I am in a league of my own.

You are too kind!
 
Quote from peilthetraveler:

Every $10 rise in oil lowers our GDP by one quarter of 1% if I remember right.
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Yet again you are not understanding the point. The GDP may go down in America by a certain amount. But it will go down in other countries by a greater amount. The advantage is a relative one not a wealth creating one. The quality of life may go down for Americans but the quality of life for other people will go down more.

In terms of power the American government gain from this relatively speaking. That is why at the end I wrote it may be in the benefit of the American Government but not the Americans.

This is quoted from the post.

"Americans can therefore afford to buy a lot more goods or the same amount with less money than other consumers across the world"

Notice that it states that the consumption abilities of the US is relative to other countries. I do not say they will get richer. I just say they will lose less purchasing power relative to other countries. It is in there benefit on a national level not an individual level.

Here is another point.

"I now after deeper thought and economic analysis believe that this view of the current situation is wrong and that the conflict and revolutions in the Middle East will serve America or at least the American government very well in the current economic climate."

Notice how I state that the benefit is the part of the government the American people. I differentiate between the two.

This makes me think that the commentators on this thread have misread my point.
 
It isn't hard to figure out what a big rally in crude will do to the economy. When gas prices consumers will be very choosey about where they drive their car and what they drive it for. High gas prices cut into discretionary income so that's less money to be spent at PF Changs or the local movie theatre. Back in 2008 when crude was heading toward 147 the S&P became almost perfectly inversely correlated to the price of crude. It was like holding the price of crude in front of a mirror to see what the S&P looked like. The higher crude goes the lower the S&P goes and the more pressure the economy faces.

When o when will Bernanke raise interest rates? Their measure of inflation is obviously misleading but one thing you can argue with is the rising price of oil. I wouldn't be surprised to see crude head in the direction of $147 this summer. Or, perhaps traders will sell that event?

Quote from sniper:

No sarcasm at all. I think what you had to say in your blog makes a lot of sense and is definitely not something I have thought about before. Like I said in my blog, I'm not an economist, just an equities trader. Really just wanted to see how others think a big crude rally will affect the U.S. economy.
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No, you are moderator of www.elitetrader.com; In the scheme of world finance and economics, practice and theory, that's all you are.

Quote from morganist:

I am a macro economist and can do those things. Just because other macro economists are limited does not mean that I am.
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Here is a question on the comments on my blog. Below is the answer I have given.

The reason I have put this is because all the links to the post were from this website so it means it was someone here that wrote it. This is the answer.

Coupon Deal said...

This can't be right. If I pay for Oil in USD, it is the same as I pay for it in EUR (adjusted for the exchange rate). FOREX allows me to always exchange my EUR to USD and back instantaneously.
27 February 2011 16:06

Morganist said...

I don't think you understand the point. You need to buy dollars to buy the oil so you buy dollars. You would not then buy back euro's with the money you spent buying dollars. That would make no sense the reason you bought the dollars was to buy the oil because you need the oil. The dollar is not then used to buy the euro because you bought it for a purpose, which was to buy the oil.

The greater the demand for the dollar the higher the price rise, supply and demand. Because people need to buy oil they demand the dollar to buy the oil. They do not demand the euro because they cannot buy the oil in euro's.

The reason that you can buy the euro back at the same price instantaneously is for that exact reason. The market has not had time to adjust to the greater demand for the dollar because you have only just bought it so the price is the same. If you waited a bit and other people needed to buy dollars to buy the oil then you would see the price change because the new demand would have altered it. You have explained why you are wrong in your own argument. You defeated your own argument.

So there are two factors here that you have to account for. The first is that the dollar needs to be held for a reason or necessity. This creates higher demand than for the euro or other currencies. Two the instantaneous exchange of currency does not allow for the increased demand for that currency to be reflected in the price yet. Remember the oil then has to bought in dollars after the dollar has been bought. Creating a delay in both the oil price alteration that the greater demand the new purchase creates and also creating a delay in the price alteration in the dollar that the new demand in oil price creates.

The alteration in prices is not instantaneous it may be fast in efficient market hypothesis but it is not instantaneous. Also there is another commodity that has to be bought which then has a cyclical impact on the original commodity this takes further time and escalates the alteration.

Does that answer your question.
 
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