Wednesday October 13, 2004 - 19:21:08 GMT
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Forex: Greenspan Drills For Oil
Greenspan Drills For Oil
With Fed Chairman Greenspan set to discuss oil on Friday, and the price of crude posting record highs, some cursory review of the Chairman's views on oil from early this summer are overdue.
To set the record straight, I (we) do not know how oil above $50 a barrel will impact growth and the general price level. So I am somewhat guilty of throwing stones in a glass house. Furthermore, I really doubt the Fed has any clue how oil impacts growth and inflation, despite an abundance of models that claim such predictive power.
What we do know is the verbal record of the Fed Chairman, who most probably believe knows more about most things than nearly anyone else in the land, and oil is no exception. In August Greenspan said the soft patch the US economy encountered (some argue is still very much in place), was caused by the run up in oil prices. Oil went from about $30 a barrel to $40 a barrel and caused the soft patch. After peaking late-May, early-June near $41 (from around $28 a barrel at end of 2003), and in the process slowing the economy by the Fed's own admission. Oil dropped back briefly to around $35 a barrel and since it has been a near straight line to $54 high hit Tuesday. My point being that if say the move from $25-41 in the first half of this year caused the spring slow patch, what is $35-$54 going to do the expansion? A soft patch? Logic would suggest something far more serious all else being equal. Ironically, economists (public and private) are more upbeat on the outlook for US and global growth at $54 than at $41 in June. And it is not just Fed officials that now believe this run up in oil, which Greenspan once asserted was transitory, is a serious threat to either growth (in a first round effect) or the general price level (in a second round effect). Perhaps this implies all else is not equal. Enter the US firm...picking up where households have left off behind sticker shock on filling auto and home heating oil tanks. Firms however are not immune to higher oil prices. Sorry but the drag on corporate profits and sentiment from $54 oil is significant and not an environment for expanding production and building inventories. Treasury yields moving lower with oil moving higher suggests intellectual consistency when it comes to what Greenspan asserted slowed the economy in the spring and what is slowing the economy now. To be fair on our Chairman, he is not alone among officials who seemed far more concerned in June with $41 oil than with $54 oil today. ECB's Trichet and even BoJ's Fukui have played down the effects on growth and inflation from record oil prices in the last several days.
It would appear to me that the US and global economy is heading for a brush with stagflation and no one seems willing to discuss it much less recognize the risk. Compare this with how the Fed reacted to the unacceptable risk however remote of an unwanted decline in prices. No I am not suggesting a 70's kind of stagflation...something far smaller, but nonetheless significant.
Greenspan has some explaining to do in his speech Friday with regard to Fed thinking on oil...households and firms are as stunned if not more today with the move from $35 to $54 as they were with the move from $28-$41 earlier this year.
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