Oil Prices and Interest Rates.....

Generali

....or Why I Stopped Worry and Learned to Love the Germans.

For most of the period since 1974, world capital flows have been driven by so-called Petrodollars: US Dollars earned by selling oil (petrol) and then re-invested into the financial system.

Petrodollars have enabled a number of things, for example:

- Western nations to run big budget deficits
- Western banks to have a ready supply of cheap money to lend to borrowers

Now it looks like the supply of Petrodollars is drying up.

To keep market interest rates anywhere like where they are at the moment will need a lot more QE if oil prices stay low.

The overall effect on the world's economy should be positive from low oil prices as people currently spending money on oil (e.g. buying bread or a newspaper) can spend that money on other things. Some sectors, like banks, will suffer though.

Why do I love the Germans? They seem to be the last ones running a current account surplus and so the last people needing to store cash at basically any price.

mwpt

As mentioned in another post my black swan event is an eventual turn of the market against so called safe haven western government debt, which will lead to a rise in interest rates, and mortgage rates, and everything that entails.

Of course at the moment central banks can suppress the rates on their own (I meant their government) debt by buying it, but can they do this against Mr. Market forever?

mwpt

Or Miss Market, apologies.

purch

.........she's married

michaels

Generali wrote: »

....or Why I Stopped Worry and Learned to Love the Germans.

For most of the period since 1974, world capital flows have been driven by so-called Petrodollars: US Dollars earned by selling oil (petrol) and then re-invested into the financial system.

Petrodollars have enabled a number of things, for example:

- Western nations to run big budget deficits
- Western banks to have a ready supply of cheap money to lend to borrowers

Now it looks like the supply of Petrodollars is drying up.

To keep market interest rates anywhere like where they are at the moment will need a lot more QE if oil prices stay low.

The overall effect on the world's economy should be positive from low oil prices as people currently spending money on oil (e.g. buying bread or a newspaper) can spend that money on other things. Some sectors, like banks, will suffer though.

Why do I love the Germans? They seem to be the last ones running a current account surplus and so the last people needing to store cash at basically any price.

Are we allowed to (most humbly) disagree?

Imagine the US run a 1 usd deficit on oil trade with Saudi Arabia. 50c gets recycled to US dermand via the sale of jet aircraft, the other 50c gets recycle via Saudi's saving it and US banks lending it out.

Now oil gets much cheaper and the oil deficit falls and either US consumers can spend the money directly on something else thus not needing to borrow to still support the same consumption or some US oil consumers save their unspent (on oil) income in the bank which lends it out for others to spend just as happened when the Saudi did their saving.

So the net impact is nil - of course there is a change in consumption patterns, perhaps arms dealers do worse and Chinese tat producers do better. The impact of such changes in demand patterns may be enough to destabilise the economy on its own without needing to look at diffuse financial market effects.

mystic_trev

Generali wrote: »

To keep market interest rates anywhere like where they are at the moment will need a lot more QE if oil prices stay low.

Sorry to hijack the thread, but what are your views on 'CoCo's' Gen?

DiggerUK

The oil surplus is a symptom of higher production, not reduced demand. Everything is overproduced at the moment.
I'm beginning to believe that low interest rates can only exist, because of overproduction in the money supply as well.
I know the reasons for QE (like 'em or loathe 'em) were to restore liquidity, but it still seems to me that liquidity will do for the highly leveraged what it did before, i.e., stuff 'em..._

Thrugelmir

michaels wrote: »

So the net impact is nil

It's not nil. The Middle East is in itself now running budget deficits. there's not the money to refurbish ones boat at a cost of £5m every year or buy a Rolls Royce with the roof lining encrusted with diamonds to represent the stars in the galaxy.

The oil price fall may be good news but the impact spread across millions of people is relatively small per capita. Many in the public sector will do little more than use the savings to offset the rise in Employees NIC that takes effect from April. I doubt GO's budget is going to particularly positive next month either. As there's still a sizable hole in the budget to be filled.

The Japanese experience suggests that there's no easy fixes.

michaels

Thrugelmir wrote: »

It's not nil. The Middle East is in itself now running budget deficits. there's not the money to refurbish ones boat at a cost of £5m every year or buy a Rolls Royce with the roof lining encrusted with diamonds to represent the stars in the galaxy.

The oil price fall may be good news but the impact spread across millions of people is relatively small per capita. Many in the public sector will do little more than use the savings to offset the rise in Employees NIC that takes effect from April. I doubt GO's budget is going to particularly positive next month either. As there's still a sizable hole in the budget to be filled.

The Japanese experience suggests that there's no easy fixes.

Surely we are talking reduced income inequality which according to Plinketty means increased expenditure?

Thrugelmir

michaels wrote: »

Surely we are talking reduced income inequality which according to Plinketty means increased expenditure?

Sharing a billion pounds between say 20 million people is £50 each. Hardly addressing inequality if you where you put the size of the world's population into the equation. Even with £100 billion to share out.

Generali

mystic_trev wrote: »

Sorry to hijack the thread, but what are your views on 'CoCo's' Gen?

Probably overpriced and a great way to get people panicking about a bank that is facing a little liquidity problem IMHO. They probably sounded like a great idea at BIS at 2am.

What do you think about them?