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Low Oil Prices
The Fed Wants Inflation
December 1, 2014 interview link
The Exchange with Amanda Lang
The US and some its allies have imposed sanctions on Russia. Jim hasn’t seen any evidence that Saudi Arabia is part of any conspiracy to damage the Russian economy.
The decline in oil prices is a global slowdown combined with normal supply and demand.
We have a lot more supply coming from Canada and the United States, while global demand is slowing down.
China is slowing down, Japan fell off a cliff in the past six months, and Europe is slowing down.
Lower oil prices might not be great for the global economy. It puts more money in consumer’s pockets, but they aren’t necessarily going to spend it and help GDP. They could pay off mortgages, car loans, student loans — there’s a lot of debt in the system.
LOW OIL PRICES
The currency wars are going strong around the world.
Japan is doing everything possible to trash their currency. Europe has been making noise about quantitative easing. China has been letting the yuan go down a little bit.
All of this is designed to export deflation to the United States.
You try to cheapen your currency, help promote your exports, and export deflation to the US.
The US is seen as the strong hands.
When you look at Saudi Arabia and OPEC, the lower price of oil may just be another form of currency war. Their currency is pegged to the US dollar, but lowering the price of their exports is exactly the same as cheapening their currency.
The US economy is fundamentally weak, with declining labour force participation, stagnant real wages and 51 million Americans on food stamps. The third quarter GDP numbers will be revised down because seasonal adjustments weren’t made to defense spending. Second and third quarter GDP numbers were swollen by inventory, which on net add nothing to GDP, and adjusted for final sales would be much weaker. This will break, and by next year we might see a weaker US dollar.
The answer to how the FED will bring a weaker currency is that they won’t raise interest rates. They won’t raise rates in 2015, and they may go back to QE 4 by early 2016.
Everyone thinks that inflation is their friend when it comes to debt.
So how to you get inflation in a deflationary world?
The world as a whole has a deflationary bias because of the depression we’re in, and the deleveraging.
How do you get rid of it? You export it to the other guy.
So right now the whole world, including OPEC and China, Japan, Europe and Canada, are exporting their deflation to the US.
We’re about to see how much the US can take before they push back.
THE FED WANTS INFLATION
The Fed has an inflation goal of between 2 – 3%. Actual inflation is close to zero.
How long can that go on?
They’ll get the inflation by coming back with some kind of QE in, say, early 2016. QE tapering has failed twice before. QE 1 was 100% taper, and QE 2 was 100% taper. They both failed. Jim expects QE 3 will also fail.
We live in a deflationary world. It’s a sad day when central banks want inflation and they can’t get it.
Another Week on Wall Street
words and music Elaine Diane Taylor
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from the album Coins and Crowns available on iTunes