Analistas 25/04/2016

Why didn’t lower oil prices boost the global economy?

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I’m skeptical of this argument - even though I am very much in favor of rethinking our usual assumptions when an economy hits the zero lower bound.

First, a priori: Falling oil prices shouldn’t affect expectations about the rate of inflation of non-oil goods and services, or at least it’s not obvious that they should - and that’s the inflation rate that is supposed to matter for investment. Still, you could argue that oil is in fact driving those expectations, whether it should or not.

But I’d make another point: Even using market expectations, real interest rates (those adjusted for inflation) have, in fact, gone down, not up, in the face of falling oil prices. How is this possible, given the zero lower bound?

It’s all about the term structure. Long-term rates aren’t at zero, although they’re at least somewhat supported by the floor on short-term rates. And as it turns out, during the recent oil crash, long-term rates fell enough to more than offset the decline in expected inflation.

Of course, Mr. Obstfeld could be right. But my guess is that the oil-price disappointment originates less from expectational channels than from two facts: Oil is now a big driver of investment, via shale; and oil exporters are actually cash-constrained these days, with an arguably higher marginal propensity to spend than oil consumers.

No Time for Credibility

Here we are with near-zero real interest rates on long-term United States government bonds; with a desperate need for infrastructure investment; with strong reason to believe that deficit spending in the current environment would improve the long-run fiscal picture, because the interest burden would be so low and higher growth would raise future revenues.

And Time magazine decides that now is a good time to devote its April 25 cover to dire prophecies about the United States’ looming insolvency, with the lead article by James Grant - a crusader for a return to the gold standard and a signatory of the infamous 2010 letter warning Ben Bernanke, then-chairman of the Federal Reserve, that his policies would cause inflation and debase the dollar.

Was Time purchased by Zero Hedge when I wasn’t looking? Who thought this was a great way to make the magazine relevant and credible right now?