Some of you may have noticed amid all the hubub that the price of oil has dropped about $12.00 per barrel over the past couple of weeks. And though this may be good news for American motorists, the reasons for this price decline are decidedly bad news for a lot of people, whether they are motorists or not. What happens in Greece, as well as the other Club Med nations, matters very much for the U.S. It goes without saying that there is no good outcome to Greece's debt workout. The damage has already been done and the questions remaining are: who suffers more or less and, what reverberations will be felt around the world as a result of the measures taken. The scariest might be the deflation of Club Med economies that is ongoing and soon to be accelerating because of the austerity measures (cuts in government spending) that will shrink economic activity. This will likely make the debt concerns even worse by shrinking the economies ability to service that debt.
The fall in the price of oil is basically the markets opinion on the future of the global economy. Oil is falling for two reasons. The first is because the demand forecast has dropped due to worsening economic conditions. The other reason is that the dollar, which most oil contracts globally are traded in dollars, has strengthened against the Euro. But the stronger dollar, despite the benefit of cheaper oil, has a downside that American policy has been trying to avoid for the last decade. This downside is the worsening trade deficit, which should be getting more press time as the Euro drops in value against the dollar. The trade deficit is the undereported twin sister of the national debt. It is the trade deficit with China and others, notably Saudi Arabia, which helps the U.S. fund it's debt. This is likely to continue and does not bode well for anybody. The falling price of oil (copper, too) is saying that America's trading partners are going to demand much less oil in the coming months, and it also means they will be demanding fewer American-made goods as well.
The only thing governments fear more than inflation is deflation. Deflation means the economy gets smaller. Technically it means that money is destroyed. Ok, that's not technical, but that's what it means. Deflation is what American federal economic policy has been fighting against since October of 2008. It is why the inflation worry is fairly remote for the time being. This worry-free approach is being vindicated as the price of oil and copper falls sharply and overall prices fall in Greece, Spain, Portugal, and Ireland. It is the effect of a massive drop in government supports for those economies. What happens next is anybody's guess, but deflation in these countries likely means further crises are bound to happen in those economies most closely linked to them. And all countries economies are linked in one way or another.
I can't say for sure what the best response is to this crisis. It seems likely that there will be mistakes made over the coming weeks because governments are in a panic and mistakes are made in that situation. But the aim of all these machinations is to essentially keep a failed system going for a little while longer. Until something happens. Maybe they think it will eventually get to rights again if they just provide enough monetary loving care. But I think Europe should be planning for a decline in economic activity and policy should be to soften the landing and make contraction fair to all parties. This cannot happen in a vacuum. It requires an unusual burden sharing by those who are less effected for the sake of those who are more effected. Europe has the opportunity to lead the world in this. If the European governments realize that the fundamental crisis of economics as currently practiced is the growth imperative, then policies can be shaped to find a lower order of economic activity and minimize the social disharmonies that often accompany declining national fortunes.
Hard choices await the people of Greece and of Europe generally. What reducing economic activity ultimately means is asking people to give up something they already feel they deserve to have. It also means asking people who don't have to give up wanting to have certain things, a certain lifestyle that they see others have and want for themselves. So called developing countries will be countries-never-to-develop, at least along the lines of Europe and the U.S. In the meantime, the Europeans, and eventually, Americans, will be rearranging their lives to deal with their return, after many centuries, to living within the natural limits of the Earth's energy supply.
I have hope and am rooting for Europe because it probably represents the best hope for the rich countries in terms of recognizing the energy and climate predicaments we face and acting on them. Certainly it is better understood there than in the U.S. Having said that, it is perhaps a faint hope. People are people and they tend to act when crises of the kind like climate change and energy descent are upon them instead of off a few years into the future. But maybe Europe will clear a path for Americans to follow after the smug and haughty certainty of America's superiority has been wittled away by events.
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