I found a very good article on The Economist, which addresses numerous questions and comments on some of our threads the last week or so. The online version does not say when the article was written.
Fragile foundations From The World in 2006 print edition
Prepare for slower growth, rising inflation and wobbly housing markets, says Pam Woodall
The exceptional nature of the world economy over the past two years is startling. Global GDP grew at an average rate of 4.7%, its fastest pace in any two consecutive years since the 1970s. In the year to mid-2005, all 55 countries that The Economist tracks each week had positive growth, for the second year running. In every year during the previous quarter-century at least one economy suffered a recession. Unfortunately, history tells us that things cannot remain so rosy for ever. The Cassandras who have long predicted a slump in American consumer spending—one of the main driving forces of global growth—have so far been proved wrong. Yet there are good reasons to believe that 2006 will be the year when consumers in America and several other economies lose their nerve.
Despite—or perhaps because of—its spectacular growth, the world economy has rarely looked so out of kilter with historical norms. Real oil prices are more than twice their average over the past two decades, and bond yields languish close to record lows. America’s saving is at a record low and its current-account deficit at a record high. Not least, there have been simultaneous housing booms in an unusually large number of countries, from America and Britain to France and Spain. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history.
[img_assist|nid=868|title=A world economy so out of balance is dangerously vulnerable to shocks.|desc=|link=node|align=left|width=400|height=346]
What might cause house prices around the world to fall and consumers quickly to close their wallets? The answer is high oil prices. With oil demand growing strongly and production and refinery capacity unusually tight, prices are likely to stay high in 2006. Oil prices have more than tripled since late 2001, a rise similar in scale to the price jumps of 1973-74, 1978-80 and 1989-90, all of which were followed by worldwide recession.
The main reason that high oil prices have so far not plunged the world economy into recession this time is that cheap money has supported housing bubbles and spending sprees in many countries, offsetting the impact of pricier oil. For example, in 2005 the United States will have paid around $120 billion more for oil than in the previous year, yet that is tiny compared with the $2.5 trillion increase in the value of residential housing. However, when house prices flatten or fall, consumers will feel the full force of dearer oil. Indeed, a further jump in oil prices could be what pops the housing bubble, by undermining consumer confidence.
Home prices have been edging down in many parts of Britain and Australia since 2004. America’s housing market is probably a year or so behind: during 2006 the year-on-year growth in average prices will fall towards zero. The experience of Britain and Australia shows that even a levelling-off of house prices, without an actual fall, can trigger a sharp slowdown in consumer spending. Half of all American private-sector jobs created since 2001 have been in housing-related industries and a large chunk of the growth in consumer spending has been financed by borrowing against capital gains on homes. A sharp slowdown in house prices will therefore have painful consequences.
Today’s combination of cheap money, soaring oil and home prices, and large budget deficits looks ominously like the 1970s, when global inflation took off. The difference is that independent central banks are less likely to repeat the policy blunders of the 1970s and the entry of China’s massive labour force into the world economy is helping to hold down wages. As a result, a return to double-digit inflation is unlikely.
The bigger risk is that climbing inflation expectations will restrict the ability of the Federal Reserve and other central banks to cut interest rates if house prices drop and spending stumbles. By slashing interest rates after the stockmarket bubble burst in 2001-02, central banks prevented a nasty recession, but inflation was then falling. Today, with inflation edging up, they would not be able to bail out homeowners. Moreover, most governments, not least America’s, now have large budget deficits and so would have little room to prop up economies with tax cuts.
One ray of hope is that Japan’s economy now seems to be in better health. Another is that, although government reforms may have stalled in Germany, the corporate sector has been fighting the flab to make itself more competitive; sooner or later, that too might deliver stronger investment and jobs. Germany and Japan are also virtually unique among developed economies in that their growth has not been driven by housing bubbles, so consumer spending, once it picks up, is less vulnerable to a bust. If the world’s second- and third-largest economies awake from their long slumbers, and if oil prices ease, then in 2006 the world economy may merely experience a gentle slowdown. If not, and if American consumers lose confidence, prepare for a nasty slump.
Timely story. I got a book yesterday: The Coming Economic Crisis: $200 Oil, by Dr. Stephen Leeb, who wrote previously a book about $100 oil, predicted the tech bubble and its collapse, and now is writing that the *biggest* economic crisis to ever face our civilization (bigger than the Depression, tech bubble, 9/11, housing bust) is $200 oil.
We are at peak oil, and supplies are dwindling, production is at peak capacity.
Demand is growing from China and India, at exponential rates.
The back of the book is about investment recommendations, and I did not jump ahead. I will post them.
I think oil will be more valuable than gold soon.
Like the tech and housing bubble, government, Wall Street, and the media have their heads in the sand! Do not expect your leaders to save you. Many civilizations ended because the people used up all their resources and did not plan for a replacement.
One more thing: the stock market bulls cite high company cash piles as proof that corporations are healthy. What idiocy! They are only holding cash because they are afraid to invest! Any company with prospects take a portion of retained earnings for R&D and investment into its future. Being in cash is something we do when we fear bad times, just like I am in my personal life.
.
