Tuesday, June 9, 2009

Oil price is the fly in the recovery ointment

In the U.S., government stimulus money is being used to bail out years of misguided investment in unsustainable autosprawl -- spread out buildings accessible only by motor vehicle. USD Billions in printed/borrowed money are being invested -- risking hyperinflation. But instead of investing in public transport and rail, most of the money is for autos, banks, and roads, propping up the same system that has failed. The plan is to have a recovery without inflation, but fossil-fuel prices stand in the way, and the dependence is being made worse. The U.S. government desperately wants to control the price of fossil-fuels, but even after massive military effort, it cannot.

Economist Abheek Barua lays it out:

...The upshot is that for most commodities there is a fundamental tendency for prices to rise. The fact that they tend to be traded as assets exaggerates this tendency and causes prices to flare up more than the simple arithmetic of demand and supply would suggest.
Thus the prospect of oil prices returning to $100 a barrel seems real. Could it derail the nascent recovery in the global economy that seems under way? Some (including Krugman perhaps) would argue that central banks should focus entirely on ‘core’ inflation and not try and fight price pressures in commodities by tightening money. A spurt in oil or other commodities would tend to be ephemeral and would not ‘embed’ itself into the economy unless real demand conditions picked up.
That, for any central bank, is a difficult call to take. It is certainly not one that the bond markets would buy into. They would tend to take cues more from headline inflation numbers rather than core inflation trends. Thus rising commodity price inflation is likely to translate into higher bond yields and higher interest rates in general...

--Abheek Barua chief economist, HDFC Bank, his "personal" views as published in the Business Standard

3 comments:

W. K. Lis said...

I heard economists predicting crude oil going over $200 a barrel by 2012.

Anonymous said...

The $400 billion [and maybe more] spent thus far on the bailout would be enough to build new rails and cover many, perhaps all, existing public transit operating costs.

infra said...

Transportation is a major component of infrastructure investments. How does free public transit factor into this plan? Do you have doubts about your transit needs being met? Feel free to share these concerns, experiences, and ideas today at www.infrastructureusa.org, where you can upload media, comment on policy news, and share your own infrastructure story.