The latest bubble has burst, not the big ones on Wall St. or at the Federal Reserve Bank and the US Treasury. But in the last few months the bubble in international energy has gone through the floorboards. The Iranians are blaming the Saudis and the other GCC countries. But even though Riyadh refuses to hold back production (in order to lift prices), it’s not the Saudis who have created the downward global spiral in all categories of commodities. The contradictions in Washington’s easy money regime are to blame, as its deleterious consequences continue to relentlessly push forward. Astonishingly, both Marxists and Austrian “gold bugs” smile in agreement. Yes, in the US both the far-left and the far-right see a stock market crash and/or a sovereign debt crisis coming. And their common response will be: “I told you so”.
Of course, all the world’s central banks have followed Washington’s easy money lead. From massive China to little Israel, the price of money (the rate of interest) has been kept artificially low since the horrendous debacle on Wall St. in 2008. And ironically, it was the same easy-money policy that caused the last major bubble to burst. Seven years ago it was an easy-credit, housing-market-bubble meltdown whose repercussions went global. This time it could be oil. In 2000 it was record-low interest rates causing the dot-com bubble within the stock market. In the easy-money regime of the 1990s, it was hedge funds (Long Term Capital Management) as well as crises in Asia, Mexico and Russia (the emerging markets). And this time, so far, very easy money has caused a boom in US shale oil. But the new glut in shale has caused this balloon of oil to be pricked. And where it’s all going to end up is anyone’s guess.
As the price of labor worldwide continues to stagnate, or worse, is it any wonder that all that easy money has gone into financial speculation? Real investment in the production of goods lacks adequate demand. So a ton of low-priced debt (cheap money at near-zero interest rates) has been leveraged to the hilt in search of corporate mergers, stock buybacks and massive amounts of energy junk bonds. Wall St. has been making out like a bandit, and everyone knows it. If and when another collapse comes, all the world’s workers now will easily understand that the level of economic inequality can only rise further as their part-time or low-paying jobs turn to layoffs. However, the next time around, as the Washington plutocracy attempts to reach for the workers’ wallets in order to bail out the fat-cat stockholders and bondholders, the political ramifications in the US are going to be historic.
So what pricked the oil balloon? If it wasn’t the Saudis, who was it? The answer is fairly straightforward. Its cause was the colossal slowdown in China. Over the years, the China export machine has been forced to peg its currency to the US dollar (voluntarily) in order to remain competitive. For all countries, a high-priced currency means high prices for its exports. Israelis know this better than most. The shekel has been kept artificially low in order to maintain Israel’s export-driven economy. In Israel this has meant that the costs of living and housing have gone through the roof, as wages continue to stagnate. In this type of economic environment, working families just can’t keep up. They are constantly treading water or worse. In China, after the global meltdown in 2008, the low interest rates meant to keep the Chinese currency from rising still couldn’t ignite its global export machine to pre-crash levels. The world’s economy had slowed dramatically. So China, like the US, attempted to reflate another cheap-money bubble once again.
Chinese interest rates were kept artificially low by the central bank, and vast amounts of government money stimulus were spent in order to maintain a level of economic activity to avoid the political repercussions of the deep global recession. It was a classic Keynesian fiscal reaction to an out-of-control easy-money monetary policy. The US followed a similar policy. Trillions of dollars of US government debt was thrown at the problem of zero economic growth. In China, a massive building boom was created as speculation rocketed in housing. As global export demand had slowed, the Chinese tossed money at whatever internal demand it could maintain. The massive housing speculation created a massive debt. But it did keep the economy growing. And as the Chinese economy continued to expand, the amount of oil that China bought from overseas producers continued to expand. By 2010 oil prices had come off the floor, and they continued to rise. Once again, like many times since the stock market crash of 1987, the truly stupendous amounts of easy-money debt, public and private, had reignited another new bubble.
As the private money tended almost exclusively to go into US oil junk bonds, commodity speculation (especially oil) and other forms of financial speculation, the global stock and bond markets took off. Investors knew that the US central bank, The Federal Reserve, was fixated on zero-percent interest rates; so any money market speculation was essentially rigged to protect the Wall St. gamblers. Investors searched for anything with a return greater than the overnight money that they had borrowed at near-zero interest rates. Loan after loan was rolled over as the leverage piled up. Even with the most risky of investments, the US shale oil junk bonds, investors felt confident. The central bank in China and the Federal Reserve in the US had once again borrowed and printed their way out of chaos (for the time being). The Wall St. banks, the global investment pools, and the wealthy worldwide all believed (wrongly, of course) that the price of oil would always stay high and the price of money low. This exuberance funded a long-term glut in the US oil sector. The US shale oil revolution was being financed not by prudent investment based on research, but by easy, newly-printed hot money in an amazing follow-up bubble to the events of 2008. This time, cheap Fed money bought government IOUs (bonds) at historic record levels (quantitative easing), fueling both a stock market and an oil-patch bubble.
This has become the third major bubble in the last twenty-five years. But this time, unlike the other two, the balloon is being pricked in China. Without a century and a half of development and an international currency everyone accepts, unlike the US, China remains an export- driven economy. So it relies on global labor to buy its products. The mountain of Chinese government money that went into the real economy of imported iron ore, copper, grain and (most importantly) oil still depended on exports in order to be purchased and remain viable. All the easy money creation in China went to support infrastructure and housing. But internal individual demand in China continues to be very weak. The Chinese are savers, not spenders, and overall the people are still fairly poor. Even investments by those with money are curtailed by government control on capital outflows. Chinese government bank debt faces severe internal structural limitations.
Since 2008, China has become a house of cards. As the empty housing projects searched for customers, the government-controlled banks became shakier and shakier. Something had to give, and eventually the government has been forced to cut back on its expenditures and imports. Oil has been China’s main import. It used to be that the US economy was the engine of global growth. But since the exporting of American industrial capacity abroad (US manufacturing jobs to China) those days now appear gone. Now when China catches a cold, the whole world becomes sick. As China slows, the bubbles have started to unravel. Oil is the first, but not necessarily the last.
Globally, the investment class is starting to get nervous. And when this class get nervous, they tend to bundle into US government securities. This has been bad news for many of the emerging-market countries like Turkey, Brazil, South Africa, and even Israel. As investment money from abroad dries up, the local currency depreciates, and the cost of living rises. The workers in these countries get squeezed due to the rising prices of imports. But US workers will not benefit from this vast injection of capital from abroad. As US bond prices rise, the dollar appreciates, making US goods and services more costly abroad. As the price of their exports rise, the US economy must slow, and that will certainly affect the artificially-high US stock market. With the demise of oil, already under fifty dollars a barrel, the one bright spot in the US industrial economy, the shale oil sector, is already beginning to shrink. Stock prices could very easily become the next domino to fall. And there is no bigger bubble than the US stock and bond market.
Another stock market crash will certainly precipitate mass layoffs. When that happens, the unraveling in all the Wall St. money markets could become a simultaneous event. A global, investment-class panic could lead everyone to the exits looking to buy gold. Is it any wonder that the Marxists and the right-wing Austrian “gold bugs” are both expecting a paper calamity? For that matter, the Torah prohibition on charging interest on money loaned appears three thousand years ahead of its time. Labor will feel the real price of falling oil when the cascade of fictitious money profits on financial speculation begins to unwind. Who can possibly bail out a government the size of the US? And for a simple working person, what good is cheap gas when you can’t afford to own a car and the mortgage payment is due? Labor needs to get itself politically organized.