I’m for ever blowing bubbles?

There are huge quantities of oil in store and afloat. Russia is pumping more as OPEC tries to throttle back production. Western and Eastern demand has been hit by the collapse of manufacturing output.Yet the oil price climbs and climbs, now almost double the low point reached earlier this year. There is plenty of investment or speculative demand.

Banks are still struggling to deal with all the past excesses in their lending books. More of the mortgages and corporate loans they advanced have been brought into question by mounting job losses and corporate profits declines. Bank shares have risen sharply from their lows.

The most violent phase of the de stocking may be over, but there is not yet any sign of output rising again. Confidence for the future is higher, but many businesses are still finding it tough to gain the custom they need.

All this could just be that phase of a normal cycle where financial markets move ahead of the real economy. The real economy will follow later, as the extra money percolates through from the purchase of financial assets into economic activity more generally.

There remain more than a couple of worries. Quantitative easing is an extreme reaction to extreme conditions. All the time the authorities are creating more money, it can sustain higher asset prices. When they stop it might look rather different. The extent of the borrowing needs of both the US and UK governments tower over markets. Despite quantitative easing, government bond prices are not roaring ahead. Investors are nervous of their future prospects, and aware that there will be no shortage in the months ahead. When QE stops, it will be much more of a strain on all markets as investors struggle to come up with all the money big brrowing governments seek.

The imbalances of the main economies have to be corrected. Lower sterling – and now a devaluing dollar – will help cut the balance of payments deficits. Only reducing governemnt spending, preferably by improving government efficiency and productivity, can tackle the major imbalance of some Western economies trying to borrow far too much. Extra government borrowing is not the answer to recession, but at the crux of the problem that needs sorting out between the high borrowing and the high saving countries.


  1. Kevin Lohse
    May 30, 2009

    Dear John. I am a simple soul and easily confused. You tell us that oil prices have doubled since the low earlier this year, but my central heating suppliers tell me that prices are the lowest since May 07. (See Boilerjuice)
    I don’t disbelieve either of you, but can you resolve this apparent dichotomy?

    reply: Heating oil prices reflect refining costs and margins as well as crude prices, and are probably based on cheaper imports of crude before recent price increases.

  2. figurewizard
    May 30, 2009

    Quantatative easing is nothing more than a polite alternative term for debasement of the currency. The big worry is that the inevitable corrective to this is inflation. Ironically it might well be the case that as the major economies start to recover and they reverse QE; as both the US and Germany have recently promised, our problems will really begin.

  3. APL
    May 30, 2009

    JR: “Quantitative easing is an extreme reaction to extreme conditions. All the time the authorities are creating more money, it can sustain higher asset prices.”

    JR: “Yet the oil price climbs and climbs, now almost double the low point reached earlier this year.”

    The two are of course connected. The $ price of oil is rising as the oil price of dollars is falling. The oil price of oil is falling because there are suddenly many, many more dollars in circulation.

  4. Brian Tomkinson
    May 30, 2009

    JR:”Only reducing government spending, preferably by improving government efficiency and productivity, can tackle the major imbalance of some Western economies trying to borrow far too much.”

    Do I detect a worrying softening on your part? Yesterday, I wrote that I thought you would be one politician we could trust to follow through in sorting out this ruined economy, now I’m beginning to wonder. You must know that efficiency and productivity improvements will not be enough – why not say so? If you don’t tell people and then you are elected and start taking the action that is necessary but you have hidden from the voters you will have made your task so much more difficult. Or are you now becoming one of those who think that by telling the truth you won’t get elected? I sincerely hope not.

    reply: No softening – I have written much about what to cut

  5. oldrightie
    May 30, 2009

    Russia, India and China will dominate world trade and finance for decades as the West struggles with the hangover and headache of massive debt. The EU will fracture and The USA will concentrate on home demand and import controls whilst their debt is still huge. The UK will wither unless a new Government finds the cojones to also become, for a few years, more isolationist. This does not mean, for either country, trade and overseas activity is ignored but that such business will only be conducted through serious barter and wealth backed assets yet to be created. Farming and small but numerous manufacturing concerns will be the answer. The same philosophy will be applied to the financial markets.
    Through less ambitious and greed based activity will we become stronger. Demand should be reduced through a less explosive population growth driven by the madness of mass immigration. This will lead to a better environment to aid and assist genuine refugee immigration as opposed to economic migrancy.
    I wish!

    1. Mike Stallard
      May 30, 2009

      Yesterday at our Church we had an art afternoon in the sun. What moved me very deeply was the way that normal English families were accepting the Polish children as friends and they were even baby sitting and taking them out with their own children. The parents were really trying to learn English.
      I asked the daughter of a Keralese immigrant to come and help me teach Eastern Europeans because we needed people with a really good command of English. She, by the way, is doing it for the Duke of Edinburgh silver award.
      May I also take the risk of linking immigration with birth control and abortion? Without banging on about it, I must say that getting rid of something like a quarter of a million babies every year and also discouraging marriage must have some effect on the population?
      And where there is a vacuum…..

  6. Simon D
    May 30, 2009

    I agree with you about the need to reduce government spending. However, there is a year to go to the election and no prospect that New Labour’s client voters or their TU sponsors would countenance any cuts. The Conservative government will inherit a horrific situation.

    The Conservatives need to encourage an intelligent debate over the next twelve months about how they might deal with government spending based on more efficiency and intelligent use of resources.
    They should encourage Parliament to set an example by putting its own house in order: at the moment there are too many MPs, too many Peers and too much money is paid out in expenses.

    Meanwhile, we are all waiting to hear about the Government’s game-plan for the future structure of, and business plans for, the tax-payers’ banks. We are looking also forward to seeing the Government (encouraged by the Conservatives) launching a joined-up public debate about these plans.

  7. Denis Cooper
    May 30, 2009

    Another £6.5 billion of existing gilts bought up by the Bank of England this week:


    and it even bought some corporate bonds, as well – to the value of £37 million, no less!

    So far the Bank appears to have spent a total of £3.0 billion on private sector assets, the original target of the Asset Purchase Facility, compared to a total of £70.5 billion of newly created money spent on buying up previously issued gilts since the start of “quantitative easing”.

    Surely it must be clear by now that the central purpose of this scheme is not to “inject liquidity into the financial system”, but to prop up the gilts market so that the Treasury can continue to borrow and the government can continue to pay its bills.

    In fact only £1.25 billion of new gilts were sold by the DMO this week, but the sale of another £5.5 billion is planned for next week:


  8. Acorn
    May 30, 2009

    “The extent of the borrowing needs of both the US and UK governments tower over markets – JR.”

    (Christ JR, I wish you would consider setting up your own Party, I see Redwood Hannan and Carswell on the banners already.)

    John Mauldin has a great piece on where is all the money going to come from to fund these sovereign deficits (see link). Will there be any left for the people who actually make things that people world wide will need, and want, to buy?

    The smart money is chasing up commodity prices because they know these are the things that will keep there value as the fiat money quantitatively eases its way into circulation. Massive doses of global inflation are required to reduce these sovereign debts for all countries; and they all will be doing it. There will be demands from creditor countries for commodities to be traded in their own currencies, not in currencies of the big debtor nations.


  9. Demetrius
    May 30, 2009

    It has gone chaotic in the full sense of the word. So few people, if any know what they are doing, and more often why. Making sense of it is almost impossible. And now we learn that in 2004 apparently the regulators had Northern Rock marked to fail. So who was responsible for avoiding that issue then?

  10. Josh
    May 30, 2009

    What confuses me is all these New Keynesian economists (Hutton*, Krugman* and the like) are proposing a massive fiscal boost financed by deficit spending, yet they seem to be forgetting the other half of JM’s theory, that a country should have a budget surplus during the boom years in order to stimulate aggregate demand during the downturn. We or the Americans didn’t. And they are increasing QE because the central bankers (I’d like to use a stronger, rhyming word, but I’m too polite) the pace of decline is slowing. It might be cheaper to live in Zimbabwe soon

    *It hurts me to describe these two men as economists, it really hurts…

    1. Josh
      May 30, 2009

      As the lefties like to dub those of a classical liberal disposition as ”neo” liberals or ”neo” conservatives in order to trick people into believing we are neo-nazi capitalist monsters who sacrifice babies to our capitalistic demon gods in Germanic forests, I shall now call them ”Neo” Keynesians. There, I feel better now

  11. Neil Craig
    May 30, 2009

    Oil is a very poor speculator’s investment since there technoloogy has made unlimited quantities available in Canada’s & elsewhere’s tar sands whose exploitation will increase with time & actially inlimited quantities are available by gtowing oil producing algae whose explotation is probably about 5 years behind where we are with tar sands.

    If people are speculating in thet, also British government bonds, there is no money shortage just a shortage of profitable investment opportunities.

    That shortage is entirely caused by the Luddism of western countries. Technology is advancing faster than ever & that always produces comensurate investment opportunities it is just that if you want to build nuclear power plants or farm with GM or sell people with Alzheimers a drug called Rember which has had startling results you simply can’t. Even when productive investment is allowed it is so hedged with restrictions you are likely to be soon undercut by China. This is not how European civilisation succeeded it is how Imperial China’s failed.

    1. andy dan
      May 30, 2009

      I always thought that the “oil sands”, or “oil shales” in Canada were an uneconomic source of oil due to the amount of energy needed to extract the oil, plus the environmental damage caused. There’s no guarantee technology will be in place soon enough to make them a viable source of energy. Is there?

      1. Neil Craig
        May 31, 2009

        The cost of refining shale oil has dropped to about $25 per barrel, though the Israelis have claimed $17. This is because the technology has improved over the years. This makes it more expensive than North sea oil but not by that much.
        There is a proposal to use a nuclear reactor to heat it even more easily in quantity which would be considerably cheaper. As normal the problems ade political more than engineering ones.

  12. Mike Stallard
    May 30, 2009

    When the Labour government decides eventually to make “Tory Cuts”, then we face a “winter of discontent” where everyone living so very handsomely in the public sector will go on strike. Remember the rubbish in the streets? The unburied dead? The closed schools and ‘ospitals? The masses of shouting “teachers” and “nurses”, many of whom had never seen the inside of either a hospital or a classroom, yelling their heads off in the street?
    More positively: if only we could collect less tax; impose less regulation and inspection; pump out less hypocritical egalitarian pretence from oligarchic Liberals living off the fat of the land, and TRUST the British people to invent, work and export, then, I do believe, things can only get better.
    I know a song about that……

  13. Stuart Fairney
    May 31, 2009

    In shock to no-one, this analysis eluded a certain BBC economics correspondent, who noted as part of his report “there was no obvious reason” for the oil price going up. Or in other words, he didn’t know why (ha ha ha……) That’s £90K of the licence fee well spent

    I wish they would stop, I was driving and such comedy during alleged news surely affects my safe use of the vehicle

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