What if We Get It Wrong Again?

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

There is a huge difference between treating symptoms of a disease, which usually provides for only temporary relief, and diagnosing the nature of the disease and searching for its actual cure. It seems that this medical concept can be applied as a metaphor to nearly every aspect of our lives, including the economy. And if the word “disease” is equated with the word “mistake,” identifying and understanding the roots of the latter seems critical to finding a way not to repeat it.

By now it is clear that the subprime toxic mess is responsible for blowing up Wall Street a year ago. However, putting all the blame on an obscure niche market for everything else that has gone wrong with the global economy is unrealistic and counterproductive. In fact, as the dust is settling, many respected economists are arguing that the culprit probably the most responsible for blowing up the global economy does not hide within exotic financial derivatives, but rather within the energy sector.

For those who may have forgotten, just before all hell broke lose in September, crude oil was trading in triple digits per barrel. It may seem irrelevant within the current price context, but the implications of government involvement within the energy sector are often huge and unpredictable, whereby knowing when to take certain steps and when not to take them is of paramount importance.

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When an investment bank teeters on the brink of bankruptcy, the government can bail it out. The government can also bail out a poor schmuck with an impossible-to-pay subprime mortgage and a bankrupt car manufacturer. But there is no such thing as an energy bailout, because there is no way any central bank in the world can create a single unit of energy and there certainly is no central bank that can print its way out of an energy crisis.

Sure, it is a legitimate question to ask what is stopping any government from ballooning its budget deficit sky-high in an effort to tame the next energy-induced recession. I mean, the taxpayer’s hard-earned money has been used for bailing out nearly everything else, so why stop now? After all, the U.S. budget deficit is already just shy of $1.5 trillion, so tagging on one more cannot make that much of a difference, right?

The trouble is that, with a budget deficit already at $1.5 trillion, there is not much else the government can do. At this point, even the talking heads realize that it would be suicide to print more money. Also, at some point, that money will have to be paid back, and sooner rather than later. This means that, if and when oil prices radically curb their enthusiasm again, as they did a year ago, the government may not be able to flush out the spill-over problems with bailouts and deficits. In layman’s terms, when we start seeing gas prices of four bucks per gallon again, we’ll probably also see tax hikes, as the government goes into contractionary monetary mode. The way I see it, netting the two will spell nothing but trouble for consumers and investors.

So, did we get the Great Recession wrong? In many aspects, I believe that, yes, we did. Unfortunately, getting it wrong during the last recession usually means ending up in even worse shape after the next recession. We already know that the adverse effects of the expansionary monetary policy of the past year or so may take decades to reverse. We also know that, if and when oil prices again hit triple digits, we most likely won’t be able to prime the money printing pump and flood the systems. And with oil already trading at about $80.00 per barrel, I don’t know about you, but I’m getting worried, even if oil futures are paid for in weak U.S. dollars.