Wednesday, October 22, 2008

The Tyranny of the Immediate

One of the great challenges that has to be faced in any attempt to make sense of history while it’s happening is the misleading impact of short-term trends. While the late housing bubble was still inflating, for example, soaring real estate values made it easy for most people to fool themselves into believing that it made sense to sink their net worth, and then some, into houses priced at even the most delusional levels. They had seen prices march steadily upwards, month after month and year after year, and that experience made it seem likely that the same steady march would continue for the foreseeable future.

The same mistake on an even more grandiose financial scale underlies the implosion of much of the world’s banking system in recent months. The first generation of derivatives, credit default swaps, and equally exotic financial livestock netted huge profits for their original breeders; so did the next generation, and the next, and before long these dubious securities – valued with an optimism usefully summed up in the phrase “mark to make-believe” – accounted for a very large proportion of the paper assets held by banks, hedge funds, and the like. Because the financial community’s recent experience with such things had been so positive, all too few investors glanced further back and saw what happened every time in the past that financial paper unlinked to sources of real wealth had been allowed to breed beyond the carrying capacity of the market.

The difficulty, as I’ve suggested in previous posts, is that historical change happens at a pace much more leisurely than textbook summaries suggest. Most people who didn’t live through the opening years of the last Great Depression leave school with the notion that when the stock market crashed in the fall of 1929, the economy reached a full stop by the time investors stopped plummeting from Wall Street windows. In reality, it took more than three years for the economy to finish contracting, and scenery en route included a dramatic stock market rally in 1930 and some of the best days of rising prices, in percentage terms, that Wall Street has ever seen. At every point along the course of contraction, furthermore, financial pundits drew false conclusions from short-term changes. The resulting headlines have more than a little similarity to the ones that clutter the financial press today.

This habit of reading too much into short-term conditions has shown itself more than once in the recent economic convulsions, and guesses about the future price of oil – a subject of interest to many peak oil researchers – have been particularly affected. Earlier this year, as the price of oil soared to $143 a barrel, a great many people argued that it would keep on climbing to $200 or $250 a barrel in the near future. Now that the price of oil has slumped below $70 a barrel, the tide of opinion has turned, and some pundits are now predicting a continued slump to $50 or even $35 a barrel. These predictions seem quite plausible at the moment they’re uttered, but then so did the idea that shares in dot-com startups would keep on climbing in value all through 2000.

The problem with linear projections of oil prices is that several factors unrelated to ordinary issues of supply and demand dominate the price of petroleum just now. One of the most important comes out of the crucial but rarely remembered fact that, while oil is priced in US dollars, most of the oil in the world these days is produced and used in countries where the US dollar is not the local currency. Since the value of the US dollar has been anything but stable of late, the price of these transactions in dollars has changed dramatically, while the price in any other terms has remained much more stable.

A barrel of oil for which a Japanese refinery pays 7500 yen, say, would cost US$75 if the dollar buys 100 yen and a bit over US$65 a few months later if the dollar rose to 115 yen. Has oil dropped in price? Only on paper, since the refinery’s bank account changes by the same amount each time. Check out exchange rates, and you’ll find that the period when oil spiked to $143 a barrel was also a period when the value of the US dollar dropped steeply against other currencies, while the plunge in the price of oil since then has paralleled a steady rise in the relative value of the dollar.

Even more dramatic, though, has been the effect of commodity speculation on the price of oil. Those economists who still insist that a completely free market will manage production and price with perfect rationality have apparently done their best to ignore the multiple monkey wrenches speculation throws into the market’s machinery. The crucial point to realize is that the results of speculation, unlike most other economic phenomena, are radically asymmetric over time. It’s worth taking a moment to understand how this works.

Consider a poker game in a tavern back room. Like speculation, poker is not a productive economic activity; instead, it is a means of exchange by which money passes from one person to another on the basis of differences in skill and luck. The results of a poker game, however, are symmetric – that is, in each game, the winnings of the winners are equal to the losses of the losers. You’ll never see a poker game in which all the players win and nobody loses, or vice versa.

Yet this is more or less what takes place in the successive phases of a speculative bubble. While the bubble is inflating, nearly everyone wins; the difference between one tulip bulb, internet stock, or condominium and another during the first phase of their respective bubbles was simply how much money you would make from it, not whether you would gain or luse. Once the bubble bursts, by contrast, nearly everyone loses; if you bought tulip bulbs at the peak of the Dutch tulip mania, internet stocks in 2000, or real estate last year, the question a year or two later was not whether you lost money or not, but simply how much of your wealth was gone.

This is what makes unrestrained speculation so serious a threat to the functioning of market societies: it amplifies the extremes of the business cycle out of all proportion. On the way up, it boosts the funds available for investment as well as speculation, and encourages overinvestment in productive capital by fostering unsustainable levels of consumption; on the way down, it slashes the availability of investment funds, helping to drive the vicious circle of contraction and disinvestment that feeds a recession and can turn it into a depression. Still, damaging as these effects are, they are temporary; sooner or later, every boom turns into a bust; sooner or later, every bust bottoms out and yields to the first stirrings of recovery.

This is exactly the dynamic traced by the price of petroleum over the last two years or so. The price spike to $143 a barrel was driven by many factors, including the first stirrings of a decline in the world’s production of conventional petroleum, but speculation played a massive role. For well over a year beforehand, financial pundits had been touting petroleum and other commodities as surefire investment vehicles, and those who got in early often made a great deal of money as oil prices climbed through 2007. This laid the foundations for a dramatic speculative bubble in the first half of 2008. Not that many years before, the idea that oil might break $100 a barrel was unthinkable to most people, and those who argued for it couched the idea in terms of a “superspike” driven by some international crisis like a US assault on Iran; what happened instead was a classic speculative bubble that zoomed far beyond anything the facts would justify, and then inevitably crashed.

That crash brought the price of a barrel of oil down more than 50% from its all-time high. It’s crucial to remember, though, that the bust phase of the speculative boom-and-bust cycle is just as exaggerated as the boom. Generally speaking, speculative busts in the past have tended to drop proportionally as far below the long-term trend line as the preceding boom rose above it, and then revert to the mean. If, as seems likely right now, petroleum is nearing a bottom somewhere around $60 a barrel, the proportional mean between peak and trough – and thus the rough current location of the mean toward which oil prices will tend to revert – is a little above $90 a barrel. Under normal circumstances, this would be the price toward which oil prices would tend to return over the months to come.

The problem, of course, is that these are not normal circumstances. While the US dollar gains in value against other currencies, as mentioned above, the price of oil will dip accordingly; if the dollar begins sliding again, on the other hand, we can expect price increases. Furthermore, not all oil fields are created equal; some of the production brought on line over the last two years or so pays for itself only when oil is well above current prices, and the likelihood that some of these will be shut down or abandoned – to say nothing of the likely impact of the unfolding credit crunch on drilling and production – make a mockery of any attempt at exact prediction.

The governmental response to the credit crunch and the near-implosion of the speculative end of the economy has its own implications, and these also push the situation away from normal. In a truly free market, the bust would have erased most of the capital that had been available for speculation, and destroyed so many businesses that the survivors would be likely to flee the more exotic realms of finance for a generation to come; this is exactly what happened in the 1930s, for instance. In the present case, though, governments around the world have propped up investment banks and speculative markets with huge inflows of cash, preventing the wave of bankruptcies that would normally end a speculative boom as wild as the one just finished. One very likely possibility is that the investment banks will attempt to launch another round of speculative excess in order to improve their balance sheets before the political consensus that supports them comes unglued; if this happens, commodities are a likely target, and could soar upwards again.

Looming over all these factors is the arrival of peak oil. Since 2005, world production of petroleum has been locked into a narrow plateau that not even a 300% increase in prices could breach, and the most believable estimates suggest that by 2010, that plateau will turn into a slow and irrevocable decline. Many of the official figures for oil production lump biofuels and tar sand extractives in with conventional petroleum; since these latter are produced using large amounts of oil and other fossil fuels, there’s a real sense in which some of today’s petroleum production is being counted twice, hiding any early signs of the approaching contraction. The credit crunch and the low price of oil, furthermore have placed additional challenges in the way of the already difficult struggle to replace the world’s rapidly depleting oil fields.

The obvious implication of peak oil is that the mean price of oil is likely to trend upward over time. The less obvious implication is that changes in the mean price may well be hard to extract from the chaotic data provided by an economy in disarray. Thus when peak oil advocates came to believe that the price of oil would soar upwards from $143 a barrel, they were running ahead of the date; when, as now, some of them are predicting a continuing decline in the price of oil for years to come, they are very likely doing the same thing. The tyranny of the immediate makes these short-term phenomena seem much more significant than they are.

My guess, based on historical examples, is that the price of petroleum and other commodities will find a bottom within the next month or two, stay there for a while, and then begin a ragged upward movement as renewed speculation cuts in sometime in the first half of 2009. Radical changes in the relative value of the US dollar could change that forecast, though the trends I’ve outlined might well still be visible if the price of oil is tracked in other currencies; a concerted attempt to reflate the economy by engineering a new commodities boom, that would have an even more dramatic effect, though the impact of rising commodities prices on a crippled economy could be dire enough that the boom might collapse of its own weight in short order. Over the long run, though, investments in energy conservation and less energy-extravagant infrastructure are likely to pay off in a big way – and the long term is what most needs to be kept in mind just now.

20 comments:

Danby said...

To expand a bit on the mechanisms involved, the price for oil one sees quoted are prices in the commodities markets. Commodities markets don't actually trade commodities, they trade contracts for the delivery of commodities.

Suppose you are an oil company, we'll call you Snakeoil. You have a tanker full of oil just loaded at the Persian Gulf. You also have contract with a refiner to deliver the oil to a refinery.

Either side of that contract can be bought or sold on the commodities market. If you think oil prices will decrease in the time it takes to cross the ocean and unload in Texas, you might sell that contract to a speculator. He pays you at the current price today and receives the proceeds when the oil is sold at the terminal in two weeks. The commodities speculator is essentially placing a bet that the price will increase by the time the oil reaches the US.

If he is correct he makes a great deal of money. If he is wrong, he can lose a great deal of money. Either way Snakeoil has already made it's money, and perhaps paid off some urgent debt, or bought you another Rolls Royce. Obviously, you want Snakeoil to sell the contract for as much as it can get. If the price has been consistently going up, that futures contract is likely worth more than the oil. Which of course resets the price to whatever deal you made.

When the financial companies started collapsing last spring, a lot of investors panicked. They took literally hundreds of billions of dollars out of the stock market. Being investors, they wanted to do something with that money to obtain unearned income. At that time, the commodities markets had been on a general upswing for better than two years. Commodities looked like a pretty good bet, and a great many new investors moved into the commodities markets.

And the plum of all commodities was Petroleum. Futures contracts for delivery 6 months in the future had returned as much as 100% profit for a lucky few. Hundreds of billions of dollars chasing a stable production of oil meant that of course the price of those futures contracts must go up. Prices are based not on actual supply and demand for oil, but on the supply and demand for futures contracts. And while the supply was stable, the demand are based on more or less informed guesses about what the price will be in 3 or 6 months. Between bad weather in the Gulf of Mexico and constant sabre rattling against Iran, the oil companies and their proxies in the US government were able to keep the supply uncertain and therefore the costs of futures contracts very high.

Commodities markets accelerate and intensify price swings. Once the price starts going down, the first commodities trader to sell his overpriced contracts keeps more of his shirt. Once a trend of lower prices is established, the buyers are not as willing to bid up the price, which means a lower price for the futures contract. If he can bid it low enough, a trader can make money in this way too. Once again, this is based on what the buyer and seller think will happen in the future. Once again, any price change is intensified and accelerated.

And that level of abstraction is why the spot price of oil is meaningless in spotting any long term trends.

Adrynian said...

If I recall correctly from the postings over at The Oil Drum on the few past peakings of resources that we have data for, we can probably expect to see an underlying trend of exponentially upward increases in price but with dramatic increases in volatility that, as you say, mask this in the short term.

Who knows? We might see $30/barrel in the months ahead, but then we'll probably also see $300/barrel in a year or two (disclaimer: I'm only guessing at the timescales, here).

It's truly amazing to me how blind free-marketeers are to the effects of completely unregulated behaviour, including speculation, on market systems.

Siobhan Blundell said...

Dear JMG, thanks for the post. I think there is a teeny typo in the penultimate paragraph, "...the mean price of peak oil", shouldn't it read "...the mean price of oil"?
Much more importantly, I am South African, as you know, and the value of our currency has plummeted recently to depths which I have never seen before. I thought, in my naive way, that the sub-prime crisis et al, would cause our currency to strengthen against the dollar. But on the front page of a major daily newspaper yesterday, the headline was "Your R1 isn't worth a dime" and it literally isn't. Presumably our banks are more deeply involved, and thus less solid, than they care to admit. I am reminded of JK Galbraith saying that when the powers that be say everything is okay, actually it isn't. I would really appreciate your thoughts on the matter, if you have the time and interest to spare.

Siobhan Blundell said...

Dear JMG, I am feeling verbose today, but you are truly prescient. An article in the previously mentioned daily newspaper, mentions "the market's fixation on the short term", but of course your phrasing, "The Tyranny of the Immediate", has the same meaning, but is more colourful, and thus has more meaning, and grace of composition. Thanks again for your post.

Charlie said...

A wonderful look at our situation as ever John.
I found your pulling together of all the present issues very enlightening.
It sems to me so sad that as a society we are not facing the hard facts of our situation. The sooner all our governments and leaders face up to our collective responsablities and limits, take stock, plan then act the sooner we can all begin to live more forfilling, happier, healthier lives in a sustainable manner.

Regards

Charlie

J Rob said...

Peak oil is like the curvature of the Earth. You don't notice it every day unless you are in the air at 35,000 feet. But it will inexorably limit our course going forward.

Maeve said...

"if this happens, commodities are a likely target, and could soar upwards again"

And this is just one of several reasons why it makes sense for people to plant gardens, adopt a more frugal mindset (replace things when they've broken beyond repair, rather than on a whim of fashion, for example), paying down debts, weatherizing homes, and so on.

I sometimes wonder how long investing in the stock market will be socially acceptable. I think the illusion that stocks are respectable "investments" (as opposed to a gamble with your money) is part of what has allowed the whole thing to get to the point it has.

John Michael Greer said...

Dan, exactly. Commodities markets as they now exist are a speculative activity, not a productive one, and like all speculative activities they amplify volatility.

Adrynian, blind faith in the free market has become one of the more popular modern surrogates for religion; lacking the keen sense of human limits that informs every traditional religion, it's pretty much guaranteed to produce disasters.

Siobhan, thanks for catching that. As for the current mess, well, I frankly don't know enough about the South African economy to be able to say anything useful about it -- each nation, and each region, has its own place in the unfolding mess, and apparently small factors can have huge impacts.

Charlie, it's not our governments and leaders who have to face up to our predicament first -- it's us, as individuals. Most of us have made choices in our lives that helped make the present mess inevitable, and we have to change our own lives before anything else will change.

J Rob, an excellent metaphor!

Maeve, good. Most people these days say "investment" when they mean "speculation." The difference? An investment pays significant returns while you own it; a speculation only pays off when you sell it -- if you can sell it for a gain. Once stocks get back to the point where dividends amount to more than a negligible fraction of the sales price, they'll be investments -- but the Dow will probably be around 1000 again before that happens. (Yes, I expect that kind of drop before all this is over.)

Blackbird said...

Hi JMG,

I recently finished reading "The Secret Garden" by F.H. Burnett. I enjoyed the story but it was the underlying class system that started getting me to thinking.

The book was first published in 1909 in a world seemingly very different from the one we find ourselves in now. However, when I started to imagine how the financial system might unravel over the next number of years I began to imagine a world in which the dichotomy between rich and poor in western society was once again so profound.

In the late 1800's and early 1900's there was a very small percentage of the population who were extraordinary well off and a large percentage who had next to nothing. Mary’s father’s brother-in-law, Mr. Craven, personifies this in the book. Mary finds herself under the care of Mr. Craven in Misselthwaite Manor - a mansion with well over 100 rooms complete with many servants and a handful of gardeners. Mr. Craven spends very little time in the manor, preferring to wander the world in order to avoid dealing with his son back home. The servants of Misselthwaite Manor are Yorkshire folk who work for next to nothing. They come from large families who never seem to have enough to eat but are a healthy, happy, outdoor lot.

I can imagine a future, not too far off in the distance, where the rich are very rich, the poor are very poor, but the middle class have been largely wiped out. Either you have money - or you do not. In the past this has pretty much always been the way it was when large numbers of people band together to form societies. It is not possible for everyone to be financially rich – which seems to have been the hollow promise of the borrow-now-pay-later people we westerners have become.

This is just one possible scenario that I could imagine happening at a future date while trying to look past where the price of oil might be in a month, or how much the US dollar will be worth in respect to the Euro at this time next year. While it is impossible, at least for me, to take my eyes completely away from watching the ups and downs of the world’s economy right now – I think there is quite a bit of wisdom in trying to sit back and imagine the world as it might be in the next 5, 10, or 50 years from now.

Cheers,
BB

Bill Pulliam said...

The interplay of the value of the dollar and the price of oil gives a great example of this amplifying effect of speculation. It's true, that both day-to-day and month-to-month, shifts in the dollar and the price of oil mirror each other pretty well. But, if you look more closely at the numbers, you see that the price of oil tends to move 3-5 times as much (in percentage terms) as the dollar did. So if the dollar drops 1%, oil springs up 3-5%, and vice versa. The waves of money slosh in and out of the commodities market in response to small tilts and jiggles from the shifting currencies. A better recipe for instability has not been invented!

tristan said...

JMG,

I have, somewhat to my chagrin, made a reasonable amount of money in the last year betting against the markets. But you nailed the difference between an investment and speculation.
What I would like to do is invest that cash in an organic farm near Portland Oregon. Have you ever heard of a Venture Capital firm that might have such an investment opportunity?

T

Mark said...

JMG, I love reading your essays every week. This essay, in particular, is one of the reasons I am hoping to bring my family along to see your keynote at the Plan C Conference.

All of the hocus-pocus that goes on in our society (markets, politics, television) seems to be lulling many people into believing everything's okay... Fortunately, there are small groups (of growing numbers) of people realizing what the future holds.

Stephen Heyer said...

Adrynian : “It's truly amazing to me how blind free-marketeers are to the effects of completely unregulated behaviour, including speculation, on market systems.”

When your excellent job and comfortable life depends on not seeing something, even the harm you are doing to others, then not seeing it is really easy.

If it is your $100 million bonus, private jet and holiday house in the Hamptons that are at stake, then millions (quite literally) of the sheep – sorry – common folk, can be destroyed and it just be so… impolite… for you and your friends to notice. Besides, they’d do it themselves if they had the chance, as proved by their enthusiasm for the housing boom when they though it was making them rich, even though that would mean beggaring their own children.

On another note, it’s interesting to see how the political right here in Australia has taken over the lefts’ tactic of Political Correctness. Every time anyone notices how the rules of the game are being changed to advantage the rich they get “Politics Of Envy” screamed at them and retire suitably chastened.

The long, hard lesson of history is that it is catastrophically dangerous to allow your neighbor to become much more wealthy or powerful than yourself because:
He will have the resources to further weigh the system in his favor.
His interests will rapidly diverge from yours.

Many cultures understood this and had measures in place carefully designed to prevent excessive accumulation of wealth, at least away from the king’s court. Ours is just learning it again as we realize that the USA political system has been basically taken over by the richest one tenth of one percent. Further, that not only have they used their wealth to corrupt the political system, they have used it to corrupt the world view and culture of the common people.

Kevin John said...

Interesting post JM, I enjoyed reading your wit and your insights.
I also have a great deal of respect for the Druid culture.
That said, however in regards to the genre of your postings I must point out that though you have hit the nail on the sheep-go-where-most-of-their-friends-go head, you might be wrong about the current public bloodletting trend to soak the peasants for all they're worth 'Peak Oil' hysteria.
I have heard many stories where wells were capped off because they didn't produce enough-fast enough and others that were proven to hold resources and just capped and ignored.Even others that did indeed go 'dry' to later return to high levels of production.
Have you done a study on Abiotic Oil? Have you ever cooked a salad and made the dressing with oil, water & vineger? What rises to the top? Normal drilling takes place miles below water table levels.
I offer this only to make a point: The elite will always have the power to control the situation whether it is in 'peak' or it is not. Not to get political but what exactly was Chenny's meeting with the top energy heads -including ENRON & co.back before 911? Peak oil pow-wow? Strategy?
How come I see paper after paper and blog after blog reporting the countless ways "amateurs" invented something that would make OIL totally obsolete next year?
How come many of them are found dead from mysterious cirmcumstances?
Coincidence JM?

I think not.

Oh, and if we all forgo our SUV's and live in a mud huts, returning to farming our land for corn, you can bet they'll be outside the door asking (demanding) for us to give them a dozen.

Thanks

John Michael Greer said...

Blackbird, the gap between rich and poor in America today is at least as extreme as it was in Victorian times, and in some ways even more so. Social inequality increases with abundance -- the richer a society is, the more drastic the inequalities between its classes -- and we are a great deal richer than the Victorians. The difference is that they made their social hierarchy public while ours is a taboo subject.

Bill, exactly -- the changes in the value of the dollar is one of the factors amplified by speculation.

Tristan, I haven't -- but then I don't have much to do with venture capital firms.

Mark, thank you. I think people are starting to get a sense that all is not well in the paradise of progress.

Stephen, no argument there.

Kevin, given that the mainstream media and governments around the world still dismiss the entire concept of peak oil with contempt, it's a bit disingenuous of you to try to dismiss it yourself as a supposed elite plot. Still, I suppose that buying into conspiracy theories is a lot more comforting than waking up to the hard reality that the life we've all been living is hopelessly unsustainable.

TheDave said...

Blackbird,

A lot of people feel that this has already happened. The 'middle class' is vanishingly small compared to the masses of the impoverished, even in the United States. Most of the 'middle class' that does exist lives on credit and debt rather than on actual wealth, and has for decades. What we are seeing now is the first part of the unraveling of that system. The most overextended are the first to fall...followed by those who are slightly more entrenched. As time goes on the former middle class will be identified by the huge amounts of useless stuff they carry around with them as the move from place to place. Desperately clinging to the last remnants of their debt-fueled lives.

All economic systems, other than barter, to translate the labor of the many into the wealth of the few. Capitalism is the pinnacle of that evolutionary chain and as such, does it better than any other.

hardhead said...

John, you are right about the "great challenge" of seeing beyond the short term into deeper long-term trends. To do so requires concentrated, sustained effort which goes against not only our natural inclinations but the general cultural milieu as well.

Aside from your perspicacious observations, what I value most about this blog is that you try to keep focused on what you see as important. The value of so many other discussions on the Web (or USENET or listservs - or even around the water cooler, for that matter) is destroyed by most participants' grotesquely short attention span. Thank you for a welcome alternative.

Thank you also for emphasizing our personal responsibility for our problems and for their solution. It's true enough that corporations, governments, and other institutions are fouling up the works and need to be brought under control. But not many people are willing to accept that the way they live their lives foul up the works just as much. As you've noted, changing that is the real key to a viable future. It's very hard to change, and if you're serious, you'll soon feel isolated or alienated; but you - on your own, no licenses or permissions needed - can do it.

Or not.

Ira Fuse said...

Wow! Thank you. After somehow "discovering" this blog, I feel as though I've struck oil or something even better. What wonderful reading. I love learning about the reasons behind things and studying the interactions and relationships which coexist. Sometimes, in order to maintain my diminishing sanity, I must half-heartedly convince myself that I must surely be an observer sent from a far away planet and that no-one on this planet has a clue about anything - after my discovery this morning, it is extremely satisfying to know that there are indeed people out there who actually DO have clues and are willing to share them.

This is some really really good reading - it's rare when I actually read every word of a blog instead of just scanning for the high points.
Thanks so much - I wish I could just meet all of you... but, this works too.

Dan, thanks for filling in a few of my gaps concerning the pricing of oil commodities, but I do have a question. Since spot prices are unreliable indicators of the underlying longer term trends, what is there that provides a more accurate way of making sense out of why and how the intrinsic value of petroleum is determined? Would it be fair to say that you just have to mentally integrate all the factors that influence its price (aka crystal ball gazing) or is there indeed a physical index out there somewhere which is useful for "longer term" analysis (say one to two years maybe)?

Thanks to you all. Nice job here. I will be doing some catching up today, as I see there are lots of past issues to navigate through.

Danby said...

Ira,
The best indicator, long term, of oil prices and trends is the trough-to-trough average. Look at the chart and track the bottoms of the price swings. There is no real upper limit, and the things that can drive the price up are the results of rumors and supposition (war and rumors of war, hurricane, peak oil, etc) the price swings keep going up until something external to the oil market (financial collapse, elections, additional continental shelf oil leases, new deposit discoveries) causes commodities investors to lose confidence in the ever-increasing price.

Once that happens, they will abandon oil as quickly as possible. But there is a limit on the down side, the actual supply and demand of physical oil. So while the downside swings will go past the appropriate level, they won't go past it much and they will very quickly return to an actually reasonable value for the current market.

Todd Boyle said...

At the end of the day, we're all interdependent. As prices for oil, real estate, and equities swing wildly, what's really most at stake is only the question of whose balances on the ledgers will be biggest. My point is not only that the economic activities of humanity will never stop. My point is that the money balances don't matter, other than to the degree we worship them (honoring our supposed "debts" heaped upon us by the so-called free market.)

One of the reasons capitalism works in some countries but not others, is that only a population already living in love, in a reasonably decent, liberal and nonviolent relations can use it. The money thing is really a suggestion that helps sort out our allocation of resources, our logistics, distribution etc. It was never intended to be "for keeps". Think of money as training wheels.