NEW YORK – Now that everyone agrees that it’s inflation, not a lingering credit crisis, that poses the gravest risk to the world economy, it’s time to think again about central bankers’ focus.
While policy-makers have grown increasingly shrill in their warnings about the danger of $135-plus oil, there’s very little they can do so long as growth, particularly in the developed economies of the United States and Europe, remains sluggish.
With banks still struggling to shore up their balance sheets and consumer confidence deteriorating on both sides of the Atlantic and in Japan, resorting to higher interest rates to counter inflation may do more harm than good.
“The Federal Reserve and the European Central Bank cannot control commodity prices,” said David Kelly, chief market strategist at JP Morgan Funds in New York.
“Every time we have a bubble, we say we’ll raise interest rates. But that’s like trying to swat a fly with a sledgehammer — you miss the target but cause a lot of collateral damage.”
That’s not to say commodity gains haven’t been swift and painful. Oil prices have surged 40 percent so far this year, and truckers, taxi drivers and farmers from Spain to Israel to Nepal have taken to the streets in protest.
The problem for Western central banks, though, is that they have no control over the factors driving commodities up — soaring demand in emerging markets such as China and India and a speculative bubble inflated by investors around the world.
For the United States, with its gas-guzzling SUVs and whirring air conditioners, some economists fear high oil prices may put a freeze on hiring and spending. That would be an even bigger threat to the economy than higher inflation.
If hiring and spending slow significantly, higher interest rates could tip an already fragile economy, which limped along at a 0.9 percent growth rate in the first three months of the year, into full-fledged recession.
- So much for “toothless tiger”, barking on inflation by the feds don’t really change the world economic without direct actions. The equilibrium of economy had been changed previously when fed cut their interest to combat a recession but what it did is pumping more money into the market to be invested into commoditties instead. Now the rich remains rich and the poor and people who don’t invest will continue their daily mundane jobs without hopes and their fear of the market collapsing may one day cause them their jobs.
The power of the rich controlling the market by speculative investment may sparks conspiracy theories and discontent among the poorer countries and blames all kind of “culprits” behind the recent rise in oil prices and inflation causing hardships and super high cost of living.
More and more people will be in a serious debt ridden situation and resort to desperate measures or gamble in to risky investment without proper experience or guidance. In the end, even the rich and powerful might one day be burned in their own game of speculative trading. The recent sudden large changes of oil prices are indicating more speculative panic selling and buying hoping to hedge against the oil prices.
The future of oil prices movement will get even more larger flucuation as major players starts acting on “rumors” or “facts” of political tension and possible disruption of oil deliveries. Currently oil flucuation goes about $5 within a single day and can go towards $10 change in a day…and no economist can predict the next movement of oil in the next half hour, much less in the next day.
For example, it can crash the oil prices today (news reports released) yet the prices had spiked to new record while the newspaper are printed. The general reaction from the public who had purchase a copy of “newspaper” which is generally old news believe that oil price had crashed instead. Then comes denial of the public that the oil is infinite and can simply pump oil out of rocks (Oil shale) or harvest faster at tar sands (oil in sand mixture), even oil rigs in deep sea oil fields are proven possible to be attacked by Nigerian militants and disrupt their oil supply.
For feds to cut interest to maintain the “growth” of global economies and increase interest to combat inflation are both counter-productive. The balance will be within the energy prices, if the energy prices can be fixed then it will be “business as usual”….unfortunately I don’t think it can ever work without seeing conflicts and war.
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