Posted on 11/15/2014 7:51:26 PM PST by Lorianne
Remember the global financial crisis, triggered six years ago when billions of dollars of dodgy loans - doled out by banks to subprime borrowers and then resold numerous times on international debt markets - began to unravel and default?
Stock markets plunged, banks collapsed and the entire global financial system teetered on the brink of catastrophe. Well a similarly chilling economic scenario could be set off by the current collapse in oil prices.
Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.
“A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialised,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.
(Excerpt) Read more at telegraph.co.uk ...
OK, it is true that they'd stop buying because they'd be jobless w/ banks charging negative interest and foreclosing on their homes, but 'not-spending' isn't the same as 'saving'.
Say you’re Chesapeake Energy and you’re hedging your 4BCF of daily production. You’re doing deals with the major banks. And your not doing all of your deals with the same bank, in case it goes belly up. The banks are doing the opposite deals with people you mentioned. But the banks also take positions sometimes because they want to and sometimes because they have to in order to make the deal. You just hope they don’t over extend. Considering the (to big to fail / government is going to bail them out) world we live in..... I’d guess they’re all over extended in a variety of sectors.
That's kind of what the article is saying but these days most folks are linking collapse with an increase in oil's price, not a decrease.
Pete, there are two things wrong with your statement:
1. That’s not the history of deflation in America. Pre-Fed, every deflation has found a bottom and the economy restarted for free market reasons. Furthermore, pre-Fed all prices fell so that wage deflation also saw price deflation. That’s the real history of deflation in America before the Fed.
2. Post-Fed, there is for certain among every economist a “good” form of deflation. It is that caused by rising productivity which drives prices down. In part we’re seeing the effects of lower energy prices throughout the economy, but an economy that is experiencing rapid productivity gains will experience deflation and that’s good. It is growth driven. Under a productivity deflation it is certain that consumers would “save” money or better put have more money while doing nothing themselves. See lower gas prices estimated to put $200 billion into the hands of consumers.
Let’s not muddy the water. The Congress has a Constitutional duty to “coin” money. The chose the Fed, but that doesn’t mean it’s an ideal choice or that alternatives don’t exist. Take a look at the “Long Depression” that wasn’t a depression.
Here’s the Wiki-view: https://en.wikipedia.org/wiki/Long_Depression
And Mises argument against it being a depression:
http://wiki.mises.org/wiki/Long_Depression
Remember the global financial crisis, triggered six years ago when billions of dollars of dodgy loans - doled out by banks to subprime borrowers and then resold numerous times on international debt markets - began to unravel and default?Remember when we had worldwide news media that didn't just go around carrying water for the Obama administration?
That's just mumbo jumbo. What caused and broke the housing bubble was stupid people buying way more than they could afford with crazy financing terms because they were all convinced that they'd make big bucks in about 3 years and move on to another house they could never afford. I argued on this site with dozens of "conservatives" who were making the case that buying their over priced homes in the ascending market and using interest only loans etc was wise investing. That the money they were throwing down was just a wise investment. Stupid people.
People's stupidity and their greed is what caused and broke the housing bubble. That combined with the government insisting people with NO MONEY or means to pay off a loan be given one because "everyone has a right to own a home".
You got it. Saudis are cutting prices because demand can’t meet high supply. We’re awash in central bank liquidity which has made it easy for every business to borrow in order to expand. But there’s not enough demand in the world to absorb the supply that’s been created by the bankers. Looking around the world, every commodity price is coming down. Think of the supply chain effects of energy and mining collapsing. There’s little upside - cheaper to manufacture and farm? So what, there’s not enough demand for the excessive supply. More companies will need to go out of business to balance it.
risk arb ops have closed. banks have cut exposure all over the place building up reserves.
we can only hope....
jobless w/ banks charging negative interest and foreclosing
That’s not the history of deflation in America.
The last two times that we had deflation was early '09 and the early '1930's. Most folks checking those eras have no problem seeing increases w/ joblessness, bank fees/failures, and foreclosures.
a “good” form of deflation. It is that caused by rising productivity
We're together on the idea that instead of a general drop in overall prices across the board, we can actually benefit from price cuts for just a few items or sectors. This is why I'd argue the article's off the mark by thinking energy deflation would cause another crisis --I'm w/ you saying it'll help.
http://www.bloombergview.com/articles/2014-11-13/how-the-g20-should-end-toobigtofail
That was the result of an EIA forecast that predicted a worldwide glut of oil, but 'forgot' to factor in Asian demand.
Driling stopped completely in the area where I primarily (Rig count: zero) for the first time since oil was discovered in the early '50s.
Ask him if he has cotton and chocolate.
--and there're still a lot of people say the housing crash caused the '08 crisis because it was huge and without it there wouldn't have been a crisis. At the same time others say the oil shock was huge and without it there wouldn't have been a crisis. My take is that the '08 crisis was the huge result of a number of huge disasters --oil, housing, stocks, and a massive loony leftwing war on businesses. We could have handled any one or two of those, but all at the same time was just too much.
This “banking system” needs to go down.
That is one-eyed economics. They sell the 100 dollar item for 95 that is worth what the 100 was and the next thing they buy is also less. A modest steady deflation is much netter and less disruptive than inflation at any level. There was steady modest deflation all through the 90s and the result was people didn’t have rising incomes in dollar measurement but were not feeling pinched because their/OUR money bought a little more each year. In periods like that there are not the big industrial strikes that characterize inflationary periods.
That’s how it works.
“My take is that the ‘08 crisis was the huge result of a number of huge disasters —oil, housing, stocks, and a massive loony leftwing war on businesses. We could have handled any one or two of those, but all at the same time was just too much.”
You are spot on. There were a multitude of weaknesses and excess. I’m one of the ones that think the huge spike in oil was what sent the house of cards tumbling but it was like “the perfect storm”.
They can reduce the fracking boom which is what they are trying to do but the tech is mature enough that the production will rise again just as easily so the price will reach a stasis at a lower level and then rise and fall from that with other economic pressures. The Saudis can try to maintain market share but they can[t drive the price and their take up any more without bringing out lots more fracked oil. The result at the pump is the same. Prices are lower than they were. The fracking phenomenon has done its job for the consumers no matter how the Saudis react. The only way they can run up the price of oil again is to cease production which would defeat the purpose of running up the price. If the Sauds force the price of oil back to 125, say, by doing that they might smile at what they have accomplished but they don’t get any of it.
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