Friday, February 06, 2009

Peak Oil, Peak Credit, and Peak Obama

I shorted oil when it hit $120. "Peak Oil" never made any sense to me, and while one day the world will move onto other energy sources it will not be because we have no oil left.

"Peak Credit" is also a phenomenon I fundamentally do not believe in. I don't see why we will not, one day, return to the levels of leverage last seen in 2003, 2004, 2005, although when that time will come I do not know. Certainly, as we know that bank lending is not constrained by reserve requirements, it is only constrained by people's willingness to borrow, and that willingness has evaporated, we're talking about a change in sentiment and those are impossible to predict.

When that change in sentiment comes, and Animal Spirits become optimistic once more, we'll see aggregate demand pick up and the credit economy will stop contracting. People say that there is insufficient "trust" and that is what is bringing the Animal Spirits low. I disagree. The problem is that people overlevered, and now they wish to save.

I did not see this before, but the paucity of MV=pY is now clear to me.

p does not fall, not because people are irrational and wages are sticky, it does not fall because debts are nominally denominated and do not rise with inflation, or fall with deflation. As people save, the real debt burden will rise even as household savings rate increase.

Unfortunately, Obama is doing nothing to hasten this change in spirit by doing nothing to help people save and maintain aggregate demand. The Obama/Krugman/NYTimes side of policy wants to pay Government workers to build unnecessary bridges in 2010 or 2011. A stimulus that helps people save is, paradoxically, rejected as being "unstimulative". The Stimulus Nazis, like the Soup Nazi, will get their wish. Moreover, the Obama administration is suffering from exactly the forms of incompetence I was told it would from insiders. In better times it would not matter.

Across the aisle things are no better. The Grand Opposition is uninterested in stimulating at all, whether it be 2009 or 2011. Clearly those in charge of fiscal policy do not understand how Federal Deficits enable private savings.

Things are looking very poor for the Democrats in 2012, and while it is ludicrous to look so far ahead, the underlying macro trends point to a long fall for St. Obama.


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