Oil, Euro and Liquidity

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Three threads that have been discussed at length on PKT have come
together in recent weeks: euro's fall, oil's rise and liquidity.

The euro's continuing fall has dampened US coroporate multinational
profits which in turn has hurt US equity markets.  The lesson from this
is that trade deficits arew not without benefits.  When the yen fell to
174 per dollar, it did not affect US export much because of the deficit
in US-Japan trade.  With the euro, it is a different story because
US-Euroland trade is realtively balanced.  Also, it had been widely
expected that the euro will be supported by the ECB, so most US firms
did not bother to hedge their euro earnings.  In this case, derivatives
would have saved the day. So structured finance is not always
destructive.

I have suggested that $35 oil is not an economic disaster but a
political problem.  $35 oil needs not be damaging to the global economy,
as many studies have shown, it nevertheless forces a restructuring of
the global economy that has political reverberations.  To begin with,
$35 oil will in the long run stimulate more exploration and production,
and reactivate idle wells that are uneconomic at $10/barrel.  Also the
global economy is growing more energy efficient with new technology and
the effect of oil price on the economy is much less than the 1970s.  And
$35 oil prevents a return to the era of abusive waste of energy caused
by excessively low oil price.  Like low wages encourages misuse of
labor, unreasonably low oil cost creates incentives for misuse of energy
and for discourages the search for alternative erengy  sources.  The
only trouble is that $35 oil takes money from the pocket of consumers
and delivers it to the oil propducers (not just Arabs), who then
reinvest it in Wall Street.  The net result is a transfer of wealth from
the "working families" of the world to capital the world over.  Consumer
demand will shift, with more money spent on fuel and utilities and less
for other types of consumption, but equity prices
will rise because there would be more dollars chasing the same amount of
shares.
A reduction of oil taxes will leave more money in consumers' pockets.
Governments should make up the gas tax shortfall by increasing tax rates
on oil asset appreciation.
Governments resist fuel tax reduction because of the bogus ideology that
moves that hurt capital hurt the poor also, if not more.  This
ideological fixation is increasing inoperative in a world saddled with
overcapacity.  Any development that reduces demand is deadly for the
current global economic structure.  Therein lies the key issue of the
coming oil crisis - balloned equity price unsupported by earnings and a
dampening of consumer demand.  The world has been enjoying a boom from
$10 oil for a decade.  During this boom, income disparaty has increased
both domestically and globally.   Now, a return to normal market price
for oil should not be allowed to continue this trend on widening income
disparity.

Tire trouble and falling profit from Eouroland have forced Ford to
scuttle the pending Daewoo deal to preserve cash.  That development has
spooked Asian markets which transfer the damage immediately to the most
liquid exchange: Hong Kong, which has no exposure to oil price
fluctuations because the small island entity's traffic is all short
hauls.  Thus liquidity, as evident in 1998 already, has its penalties.
In Asia are two major oil producers and OPEC members: Indonesia and
Malaysia.  Yet the windfall from oil is not being reinvested in these
two economies, but instead heads for Wall Street, thus making Asia
excessively impacted by high oil prices.

Henry C.K. Liu