Look, I'm an optimist at heart. I see silver linings where others see nothing but clouds. So what if consumer confidence is at a ten-year low, consumer spending down, retail sales dropping, share prices still falling, wages in the private sector declining? Most people looking at these numbers are worried about the economy, but not me. I'm an optimist. Not everything's dropping. Lookat oil prices. They're soaring.
Okay, I know. High oil prices aren't exactly a silver lining. But look at it this way: With oil prices going up, we don't have to worry so much about deflation, at least right now. Otherwise, all prices would be heading downward-- like what's happened in Japan.
When prices start dropping, consumers expect even lower prices in the future sothey postpone buying, which means companies sell less and have to lay off more people, which means consumers have less money to spend. And as a result, both consumers and businesses can't repay their loans, so banks start going under. And so on.
But rising oil prices reduce the immediate risk of deflation. Oil prices affectthe cost of just about everything. So the current surge in global oil prices iscausing almost all prices to rise rather than fall.
Now, I'm an optimist, but I've got to be candid with you. These oil-price increases may prevent deflation right now, but over the slightly longer term --say, if oil prices hover around $40 a barrel or more for another 3 or 4 months-- they increase the risk of deflation. That's because higher oil prices squeezecorporate profits, leaving companies with less money to invest in plant and equipment. And they squeeze consumers at gas pumps and in their heating andair-conditioning bills, leaving consumers with less to spend on everything else. And if businesses and consumers spend less on everything except oil, overall demand drops, which means companies will have to lay off more people. And this in turn increases the odds of another recession or -- deflation.
I'm an optimist, and I want to be upbeat. I look for silver linings on economicclouds, but the clouds are getting bigger, and it's looking more and more like we're in for a storm.
