Central bankers in countries that have fallen into recession or are on the precipice have suffered seizures over the fall in oil prices. Most are mainstream economists or groupies who think that falling oil prices will deepen the plunge in prices, which they consider the ultimate evil, even while most consumers are cheering them.
Of course, mainstream economists will fall back on the old apologetic that says what is good for individuals can be bad for the nation as a whole. They claim it is a paradox and those types who love Eastern mystic nonsense like “the sound of one hand clapping” or “global warming will cause another ice age” love such inscrutable sayings.
The truth is that it’s not a paradox; it’s a contradiction. Mainstream macro contradicts a large part of the principles of microeconomics. And since micro has the firmer foundation that means a lot of macro is pure nonsense. Now mainstream macroeconomists aren’t dummies, so why do they love inflation when the rest of the sane world hates it? It’s because they know what inflation does: it transfers wealth from savers to borrowers (and they hate savers) and from workers to employers.
Mainstream macro hates savers because it is caught in the whirlpool of the circular flow economy. Every intro text book sells the idea of circular flow: money flows from households to businesses and government and then back to the people. Savings are a “leakage” from this flow, which means that savings reduces the volume of the flow and causes the perpetual motion machine to slow down and cause a recession. Now if the circular flow model accurately represented the real world, then I would have to agree with macro. The only way an economy can grow within the model is for the money supply to grow. This is where the “Modern Monetary” theory gets its nonsense that economies can grow only if the government has greater deficits and borrows more.
But the circular flow model of the economy does not describe reality. It’s a very childish model, much like Krugman’s silly baby-sitting co-op model. The truth is that savings are not a leakage but the main wellspring of growth. Entrepreneurs borrow the savings and invest in better tools for workers. Those better tools increase productivity that leads to higher wages and standards of living. In the real world, economies can grow to any size with a fixed stock of money. The UK and US proved that in the 19th and early 20th centuries.
Stuck in the crude circular flow model, mainstream economists think that economies can only grow if they impoverish consumers by creating moderate levels of inflation. That’s why the mainstream economist Alan Blinder’s must write in the WSJ like this: “The Unsettling Mystery of Productivity” (Nov. 25). Blinder wrote, “Since 2010 U.S. productivity has grown at a miserable rate. And no one, not even the Fed, seems to understand why.” Of course they don’t, but followers of the Austrian school of economics do.
The other crude aspect of mainstream economics is its understanding of the role of crude oil. They still think that increases in crude prices in the 1970’s caused several recessions. Crude can’t seem to please them; they find rising and falling crude prices terrifying.
However, Austrian economists know that with a fixed stock of money, falling crude prices cannot possibly cause deflation. That’s because for every dollar consumers save on gasoline at the pump they spend on something else unless they stick it under a mattress. So falling gasoline prices will cause rising prices in other areas dollar-for-dollar.
What does all of this mean for investors? I believe it means a continuation of low inflation and sometimes deflation for the medium term. That is not good for stock prices, but wonderful for bond investors, people who hold dividend paying stocks and consumers in general. Stick some of that gas savings in a bond.