The Real (and Troubling) Reason Behind Lower Oil Prices

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It isn't supply and demand, as most people believe

I am obsessed with how the top tier of finance has undermined, rather than fueled, the real economy. In part, that’s because of I’m writing a book about the topic, but also because so many market stories I come across seem to support this notion. The other day, I had lunch with Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management and chief of macroeconomics for the bank, who posited a fascinating idea: the major fall in oil prices since this summer may be about a shift in trading, rather than a change in the fundamental supply and demand equation. Oil, he says, is now a financial asset as much as a commodity.

The conventional wisdom about the fall in oil prices has been that it’s a result of both slower demand in China, which is in the midst of a slowdown and debt crisis, but also the increase in US shale production and the unwillingness of the Saudis to stop pumping so much oil. The Saudis often cut production in periods of slowing demand, but this time around they have not. This is in part because they are quite happy to put pressure on the Iranians, their sectarian rivals who need a much higher oil price to meet their budgets, as well as the Russians, who likewise are on the wrong side of the sectarian conflict in the Middle East via their support for the Syrian regime.

Sharma rightly points out, though, that supply and demand haven’t changed enough to create a 50% plunge in prices. Meanwhile, the price decline began not on the news of slower Chinese growth or Saudi announcements about supply, but last summer when the Fed announced that it planned to stop its quantitative easing program. Sharma and many others believe this program fueled a run up in asset buying in both emerging markets and commodities markets. “Easy money had kept oil prices artificially high for much longer than fundamentals warranted, as Chinese demand and oil supply had started to turn back in 2011, and oil prices have now merely returned to their long-term average,” says Sharma. “The end of the Fed’s quantitative easing has finally pricked the oil bubble.”

If this is the case, the fact that hot money could have such an effect on such a crucial everyday resource is worrisome. And the fact that the Fed’s QE, which was designed to buoy the real economy, has instead had the unintended and perverse effect of inflating asset prices is particularly disturbing. I think that regulatory attention on the financialization of the commodities markets will undoubtedly grow; for more on how it all works, check out this New York Times story on Goldman’s control of the aluminum markets. Amazing stuff.

Correction: The original version of this story misidentified Ruchir Sharma. He is the head of emerging markets for Morgan Stanley Investment Management.

Read next: The U.S. Will Spend $5 Billion on Energy Research in 2015 – Where Is It Going?

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MONEY The Economy

Why the Good Jobs Report Isn’t Even Better

Photo Researchers—Getty Images Bridge Building in the New Deal Era

These four charts show why today's jobs report could have been that much better— if only public-sector employment would ever bounce back.

Thursday’s jobs report, which showed that the nation’s unemployment rate fell to 6.1%, was viewed in a very positive light.

Not only did more Americans gain employment than expected in June, but wages perked up as well. The White House, in fact, noted that the private sector has added 9.7 million jobs over 52 straight months of job growth.

The key word there is private. Of the 288,000 jobs added in June, 262,000 were private sector positions. That means only 26,000 came from Federal, state and local governments. Which means if you’re a teacher or a Leslie Knope-wannabe, finding work remains less than easy.

In fact, this chart shows how the public sector outlook has deteriorated since the end of the recession in June 2009:

US Government Payrolls Chart

US Government Payrolls data by YCharts

Yet in the aftermath of past recessions, such as the one that ended in 2001, local, state and federal jobs have traditionally been the first to rebound:

US Government Payrolls Chart

US Government Payrolls data by YCharts

Federal employment in particular continues to be weak…

…The same goes for teaching jobs.


Why have teachers had such a rough go of it? Well, according to the Center on Budget and Policy Priorities, states are simply spending less on education:

At least 35 states are providing less funding per student for the 2013-14 school year than they did before the recession hit. Fourteen of these states have cut per-student funding by more than 10 percent.

But states are not alone. Ever since the effects of the stimulus have worn off, federal government spending has also hit a wall.

TIME Japan

Japan’s Deficit Hits Record HIgh

TOSHIFUMI KITAMURA—AFP/Getty Images A cargo ship berthes alongside a container wharf in the port of Tokyo on February 20, 2014.

A slew of unhealthy indicators dampen hopes of a recovery

Japan’s current account deficit swelled to $15 billion in January, the largest in its recorded history.

The bad news comes on the heels of another unsightly indicator, GDP growth, which officials revised from an anemic 1% in 2013 to an even more anemic 0.7%. Not even consumer spending, which was expected to rise before a new consumption tax went into effect, escaped the downward drift. Officials revised it down from 0.5% to 0.4%.

The Nikkei index slid 95 points following the news of the slowdown.


TIME Economy

5 Years After Stimulus, Obama Says It Worked

U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington
Larry Downing—Corbis U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington, D.C., on Jan. 28, 2014.

Five years ago Monday, President Barack Obama visited the Denver Museum of Nature and Science to sign the American Recovery and Reinvestment Act, his $800 billion stimulus bill. At the time, the U.S. economy was losing 800,000 jobs a month. In the fourth quarter of 2008, it had contracted at an 8% annual rate, a Depression-level free fall.

“Today does not mark the end of our economic problems,” Obama said on Feb. 17, 2009. “But it does mark the beginning of the end.”

And so it did. The stimulus quickly became a national joke, mocked by the right as a massive boondoggle and by the left as a pathetic pittance. A year after it passed, the percentage of Americans who believed it had created jobs was lower than the percentage of Americans who believed Elvis was alive. But after an epic financial crisis, the Recovery Act did launch a recovery. The economy started growing again in summer 2009. It started adding jobs again in spring 2010.

This week, the White House will release a report documenting how the stimulus spelled the difference between contraction and growth for much of Obama’s first term. Politically, the White House lost the argument over the stimulus long ago, but for Recovery Act obsessives — O.K., maybe I’m the only one — it’s still nice to see the facts in black and white.

Q2Quarterly Effect of theRecovery Act and Subsequent Fiscal Measures on GDP, 2009–2012
Bureau of Economic Analysis, National Income and Product Accounts / Congressional Budget Office / CEA calculations

The main conclusion of the 70-page report — the White House gave me an advance draft — is that the Recovery Act increased U.S. GDP by roughly 2 to 2.5 percentage points from late 2009 through mid-2011, keeping us out of a double-dip recession. It added about 6 million “job years” (a full-time job for a full year) through the end of 2012. If you combine the Recovery Act with a series of follow-up measures, including unemployment-insurance extensions, small-business tax cuts and payroll tax cuts, the Administration’s fiscal stimulus produced a 2% to 3% increase in GDP in every quarter from late 2009 through 2012, and 9 million extra job years, according to the report.

The White House, of course, is not an objective source — Council of Economic Advisers chair Jason Furman, who oversaw the report, helped assemble the Recovery Act — but its estimates are in line with work by the nonpartisan Congressional Budget Office and a variety of private-sector analysts. Before Obama took office, it would have been a truism to assert that stimulus packages stimulate the economy: every 2008 presidential candidate proposed a stimulus, and Mitt Romney’s proposal was the most aggressive. In January 2009, House Republicans (including Paul Ryan) voted for a $715 billion stimulus bill that was almost as expansive as Obama’s. But even though the stimulus has been a partisan political football for the past five years, that truism still holds.

The report also estimates that the Recovery Act’s aid to victims of the Great Recession — in the form of expanded food stamps, earned-income tax credits, unemployment benefits and much more — directly prevented 5.3 million people from slipping below the poverty line. It also improved nearly 42,000 miles of roads, repaired over 2,700 bridges, funded 12,220 transit vehicles, improved more than 3,000 water projects and provided tax cuts to 160 million American workers.

My obsession with the stimulus has focused less on its short-term economic jolt than its long-term policy revolution: I wrote an article about it for TIME titled “How the Stimulus Is Changing America” and a book about it called The New New Deal. The Recovery Act jump-started clean energy in America, financing unprecedented investments in wind, solar, geothermal and other renewable sources of electricity. It advanced biofuels, electric vehicles and energy efficiency in every imaginable form. It helped fund the factories to build all that green stuff in the U.S., and research into the green technologies of tomorrow. It’s the reason U.S. wind production has increased 145% since 2008 and solar installations have increased more than 1,200%. The stimulus is also the reason the use of electronic medical records has more than doubled in doctors’ offices and almost quintupled in hospitals. It improved more than 110,000 miles of broadband infrastructure. It launched Race to the Top, the most ambitious national education reform in decades.

At a ceremony Thursday in the Mojave Desert, Energy Secretary Ernest Moniz dedicated the world’s largest solar plant, a billion-dollar stimulus project funded by the same loan program that financed the notorious Solyndra factory. It will be providing clean energy to 94,000 homes long after Solyndra has been forgotten. Unfortunately, the only long-term effect of the Recovery Act that’s gotten much attention has been its long-term effect on national deficits and debts. As the White House report makes clear, that effect is negligible. The overwhelming majority of the Recovery Act’s dollars have gone out the door; it’s no longer adding to the deficit. It did add about 0.1% to our 75-year debt projections, but allowing the economy to slip into a depression would have added a lot more debt.

The real long-term danger is that the Recovery Act became so unpopular so quickly that future politicians might shy away from stimulus packages. Europe quickly embraced austerity, which is one reason the unemployment rate in the euro zone is almost twice as high as ours. Historically, recoveries in the U.S. have been much stronger and faster, and from much less damaging financial crises. This time it hasn’t been as strong as it should have been, partly because of austerity fever among Republicans, stimulus discomfort among Democrats, and deep budget cuts at the state and local level. The political pendulum has swung back toward austerity, producing the “sequester” and other anti-stimulus.

But the report is a reminder that the Recovery Act succeeded in creating jobs, boosting growth and saving us from a much worse fate. We’re still healing from the worst crisis in 80 years, but we’re well past the beginning of the end.

MONEY 2012 election

Election 2012: The Candidates and Economic Growth

Photo: Ryan Mesina Getting the economy growing again is many voters top priority. Obama and Romney have polar-opposite policies to do just that.

Getting the economy growing again is a pivotal issue for most voters in this year’s election. The candidates offer two wildly different proposals for how to reignite the economy, which essentially come down to a choice between increasing government spending and lowering taxes and reducing regulations.

The third in Money magazine’s three-part series on voting your wallet, here’s where the candidates stand on stimulating the economy and why their proposals may not be quick fixes.

Getting growth back

What’s at stake: The normal ups and downs of the economy aren’t always an urgent personal concern to every voter. But we aren’t in a normal economy.

Even if you’re working, years of weak growth and stubbornly high unemployment rates have taken more than a psychological toll. You haven’t had a lot of leverage with your boss to get better pay or a promotion.

For retirees, the Federal Reserve’s efforts to keep things from getting worse, combined with investors’ flight to safe Treasury bonds, have meant rock-bottom rates on savings. So getting the economy growing is many voters’ top priority. Yet Washington has rarely been more polarized when it comes to how to accomplish that.


The promise: Think Reaganomics. Romney wants less regulation.

He’d work to repeal Dodd-Frank, the post-crisis law that aims to rein in Wall Street. He wants lower, flatter taxes on corporations (a point on which Obama agrees). He also says he wouldn’t reappoint Fed chairman Ben Bernanke when his term ends in 2014; spokesman Burks says Romney would seek someone committed to “sound money.” That could mean a chairman who’s less activist about stoking the economy.

And then there are the lower individual income tax rates, which Republicans believe are important for rewarding work and investment. On the other side of the ledger, Romney vows to make the budget math work by getting spending down to 20% of GDP by 2016, from about 24% today.

The catch: Past Republican administrations — Reagan, the younger Bush — have proved very good at cutting taxes. Reducing the deficit? Not so much.

Low taxes are good for growth, but they have to be weighed against the potential drag from higher debt.

Romney’s case turns in part on whether he can get Congress to pass the spending cuts that pay for lower taxes. Analysts at the liberal Center on Budget and Policy Priorities say Romney’s tight spending cap leaves safety-net programs such as Medicaid open to painful cuts.

The potential impact: Romney’s pro-business attitude might stoke some extra growth, but don’t look for a zooming turnaround. Regulation and taxes are hardly the only things weighing on the minds of CEOs deciding whether or not to hire these days. Consumers remain deep in debt and housing is still weak; Romney offers no quick fixes there.


The promise: If Romney’s economic plan is a reboot of a 1980s franchise, Obama’s is the muted sequel to last season’s expensive blockbuster.

Since taking office, the President has focused his economic revival efforts on quick injections of government spending and getting more cash into the hands of lower- and middle-income consumers. These jump-starts included cash for clunkers, “shovel-ready” construction projects, and temporary tax cuts.

Many economists believe the stimulus kept the country from going into an even deeper recession, but it hasn’t been enough to create a strong recovery. Obama’s 2013 budget proposal looks for more stimulus, but the scale is smaller. There’s aid to financially strapped states so that they can hire more teachers and cops, and money for building roads and rails.

The catch: Set aside the debate over whether stimulus spending works. A practical question to ask about Obama’s plan: The President and what Congress?

Even if Obama wins, he’ll probably have to negotiate with a Republican-controlled House to avoid a looming anti-stimulus, in the form of the”fiscal cliff” of automatic tax hikes and the spending cuts agreed to in last year’s debt-ceiling deal.

“We will certainly have a recession if we hit the full fiscal cliff,” says Jeff Vanke of the Committee for a Responsible Federal Budget.

The potential impact: As with Romney, it’s hard to see Obama delivering a quick economic bounce. And over the longer run, even after his stimulus programs tail off, he sets course for a higher level of spending than Romney — at 22.3% of GDP — which demands higher taxes.

While the President often frames his case for more spending as a way to boost growth, the truth is that a lot of his economic agenda is about his vision of what a good society should look like. The Affordable Care Act is not a jobs program.

On the other side of the divide, likewise, many voters would choose Romney’s vision of lower taxes on wealthy high achievers but fewer government services even if it left them worse off personally. As much as you may be voting your wallet, it’s hard to avoid voting your values.


The candidates and tax reform

Tackling Medicare costs

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