The risk of a nasty mix determined by inflation from raw materials, sluggish production, unemployment and declining demand for goods and services. The serious danger comes from the fact that Western economy has not been changed after the recent crash.
The European economy is picking up slowly , or perhaps not at all, and the menace of a financial run against the weaker countries is still there. Unemployment is still there , also, in Europe and in the US, and possibly increasing in Europe, due to the reduction of public spending, and the consequently sluggish demand. The US companies, which are competitive in the European market, due to the dollar being weaker than the Euro, seem to put all their hope of survival in reducing the labour force, whose total cost is possibly below ten per cent of the total. The situation looks increasingly as if there were a “Conspiracy Not To Hire” respected by all producers.
However, the stagnation of the West is not preventing increase of world demand for raw materials, pushed up by the growth in China , India and others . Some rare minerals used in electronics are already scarce. The demand for oil, the raw material produced in largest volumes, is also increasing under the same pressure, notwithstanding the near stagnation of oil demand in Europe and Japan. The OPEC producers are tentatively proposing prices that few years ago were considered lethal for the world economy. They want to avoid a new price shock, but say they would favour an increase , perhaps up to 100 dollars a barrel, which they consider not dangerous in the new economic situation of the world.
At present there is no scarcity of oil in the market , and the OPEC countries would probably be able to increase production ; but , of course, they would rather prefer increasing prices , obtaining the same income while keeping some oil underground for the future. They seem, however , to be still uncertain , because they fear the competition of other sources of energy , like the renewable and nuclear, and , above all , they fear a crash of demand, something that has happened before , making huge holes in their finances.
The other big player in this market, the oil companies, define themselves as “ price takers “ , who buy and sell in the futures market not in order to influence the price, but only to insure themselves – to hedge – against negative developments – or so they say. Their position is , basically, not different from that of OPEC producers.
Point is that the oil producers are not the real price makers: the price of raw materials are dictated minute by minute by the futures market , following the changes of demand and supply balance for oil , but also feeling a much stronger push from the oscillations of the volume of capital that enters in such markets looking for a quick profit. The rate of interest being still quite low, anybody can get money and play for speculative gains in such markets: and the big banks have not been the last to take advantage of it. We will therefore have an increase of the flow of money playing for more money in the futures markets, and especially on the crude oil ones.
What if the price of crude oil increases, pushing along other raw materials, and the futures market creates a speculative peak , and, again , another price shock? We would have at the same time inflation from raw materials, sluggish production, unemployment, and declining demand for goods and services : a nasty mix indeed. This serious danger comes from the fact that Western economy has not been changed after the recent crash. The banks keep doing what they were doing then, and increase their profits, the only difference being that the building and mortgage market is not reviving, and speculation has to find other areas.
However, the conditions for such a situation are all there: cheap money, pumped by the State in the US in a desperate attempt to revive the economy; a pressure of raw materials and oil demand coming from the East; oil producers who would be quite happy to see their price increased being at the same time able to blame speculation for it ; futures market that have become the most attractive area for people playing with cheap money . Is it possible to avoid all this? Perhaps it is. But it would require a different strategy of the industrial companies , and the implementation of some of the various proposals to reduce the influence of speculative markets , which were advanced after the big crash and have gradually disappeared in the general financial bonanza of the big banks.