${Html.ActionLink("My MarketWatch", "index", new { controller = "composite", area = "section", page = "my" })} | !{Html.ActionLink("Sign out", "LogOff", new { area = "User", controller = "Account" }, new { id = "signOutLink" })}
Welcome, ${UserDisplayName}
Log in
Become a MarketWatch member today
Matthew Lynn's London Eye Archives | Email alerts
Feb. 29, 2012, 8:28 a.m. EST
Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:
Create Portfolio or Cancel Already have a portfolio? Log In
By Matthew Lynn
LONDON (MarketWatch) "” When William McChesney Martin was chairman of the Federal Reserve all through the 1950s and 1960s, he famously described the job as "taking away the punch bowl while the party was still going." Central bankers don't think like that anymore "” they are more likely to be cheerfully pouring more vodka into the mix, and asking if anyone knows the name of a good dealer in tobacco-based products.
Still, we still have someone who is prepared to act as the anxious parent to the global economy.
Except these days, it is the oil market.
Central banks keep furiously pumping more money into the economy "” right now in Europe, and mostly by stealth. But as soon as they do so, the price of oil goes up and that promptly takes money out again. Like hamsters on a wheel, they are running more and more furiously all the time "” and getting precisely nowhere.
The oil price has taken off again in the last few weeks, hitting new highs. Brent crude is now up to $125. That is still below the $145 it touched briefly in 2008. But measured in sterling or euros "” that is, in the prices that actually matter to consumers who are not Americans, oil is now at its highest-ever price. A barrel of Brent crude now costs 93 euros, or 79 pounds, record levels for both currencies. That is translating into high prices at the pumps. In the U.K., a liter of diesel now costs £1.43.
European banks and institutions took â?¬530 billion in loans from the European Central Bank under its long term refinancing operation. Dow Jones's Jenny Paris has the details. Photo: AP
There are lots of reasons for oil prices to be going up, of course. Demand is rising in the emerging markets, where growth is still strong. There has been a cold snap across Europe, increasing demand for heating oil. There is tension with Iran, and a revolt in Syria that may soon turn into a civil war. Russia has a tense presidential election this weekend: turmoil there might hit what is now the world's largest producer of oil, if not yet the largest exporter.
But the main reason is one that is rarely mentioned. The world is being flooded with printed money. In reality, oil is not expensive. It is money that is cheap.
Most of the standard explanations for rising oil prices don't make much sense. Demand rises gradually from emerging markets all the time "” just as it goes down in more energy-efficient developed markets. It's often chilly in Europe at this time of year "” it's called winter. No one in Russia is going to turn off the oil wells unless they want to freeze and starve. And if you can remember a time when there wasn't rising tension in the Middle East, then you have a longer memory than I do.
There is no very good reason why those factors should be pushing oil prices to record highs this year "” as opposed to last year, or the year before.
The real reason is there is a lot of fresh money and it has to go somewhere.
Although it has not been widely discussed, Europe is now in the money-printing business big time. The Bank of England has embarked on a fresh round of quantitative easing. It is creating an extra £50 billion, taking the total to £325 billion since the program started in 2009. The latest minutes from the bank show that two members of its Monetary Policy Committee voted for even more last month.
More significantly, Mario Draghi, the new president of the European Central Bank, has started minting new euros on vast scale. So as to not offend the neighbors in his Frankfurt headquarters "” where they start sobbing into their sauerkraut at the mere mention of quantitative easing "” it isn't called that. Instead it is called LTRO "” or the long-term refinancing operation "” and it involves handing over lots of very cheap money to the banks. But whether you start spraying cash around by the front door or the back door does not in the end make much difference. It is still money, and it ends up somewhere.
So far, Draghi's LTRO operations have released 489 billion euros into the economy in the first round and more than 500 billion euros in the second.
That may well have been necessary to stop the euro from falling apart, and to keep the European banking system alive. But you can't release that kind of money into the system without it having some impact. For a comparison, the Federal Reserve's first round of QE was $1.25 trillion, and the second round was $600 billion. In dollar terms, Draghi has chucked $1.3 trillion into the pot, and the U.K.'s Sir Mervyn King another $507 billion. Europe has already matched the Federal Reserve's QE. So this is serious cash, even by central banking standards.
The results have been much the same as when the Fed printed money. Asset prices are starting to rocket. Equity markets are buoyant again. But most significantly commodity prices, particularly when measured in weaker euros or pounds, are starting to climb. Oil and gold "” which always move together in the medium-term "” are already racing up in price. Other commodities will follow.
Central banks are fast getting locked into a destructive cycle. They print money to try and pump up demand. Commodity prices rise, which then takes demand out of the economy again.
Take a country like Italy. It imports 2.2 million barrels of oil a day. Thirty euros on the oil price adds 24 billion euros to the annual Italian energy bill "” and takes out 24 billion euros from the Italian economy. For every euro you pump in, another goes out.
Worse, it constantly distorts the global economy, draining money from manufacturing nations like Italy or France, and pumping it into resource-rich countries like Russia or Saudi Arabia. Since the manufacturing countries are usually more productive, and more democratic, that hardly makes much sense.
Investors can of course take advantage of it. If Draghi plans to carry on creating new money on this scale "” and the chances are that he will "” then it makes sense to keep buying gold and oil, and to a lesser extent equities.
But at a certain point, central bankers will have to recognize that it isn't really working "” and that the economy has deep structural problems, which simply printing more cash will not fix.
Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His latest book "The Long Depression: The Slump of 2008 to 2031" is published by Endeavour Press.
Bernanke sees "?different signals' from economy
Buffett rebuffs gold, but inflation says "?buy'
Why it took the Dow so long to eclipse 13K
Grantham wonders if Marx was right after all
Gold drops as much as $80 on Bernanke comments
Santorum's real weakness is the economy
Economy still hobbled by weak housing, high debts
What central banks provide, oil markets take away
Grantham wonders if Marx was right after all
Trading Strategies: Pivot Points
Free Homes, Made to Order for Wounded Vets
Asia's Week Ahead: China Data, Australia PM
U.S. Investors Start Week with Heavy Data releases
Gold drops as much as $80 on Bernanke comments
Fed finds housing, banking conditions improved
WASHINGTON (MarketWatch) - Home real estate markets and banking conditions are improving across most of the...
Grantham wonders if Marx was right after all
Time to unload Bank of America?
Read Full Article »