When Ronald Reagan entered the White House in 1981, he openly predicted a decline in the price of oil. With the value of the dollar on the rise after a decade of debasement by Presidents Nixon, Ford, and Carter, Reagan knew that a reversal of dollar policy that vandalized reason would bring down nominal prices at the pump.
Was Reagan predicting years of gloom? Figure that oil had recently risen as high as $40/barrel. Did the latter signal an economic boom? No and no to the two questions. Oil had been expensive not because demand for it well outstripped supply, but because the dollar in which oil was priced had been in decline for much of the 1970s.
The price of a barrel during Reagan’s presidency fell as low as $8/barrel. But far from a recessionary age, the Reagan years were what the late Robert Bartley referred to as “The Seven Fat Years.” That was the title of a 1992 book he wrote about the economy under Reagan. It boomed. The stock market soared.
That it did was kind of a statement of the obvious. Figure that oil is a major input when it comes to economic activity, and the input was quite a bit cheaper. This was a good thing for an economy rather reliant on oil. Of course, a major driver of cheaper oil was the aforementioned rising dollar. Reagan was leaving behind the malaise of the 1970s that was a consequence of dollar devaluation. Devaluation is the surest sign of economic decline.
That is so because the people are the economy, and the people earn dollars. While economists will tell you that currency devaluation is good for economic growth, the mildly sentient understand the foolishness of such a viewpoint. Devaluation is a tax on our work. It shrinks what we get for our work, only for it to cause bigger downstream problems.
Lest readers forget as economists routinely do, investment is what powers economic growth and investors are pursuing returns in dollars when they put wealth to work. Please think about this truth while also thinking about the popular belief among economists that currency devaluation boosts economic activity. Quite the opposite, actually. Since investors are seeking returns in dollars, devaluation is by its very name a penalty – or tax - placed on investment. The economy boomed during the Reagan years, while the price of oil happily fell substantially. The two aren’t unrelated.
All of which requires a pause. Even though falling prices have always been bullish in consideration of oil’s central economic role, there’s a tendency to forget this. In a recent piece for the Washington Post, columnist Catherine Rampell observed that “Part of the reason energy prices are dropping” is because “the global economic outlook is darkening.” The view is contradictory. Oil’s centrality powerfully indicates that the global economy would gain from it being less expensive. Which is true. And we don’t just have the Reagan ‘80s to point to as a way of making this case.
Figure that the 1990s if anything exceeded the Reagan ‘80s from a growth perspective. While the S&P 500 rose somewhere north of 200% in the 1980s, it jumped over 300% in the 1990s. Good as Reagan was on the dollar, Bill Clinton was arguably even better. His Treasury secretary in Robert Rubin put to bed all the thumbsucking about Japan that had at times defined the ‘80s. With the dollar/yen less politicized by the Clinton Treasury, the market realization was that Rubin et al believed their rhetoric about a strong dollar being in the best interests of the American people. A strong dollar, soaring equity markets, a booming economy, and rather cheap oil. So good was the economy that Clinton easily survived Monica Lewinsky and all that.
All of which brings us back to the present. Rampell points to a “darkening” global economic outlook as a potential downside of $75/barrel oil. Such a view ignores the dollar’s powerful rule in the price of crude, one that easily trumps supply/demand that writers so simplistically apply to everything. Beyond that, Rampell ignores basic logic. Precisely because oil looms so large on the matter of economic progress, a cheaper price could hardly be bearish.
History supports this view. Ever since the dollar’s stability as a unit of measure was abandoned in the 1970s, oil has risen when the dollar has weakened and it has fallen when the dollar has strengthened. Which scenario was better for the economy? The question has already been answered. We have nothing to fear from falling oil prices unless greater prosperity is fearful.
