LONDON () -- The Dow, the Nasdaq and the FTSE have all been centre stage. The rises, the dramatic falls, then the slight respite as we go to press. How the U.S. markets have seen 9% falls off of their heights. How it affects shareholders, business, investment. Everyone has been talking about it, the mass media have been all over it.
But here sits a primary problem of the way markets both act and are reported. All of which is centred around the reality of oil and energy and the way it is underreported on big networks and newspapers. Because if you watch, listen or read these news organs you might think that this problem was just something that affected the floor on Wall Street. But it is not so.
The U.S. and European markets have taken hits of anywhere from 9-12% it is true. But they did relatively well. In contrast India's Sensex in Mumbai fell a terrifying 28%, in one month.
The basic reason is energy, and in the future the ones who will pay, are the weakest. It is the oil inflation chain, the ripples of the oil wave.
Let us look at the recent days as an example. To start with is the price of oil and gas. The price is caused by demand, war, regional disturbances, large scale theft, poor statistics, maturing fields and so on. We all know why, we have our own take on exactly which piece of the puzzle is most important. But the price is high, inflated.
This is causing general economic inflation. It is in much smaller amounts than before, but proportionately the room to manoeuvre for central banks is also squeezed. The fear of - historically - small amounts of inflation causes markets to think the U.S. economy will slow. Goods and commodities will, are, becoming expensive. When that happens no one in the U.S. will purchase anything. So economists think.
In the past that would have really hurt U.S. business. Maybe even less than India's. India after all was not connected to the U.S. in the way it has been in the past twenty years. But now India, and of course China, make huge amounts of goods for both the U.S. and the other richest nations, members of the OECD.
The people who would have been hurt were the small U.S. traders, millions of them. Now all those who were in manufacturing, retail, hard commodities and even energy extraction have seen their jobs leave the country, as the resources they seek are both more plentiful and far cheaper elsewhere. They have long been dispensed with.
Instead we have far less small traders and far more huge corporations. And corporations of corporations. They have been able to delay the hit of $50-plus oil for far longer than the small guys would have. In everything except fuel and cigarettes, they know we are addicted to them.
So when the U.S. market falls 9%, being the source of the fear, the reason for the potential turn-down and the geographic location for it, then it is a huge media event. But the market in America's poor has already felt the affect of high fuel costs, so have the middle class. The super rich like T Boone Pickens who paid himself - and the future generations of his family to rule over you - $1.5 billion last year, could not care less.
Likewise it is worrisome to think of the ripple. After all what happens if a recession did occur in this way? One that was fairly bad in the OECD nations, but bounced back to be a disaster in developing countries? What would central banks do? Lower interest rates to zero again? What would happen to asset prices? How about raise them to 10% and collapse the whole show? There is no room to move anymore.
And what has sparked all of this is oil, energy. For whatever reason you think the price is high. Feeding slowly into the chain. Inflating the price of commodity manufacturing, purchase prices and transport. Increasing the cost of the energy to create the commodity in the first place. Increasing the price of consumer energy.
Worryingly when the SENSEX fell 28% in one moth the cost of energy did not follow. That is a like an axe suspended over the neck of the global economy. Oil stuck at home. Oil sat around $68 to $70. It did not even fall 9% . Enough people are still consuming hard to keep it there, of course still including those playing catch up in India and China just as the first wave breaks on the shore. But the biggest effect will be on the poor in rich countries and on the poor countries of the world.
Any recession combined with high energy costs may be the final ripple. How oil tripped the globalized economy into recession, a wave started by oil. Finished by oil.