As I've mentioned, I'm not happy with my level of understanding of Macro Economics. As an Engineer, i was never required to take an econ class, and so like many I've picked up bits and pieces along the way. Micro econ, the stuff we live by every day, is relatively straightforward and intuitive. Macro, at least to me, is neither.
So, after years of thinking I halfway understood the views of Austrians and Keynesians, and the general view of inflation and deflation, and trade balances and commodities and so forth, along came 2007. I was one of the people who saw the advent of peak oil and the impact on economies as pricing rose to match the marginal cost of new production (which it does, thanks to micro econ). Though nobody wanted to admit it, high oil prices were one of they key shocks to the world economy in 2008 that kicked off a cascade of collapses. After crash, of course, oil prices dropped as consumption dropped, pretty much as I and most rational thinkers would expect.
I was not at all surprised by the crash. All of my (meager) assets were in cash and gold, and my family suffered not a whit in the stock market crash, and I was fortunate enough to hold a job through the dip, which was almost as severe as I expected.
So far, so good? Well yes, but then QE came along with bailouts of gigantic proportions. I freely admit that I did not expect the gov't to bail out businesses and banks to the tune of trillions of dollars, nor to continue such spending for years with near-zero interest rates. I knew enough about econ to know what low interest rates do, especially coupled with inflation -- they erode savings, push investors further out the risk/return curve, and create moral hazard for the thrifty by benefiting the risky, especially when risk is backed by boundless backstops.
I honestly never thought the US gov't would so blatantly crush the little guy, while making banks and major corps and investors whole. And even when the intent was obvious, I didn't think it would work. My Austrian leanings anticipated market punishment, with weaker dollar. I was completely wrong.
Well, not completely. Gold was a REALLY good investment, for my modest holdings, and college expenses made me liquidate that later at relatively good time, but that was just luck. Other than that, I failed to join into the risk market, and missed much of the run-up in stocks. Obviously, my understanding was incomplete, so I knew I didn't know enough......and I also knew that the financial pundits don't either, since they missed the crash and the turnaround and everything else beyond fairly obvious currency moves and near-term changes.
Along this time I'd already decided that being on the non-discretionary side of the economy made more sense than where I was, so I voted with my feet and changed industries. I was also back in school, with plenty to do, so I just filed away this need to learn and got absorbed in life for a while.
Fast forward to 2014, and I'm done with school, some of the kids are off at college, and I see stocks at record highs and gold dropping, still with trillion-dollar deficits more or less, and I can't help but be intrigued.
The oil issue was resolved, and so far I'd been right about getting into energy -- oil prices were high, and energy was king. Personally, I'd never really believed the world would adjust to $100 oil as well as it had, but to degree it was clear than it hadn't, with high unemployment, heavy gov't debt, and slow growth the world over. $100 oil was enough to ignite the shale revolution, and though I had indeed expected unconventional oil to grow, it did so better than I'd anticipated. This is worthy of further discussion, too, but not today.
Expensive oil fostered a broad interest in renewables, and essentially enabled a renaissance in wind and solar, helped along by gov't subsidies the world over. The interplay between oil prices and renewables is worthy of a discussion all its own, too, but not today.
So today we have the double-whammy of crashing oil prices with slow consumption and expanding production, with changing fortunes around the globe, and various financial shocks. How will this play out, and what should countries (especially ours!) do? Good question, and I know I don't know enough to answer......yet.
A few points are key: lower energy prices profit consumers and punish producers, on the int'l level and here in this country. It seems pretty intuitive that those countries that are heavy net imports WILL do better, and those that are heavy exporters (like Russia, Venezuela, and much of the MidEast) will struggle. What about those in the middle, like the US?
First, we need to understand how money flows, and double check that "intuitive" part, because I've already proven my intuition doesn't work very well. I understand this is a basic equation in macro econ, and I assume there isn't much argument about its validity (it is a pretty basic assertion, really).
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
I think I understand this, and its a pretty simple concept: in a given country's money, everything that is owned -- money, whether asset or debt, whether real physical asset or financial instrument -- is either owned by the private population (and that includes corporations!), the government, or by foreigners (those outside the country). This is really basic and intuitive, yet it implies a lot of more subtle and less intuitive consequences, especially when you add in fiat currency, bonds of various sorts, loans, and of the course the complications of changing monetary flows over time. Which is what Macro Econ is all about. And which is pretty much universally understood.
Edit: this is intuitive for flows where everything that transfers goes from one party to another; it's less-so for the assets overall over time. If growth in one area has to be offset by debt somewhere else, then growth means offsetting growth of assets and liabilities overall.
Enough for this post...maybe the next one will cover currency first, and and a little about financial assets. And then we'll get back to economics, and maybe eventually the impact of oil shocks.....
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