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OPEC Presents: QE4 And Deflation

OPEC Presents: QE4 And Deflation thumbnail

Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.

The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.

The ‘OPEC Q4? may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as we’re already seeing, those firms’ market values are certain to plummet. And, see yesterday’s essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.

You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop.

Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.

It’s like a parasite can live in your body for a long time before you show symptoms of being sick, but it’s very much there the whole time. A lower gas price may sound nice, but if you don’t understand why prices fall, you risk something like that monster from Alien popping up and out.

I had started writing this when I saw a few nicely fitting articles. First, at MarketWatch, they love the notion of the stimulus effects. They even think a ‘consumer-spending explosion’ is upon us. They’re not going to like what they see. That is, not when all the numbers have gone through their third revision in 6 months or so.

OPEC Has Ushered In QE4


Welcome to the new era of QE4. As if on cue, OPEC stepped in just as monetary policy (at least the Fed’s) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices. Protest away about the 1% getting richer and how prior QE hasn’t trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.


It’s hard to imagine a “more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally,” says Alpari U.K.’s Joshua Mahoney. “For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits.” 


The impact of that could be “bigger than anything that has come before,” says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas. Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it’s a “fundamental positive for anybody who uses oil, who uses energy.” Just not great if you’re from Canada, Russia or Australia, he says. Or if you’re the ECB, fretting about price deflation. Or until it starts crushing shale producers.

Bloomberg, talking about Europe, has a less cheery tone.

Eurozone Inflation Slows as Draghi Tees Up QE Debate


Eurozone inflation slowed in November to match a five-year low, prodding the European Central Bank toward expanding its unprecedented stimulus program. Consumer prices rose 0.3% from a year earlier, the EU statistics office said today. Unemployment held at 11.5% in October [..] While the slowdown is partly related to a drop in oil prices, President Mario Draghi, who may unveil more pessimistic forecasts after a meeting of policy makers on Dec. 4, says he wants to raise inflation “as fast as possible.” [..]


“The only crumb of comfort for the ECB – and it is not much – is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer at IHS. The data are “worrying news” for the central bank, he said. Data yesterday showed Spanish consumer prices dropped 0.5% this month from a year ago, matching the fastest rate of deflation since 2009. In Germany, Europe’s largest economy, inflation slowed to the weakest since February 2010. [..] 


Bundesbank President Jens Weidmann, a long-running opponent to buying government bonds, today highlighted the positive consequence of low oil prices.“There’s a stimulant effect coming from the energy prices – it’s like a mini stimulus package,” he said in Berlin.

Sure, there’s a stimulant effect. But that’s not the only effect. While I’m happy to see Weidmann apparently willing to fight Draghi and his pixies over ECB QE programs, I would think he understands what the other effect is. And if he does, he should be far more worried than he lets on.

But then I stumbled upon a long special report by Gavin Jones for Reuters on Italy, and he does provide intelligent info on that other effect of plunging oil prices. Deflation. As I said, it eats societies alive. I cut two-thirds of the article, but there’s still plenty left to catch the heart of the topic. For anyone who doesn’t understand what deflation really is, or how it works, I think that is an excellent crash course.

Why Italy’s Stay-Home Shoppers Terrify The Eurozone


Italy is stuck in a rut of diminishing expectations. Numbed by years of wage freezes, and skeptical the government can improve their economic fortunes, Italians are hoarding what money they have and cutting back on basic purchases, from detergent to windows. Weak demand has led companies to lower prices in the hope of luring people back into shops. This summer, consumer prices in Italy fell on a year-on-year basis for the first time in a half-century ..


Falling prices eat into company profits and lead to pay cuts and job losses, further depressing demand. The result: Italy is being sucked into a deflationary spiral similar to the one that has afflicted Japan’s economy for much of the past two decades. That is the nightmare scenario that policymakers, led by European Central Bank chief Mario Draghi, are desperate to avoid.


The euro zone’s third-biggest economy is not alone. Deflation – or continuously falling consumer prices – is considered a risk for the whole currency bloc, and particularly countries on its southern rim. Prices have fallen for 20 months in Greece and five in Spain, for example. Both countries are suffering through deep cuts in salaries and state welfare. Yet Italy, a large economy with a huge public debt, is the country causing most worry. [..]


Like Japan, Italy has one of the world’s oldest and most rapidly aging populations – the kind of people who don’t spend. “It is young people who spend more and take risks,” says Sergio De Nardis, at thinktank Nomisma. In recent years, young people have been the hardest hit by layoffs, he says. Many have left the country to seek work elsewhere. People tend to spend more when they see a bright future. Italian confidence has steadily eroded over the past two decades … In Italy, as in Japan, the lack of economic growth has become chronic.


Underpinning economists’ worries is Italy’s biggest handicap: a huge national debt equal to 132% of national output and still growing. Rising prices make it easier for high-debt countries like Italy to pay the fixed interest rates on their bonds. And debt is usually measured as a proportion of national output, so when output grows, debt shrinks. Because output is measured in money, rising prices – inflation – boost output even if economic activity is stagnant, as in Italy. But if activity is stagnant and prices don’t rise, then the debt-to-output ratio will increase. [..]


Sebastiano Salzone, a diminutive 33-year-old from the poor southern region of Calabria, left with his wife five years ago to run the historic Cafe Fiume on Via Salaria, a traditionally busy shopping street near the center of Rome. Salzone was excited by the challenge. But after four years of grinding recession, his business is struggling to survive. “When I took over they warned me demand was weak and advised me not to raise prices. But now, I’m being forced to cut them,” he says. [..] Despite the lower prices, sales have dropped 40%, or 500 euros a day, in the last three years.

For hard-pressed individuals, low and falling prices can seem a godsend; but low prices lead to business closures, lower wages and job cuts – a lethal spiral. Since Italy entered recession in 2008 it has lost 15% of its manufacturing capacity and more than 80,000 shops and businesses. Those that remain are slashing prices in a battle to survive.

Home fixtures maker Benedetto Iaquone says people are now only changing their windows when they fall apart. To hold onto his €500,000-a-year business, Iaquone says he is cutting prices. By doing so, he is helping fuel the chain of deflation from consumers to other companies.


In Italy’s largest supermarket chains, up to 40% of products are now sold below their recommended retail price, according to sector officials. “There is a constant erosion of our margins,” says Vege chief Santambrogio.


What Italy would look like after a decade of Japan-style deflation is grim to imagine. It is already among the world’s most sluggish economies, with youth unemployment at 43%. As a member of a currency bloc, Rome’s options are limited [..] Italy’s budget has to follow European Union rules.


Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.


Many in southern Europe say the EU should abandon its strict fiscal rules and invest heavily to create jobs. They also say Germany, the region’s strongest economy, should do more to push up its own wages and prices. Mediterranean countries need to price their products lower than Germany to make up for the fact that their goods – particularly engineered products such as cars – are less attractive. But with German inflation at a mere 0.5%, maintaining a decent price difference with Germany is forcing southern European countries into outright deflation


Italy’s policymakers are trying to stop the drop. Prime Minister Matteo Renzi cut income tax in May by up to €80 a month for the country’s low earners. But so far the emergency measures have had little effect – partly because Italians don’t really believe in them. A survey by the Euromedia agency showed that, despite the €80 cut, 63% of Italians actually think taxes will rise in the medium-term. Early evidence suggests most Italians are saving the extra money in their paychecks. If so, it will be reminiscent of similar attempts to boost demand in Japan in the late 1990s. The Japanese hoarded the windfalls offered by the government rather than spending them.

That same process plays out, as we speak, in a lot more countries, both in Europe and in many other parts of the world: South America, Southeast Asia etc.

Deflation erodes societies, and it guts entire economies like so much fish. Deflation is already a given in Japan, and in most of not all of southern Europe. Where countries might have saved themselves if only they weren’t part of the eurozone.

If Italy had the lira or some other currency, it could devalue it by 20% or so and have a fighting chance. As things stand now, the only option is to keep going down and hope that another country with the same currency Italy has, i.e. Germany, finds some way to boost its own growth. And even if Germany would, at some point in the far future, what part of that would trickle down to Italy? So what’s Renzi’s answer? An €80 a month tax cut for people who paid few taxes to begin with.

Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it.

And don’t think the US is immune. Most of the Black Friday and Christmas sales will be plastic, i.e. more debt, and more debt means less future spending power. Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.

And yes, oil at $50-60-70 a barrel will accelerate the process. But it won’t be the main underlying cause. Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that. And all the combined central bank stimulus measures will mean a whole lot more debt deleveraging on top of what there already was.

We’ll get back to this topic. A lot.

Automatic Earth

21 Comments on "OPEC Presents: QE4 And Deflation"

  1. steve on Sat, 29th Nov 2014 10:37 am 

    it is difficult to know anything anymore…we think we are working with an open market system but I would not be surprised to find someone behind the curtain manipulating the prices of oil just with a push of a button….who is watching the watchers?

  2. Plantagenet on Sat, 29th Nov 2014 11:12 am 


    Its pretty obvious who is “pushing the button” for low oil prices. There was just an OPEC meeting and the Saudis refused to cut their oil production causing the price of oil to plummet farther.

  3. buddavis on Sat, 29th Nov 2014 11:21 am 

    I can not wait for the hearings on capital hill to grill the oil traders on wall street and the CEO’s of the oil companies for why they are manipulating the oil price down.

  4. Perk Earl on Sat, 29th Nov 2014 11:25 am 

    “I would not be surprised to find someone behind the curtain manipulating the prices of oil…”

    I’ve been wondering the same thing lately, especially with the drop being so much, down 30% including the huge drop just these past two days. We know from news articles that banks were manipulating currency to their unethical financial advantage. There’s been speculation about the manipulation of gold price, so why not oil?

    I have no idea if they are or are not manipulating oil price. But, if it is then it is very short sighted since many non-conventional sources will get mothballed, the majors will reduce exploration, oil exporters economies will suffer and if oil price remains low for an extended period of time the effect will be much less future oil supply.

    Who knows maybe it’s a manipulated going away party – lol! “We just thought the people (and the wealthy looking to line their nest eggs) would like one more robust economic period for oil importers before all hell breaks loose. Enjoy the QE4 party while it lasts.”

  5. pat on Sat, 29th Nov 2014 11:42 am 

    an excellent article “Stocks and bonds are much easier to artificially inflate than commodities are.” “Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.” they already seem to have entered a deflation with many a big nations to see deflation soon.

  6. penury on Sat, 29th Nov 2014 11:54 am 

    Perhaps the price of oil is not being manipulated. At least the way people currently are thinking of manipulation. Perhaps the school of thought that deflation is occuring is correct. Perhaps it is true that the price is being set on the margins and the fact that increasingly numerous people can now only afford half or less of the products that they previously used. Manufacturing is down, shipping is down, tonnage per mile is down,lets see what the great American spending frenzy can do. Check prices in Feb.

  7. Plantagenet on Sat, 29th Nov 2014 11:55 am 

    @Perk Oil

    The Saudis are manipulating the price of oil—isn’t that obvious?

    Its not shortsighted from the Saudi perspective—-they want to drive US tight oil shale out of business so they can continue to dominate the oil biz

  8. steve on Sat, 29th Nov 2014 12:35 pm 

    I don’t know Plant…I wish it was that simple…but that does not make any sense at all…They want to drive the price down and make billions less so that they don’t have to hear about fracking?

    Will the FED really allow deflation? They have thrown everything at it….why would they stop now? Although a little deflation to slow the consumption of oil down a bit and hope for some miracle or an easier transition to a lower carbon society might be the end game…

  9. shortonoil on Sat, 29th Nov 2014 1:09 pm 

    If the Saudis knew that they would be receiving a lower price in the future than they are now, why would they cut production? To receive less total revenue! Over the long term oil prices are going down, and OPEC is keenly aware of it. They know that oil prices have reached the maximum level that the economy can support. As prices contract so does the economy which drives prices even lower. We are in a downward spiral that is leading to the end of the oil age.

  10. tahoe1780 on Sat, 29th Nov 2014 1:10 pm 

    Plant – Isn’t virtually all “oil” production increase the past couple of years due to the U.S.’s “Shale Miracle”? Isn’t Saudi production actually down a bit?

  11. Northwest Resident on Sat, 29th Nov 2014 1:46 pm 

    “I would not be surprised to find someone behind the curtain manipulating the prices of oil…”

    Either would I. In fact, anybody who reads my posts would know that I strongly suspect that is the case.

    Shale oil production was/is on the verge of taking a dramatic dump anyway, with or without the recent oil price plunge. See Ron Patterson’s post titled “Bakken Sweet Spots are Petering Out”. In addition to that damning set of facts, the New York Times published an in depth study of shale oil production accompanies by thousands of oil/finance industry documents including emails that paint a clear picture of an industry that knows it has a short life span owing its existence to Ponzi scheme hype and massive (and ultimately unpayable) debt accumulation.

    Shale oil production was a flash in the pan and that bright flash is dimming quickly — with or without the oil price plunge and with or without the Saudi/OPEC actions.

    Some might suspect that the timing of the oil price plunge, the Saudi actions, numerous official statements on the subject and the churning propaganda machine ALL are independent of the looming bust for the shale oil (and assorted high cost unconventional) industry — pure coincidence.

    Others might suspect that there is less coincidence involved, and maybe a little behind-the-scenes manipulation with the intent being to provide a convenient excuse for TPTB to explain why the shale/unconventional oil industry — along with massive investments that enabled those industries — all went POOF in such a relatively short timespan.

  12. louis wu on Sat, 29th Nov 2014 2:27 pm 

    With prices down the Saudis revenue is also down, although still above what it was a decade or so ago.Maybe the unrest is growing and they can’t afford any more revenue loss by cutting their own production.They probably need all the income they can get as the price goes down.And why should they cut their production.Let the other OPEC producers or the USA cut their production to try and bring prices back up.Of course what happens if anyone cuts their production and prices still don’t go back up?

  13. Apneaman on Sat, 29th Nov 2014 3:11 pm 

    In a true free-market anyone selling anything should be “free” to sell as much or as little of it as they like and ask any price they like. According to the theory the market will decide whether that seller gets what they want. Of course we will never know since a “free-market” has never existed; just a few brief periods where it was less corrupted and manipulated.

  14. Solarity on Sat, 29th Nov 2014 5:07 pm 

    “Deflation is people not spending…” and therefore a decline in demand. Demand for oil dropped due to high prices, but for people, recognizing a need to cut and actually cutting is a slow process. This (now obvious) time-delay was apparently about 3 years–between the onset of high prices and when demand dropped below supply. The reverse is also true: demand stimulation will preceed actual consumption by at least 6 months.

    Thus low prices will encourage demand which will increase price. But will producers overshoot in their exuberance to make-up for lost revenues? Will oil be $300/barrel by the end of 2016?

  15. MonteQuest on Sat, 29th Nov 2014 5:24 pm 

    So, “speculators” behind some curtain are betting the price of oil will go down?

    Who is manipulating these puppets? LOL

  16. Davy on Sat, 29th Nov 2014 5:52 pm 

    I think the oil market is a fascinating market. No other market has such twists and turns that profoundly affect everyone. I believe at times this market is manipulated but lately there are just too many forces at work. In some ways the manipulations so diverse as to make it a truly free market at least for the moment. The biggest oil market manipulation at the moment is the effects of depletion and the economics of excessive debt.

  17. steve on Sat, 29th Nov 2014 6:21 pm 

    “Who is manipulating these puppets?”

    Well that I don’t know but I have been to some high level talks…all ready to ask some tough questions and there is no space to ask these questions not to mention how there is a concerted effort to manipulate “the oil story” in MSM…maybe I am crazy but it just seems like there is no free market….

  18. Perk Earl on Sat, 29th Nov 2014 7:27 pm 

    “@Perk Oil
    The Saudis are manipulating the price of oil—isn’t that obvious?”

    Actually no it isn’t obvious. All their doing is continue to produce a steady stream of oil. It may be both OPEC (with Saudi’s) have decided to NOT reduce production to keep oil price low enough to do lasting damage to LTO in the US, but I wouldn’t characterize that as manipulation.

    The kind of manipulation being suggested here is similar to a lot of other manipulation we’ve seen in recent years, like currency manipulation which the banks were caught doing.

    I think it is wrong to blame the Saudi’s or OPEC for not reducing supply in the face of lower oil price, then label it manipulation. Business is business, but manipulation is a different dog altogether.

  19. Apneaman on Sun, 30th Nov 2014 12:14 am 

    If the Saudi’s or OPEC reduced supply, would that not be manipulation too? When things are going well or are just stable no one ever seems to be shouting about manipulation then. Sometimes shit happens when nobody meant it to happen. In fact, when you have a highly complex global system with multiple players with ever shifting alliances and needs all driven by human greed and power seeking you would expect unintended consequences to crop up on a regular basis.

  20. Davy on Sun, 30th Nov 2014 5:17 am 

    Manipulation is the skillful handling, controlling or using of something or someone (google). Manipulation is yet to be seen. We can look in the rearview mirror months down the road if KSA actions were skillful handling or controlling. KSA by its nature is an oil manipulator as other large producers are. The key determination is skillful and actual control. KSA made a decision that caused a market reaction or a controlling effect. Skillful will be if they achieve their objectives.

    I have seen no one here with a direct line to KSA leadership so we can only guess what their objectives are. Do they understand POD? Do they realize the economy is sick and a contraction is due per the business cycle? There is plenty of evidence of that. KSA knows what a sick economy does to prices long term. Why not try to jumpstart the economy with some lower price juice. Do they want to harm some opponents? I am sure that is on the agenda but at the expense of their economy? That is a value judgment. Could it be they are gambling both juice for the economy and hurt for the opponents? Sounds like a good poker bluff.

    I personally believe this time is different. We are in a new era post debt, post high oil economic value, and limits of growth in diminishing returns. We have entered the bumpy descent zone. This new era will see normal economic activity change. Call it a pole shift. Call it the other side of Hubert. This is geologic, economic, and systematic. These three variables in unison will be what makes this shift so powerful. This change has yet to gain the momentum to overcome BAU’s momentum. BAU has had a long time to gain mass and velocity. It will take a large prolonged force to slow BAU down. These three forces are powerful and a power unlike anything seen in history. We are an oil based civilization that utilizes oil through economics to create systematic complexity that has allowed for a large population. Can you spot a predicament? I do.

  21. Perk Earl on Sun, 30th Nov 2014 12:00 pm 

    “This is geologic, economic, and systematic. These three variables in unison will be what makes this shift so powerful. This change has yet to gain the momentum to overcome BAU’s momentum. BAU has had a long time to gain mass and velocity. It will take a large prolonged force to slow BAU down.”

    I know what you mean about BAU’s momentum, Davy. Still has the façade of normalcy, with the underlying support system under siege by depletion. I keep wondering when the point in time will happen when some event occurs causing it to become obvious to most people, even corns, that the edifice is teetering towards non-BAU.

    I’m also wondering in this latest oil price descent that threatens long term supply, if a new normal oil price of something like 60 for WTI settles in, resulting in even more reliance on the oil giant fields. Then at some point those fields sharply tilt into descent. Oil price rises but not enough to warrant tapping non-c, and that’s when the wheels start to come off.

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