Crude oil for May delivery plunged into negative territory today, the first time such a thing has ever happened. We have negative interest rates so why not negative rates for other prices? After all, an interest rate is fundamentally the price of money.
I’m being facetious–mostly. The indications are everywhere. The global credit system is coming apart. We’re in uncharted territory so it’s hard to know exactly what the unwinding is going to look like, but there’s no way we’re going to be able to sustain one historical battering after another without big fissures in the underlying foundation.
In late 2018, the Fed tried to begin chipping away gently at its balance sheet a full decade after ‘temporarily’ exploding it. In response, the market crashed, so the Fed promptly reversed course.
That didn’t stop the repurchase markets from inexplicably locking up in the middle of last year, something that ostensibly makes no sense when money is so cheap and cash reserves so large. The Fed has been goosing the repo markets ever since, and it looks like if it ever stops, they’ll seize up again.
When coronavirus pricked the asset bubble, the Fed and the Treasury threw out all pretense of being separate, independent entities and collectively promised to buy and underwrite everything–junk bonds, treasuries, equities, mortgages, business loans, everything–to resolve the crisis.
And now the story is that even these open-ended, infinite promises aren’t enough. After all, there’s so much excess oil sloshing around that people are literally going to have to be paid to take physical delivery of it.
This means price deflation is coming, right? Hell, it means it’s already here–oil costs nothing!
Well yes, oil has become a lot cheaper over the last several weeks. That’s nice enough when you’re filling up your tank at the gas station. But a lot of things require oil in their production process. In fact, almost everything does in one form or another. That oil is so cheap it literally can’t be given away is an indication global production is cratering and the worldwide contraction in output is even worse than the pessimists think. Meanwhile, central banks across the world are flooding the planet with cash.
More currency, less stuff for that currency to chase. Consumer price inflation is coming.
If I’m incorrect, we’ll have managed to have discovered the Midas touch in the midst of a global pandemic. Extend unemployment benefits above wages at the time of termination, institute a UBI, keep every business afloat and every pension plan solvent, throw money out of helicopters to the people below–and still see prices fall! Everybody works less and buys more. We’re set!