Where is the smoking gun?
It is interesting to note that through this economic crisis everyone missed the root cause of the world wide economic collapse. What is the root cause of the global economic contraction? We tend to blame things that are intuitive like banks, Wall Street and private business layoffs but they are all symptoms. Financial Markets are the prime target because we associate dollars with the economy, as we should, but they are symptomatic of a much larger crisis. A crisis that we have to articulate before we can solve it. Einstein said that if he had one hour to save the world he would spend fifty-five minutes defining the problem and only five minutes finding the solution. This quote illustrates an important point: before jumping to conclusions regarding the economic meltdown, we must step back and invest time and effort to determine the real problem within the economy.
US banks, AIG or any other financial institution could not have caused an economic collapse of global proportion. The banks were second to the auto industry to feel the economic contraction. What common worldwide resource could have caused this crisis. At the time of the economic collapse late 2008 oil was tipping the scale at $130/bbl. The only thing that can cause a WW collapse is a WW inelastic commodity that is powerful enough to affect all countries WW. I beleive that the smoking gun is OIL.
Everything in life has an energy component (cost) associated with it--food, fuel, electricity, water, production, etc. People use disposal (fungible) income to meet small periodic swings in energy cost, but when the short term volatility of energy swings more than 20% and stays there for several months, people and businesses have to make hard choices. Do I pay for gasoline to get to work or run my process or deliver my product, do I put food on the table, do I keep the electric and water on, do I pay my credit cards, my home loans ...? At first they begin to borrow (take from Peter to pay Paul) and that works for a short period but at the end of the day after making these choices and runnning up the debt, those on the margin (large debt to equity ratios) did not have sufficient money remaining to pay the mortgage, or the car payment, or the credit cards, and the financial markets reacted as delinquincies mounted.
The result, I believe appeared to the neophyte that it was the banking and financial market who were at fault. We blamed 0 interest loans, brokers, etc. But I submit to you that they were only the tipping point, they were the first after automotive to see the train wreck coming. As soon as energy prices fell, the economy began its slow recovery. In my small mind, I am convinced that the cause of the economic collapse was volatile (out of control) energy costs of the past 8 years. At the time of the economic collapse, oil was heading above $130.00/barrel. And, it is not over by any stretch. Oil prices have topped $90.00/bbl last week and they continue to rise.
If energy does not stay below $75.00 per barrel the economy will not recover on its own. We will see a second 2012 contraction. With higher prices will come additional economic burden and a contracting rather than expanding economy will result. Energy Drives the Economy, Period.
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