In the past I have pulled up charts and noticed that the price of West Texas Intermediate Crude and inflation as well as recessions are correlated.
I have rule of thumb, that anything sustained price of oil above the 10 year simple moving average of oil is a drag on the economy and that drag will either show up as slowing economic activity or general inflation or both. While is seems intuitive that high energy prices would cause in inflation and suck money out of the economy there are many other factors that might have the same effects.
On the other hand, I have noticed that inflation and/or a slowing economy are correlated. So the burning question I have is this: What is the lag between the pressures of oil prices above the 10
year moving average (High energy costs) and inflation or recession?
If you look at the chart I posted, you can see that we have had 15 months of high energy costs. Every day that prices are high is a day when energy sucks the life out of the economy. The question is how long after the prices drop to normal are below before the economy responds?
@qazulight you made a good observation. But the system is more complex.
The price of oil responds to demand as well as supply. Usually, demand for oil grows during an economic boom (lots of factories, etc.) and shrinks during a recession.
Recessions may be caused by the rising price of oil, as happened during the 1970s. Recessions may also be caused by the well-known cycles of production and inventory imbalances which have happened since the beginning of capitalism. Recessions may also be caused by speculative boom-bust cycles in finance or by the Federal Reserve raising interest rates. Or by other reasons.
If one was to assume that energy costs above the 10 year moving average suck cash out of the economy then we can calculate the number of dollars pulled out of the economy.
In fact I may as the Artificial Intelligence to grab the daily closing prices and build me a spread sheet to pull the actual dollars sucked out of the economy.
Of course as the USA now produces a lot more of its own petroleum, the some of the excess cost is recycled back into the economy. Because of this counties with higher dependance on oil imports would be harmed more.
Still burning expensive oil does not build anything anymore than hurricanes create wealth by destoying houses that are insured.
There is a corollary. Low oil prices do not necessarily juice the economy anymore than low interest rates do. Rather excessively low inputs into an economy, no matter energy, labor or capital cause misallocation and as far the economy goes it is like pushing on a string.
Generally, long term prices that do not reflect actual ling term costs will cause the economy to use or consume wastefully. This waste is mis allocation of resources. A current and egregious mis allocation excessively low cost of capital, that is associated with share buybacks or dividends paid with borrowed money. We also see this distorted cost of capital show up in borrowing for super large homes and over prices super large trucks and SUV’s.
The same has happened with labor and oil. Just look and you will see.
This doesn’t make a strong economy any more than eating 4000 calories of oreos a day makes a person strong. It might be pleasant, addictive even, but good? Nope.
I suspect that we are at a very good spot today. Labor capital and energy seemed to be priced about right. If we can hold these in about this range we should be able to build a very robust economy.
Okay, you are taking another look of sorts at something called “Optimizing the Economy”.
Yes supply side economics specifically avoids optimizing the economy. It is a failure to not have a fiscal policy. The last 15 years have been horrifying. The very high debt to GDP ratio is the main resultant. The same forces that caused the ratio to be through the roof have no idea how it got there.
Optimizing the economy through fiscal policy over time brings that ration down. Wealth in the US will explode.
The larger issue in the follow through will be reflected as utility costs not rising as fast as profits or labor for most years. That is the way to wealth and productivity.
2022 was key to delivering most of the needed early fiscal policy for the period.
adding the main thing the public knows is running for office on supply side economics is the surest way not to get elected.