The Mood Surely Is Different on the Other Side of the Pond

OK, so we've experienced the brunt of $4 (soon to be $5) gasoline, and rightfully we are hurting. However, the scary thing is that oil is integrated into almost every product that we come across on a daily basis. And we haven't yet experienced the brunt of that price shock; normally, it takes about 4-6 weeks for $135 oil (first breached in May) to reflect on retail prices. According to a memo sent by RBS to its private clients, the outlook is not good, especially once the effects of the fiscal stimulus wear off.

While I believe that any candidate's economic policy is better than the current one's, I find it troubling that the media continues to fixate on ideological principles, totally ignoring the current global economic landscape; navigating the upcoming turmoil will require unparalleled pragmatism that utilizes principles from both sides of the aisle. Blind ideology has led us to this point, and it is unrealistic that any party has a monopoly on the solution. Furthermore, news coverage seems to ignore the severity of the situation, perhaps to avoid the dreaded "stagflation" label, which would conjure memories of a failed Carter term and handicap the Obama campaign. Across the pond, the Brits have no qualms addressing the severity; from the Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century. . . .

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said. . . .

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

Wow, let's see: a crash in the global stock and credit markets; one of the worst bear markets in the past century; additional fiscal stimulus would only increase already-staggering headline inflation; and the Fed is basically out of ammunition.