Who needs high drama when you have monetary policy? That may be one of the key questions circulating both inside the secretive halls of the Kremlin as well as the golden arches of OPEC. Russia and Middle Eastern oil producers, at least from the perspective of the balance sheet, are the unintended (and more pointedly, the unexpected) victims of Ben Bernanke and the U.S. Federal Reserve.
The mandate for quantitative easing, the unprecedented aggressiveness by which the central banking juggernaut engaged in the artificial liquidation of the economy, failed miserably and, if it were not for the lack of journalistic integrity, quite spectacularly. Bernanke’s much heralded playbook was nothing more than a simple derivative of tried-and-failed policies in which fiscal decision makers attempt to dissipate the aftershocks of a financial crisis by spreading the pain over a greater surface area. This dispersion is known in common language as inflation.
In reality, inflation is supposed to be a “good” thing in the context of a program like quantitative easing. The very nature of aggressively pushing money velocity out the door is inflationary: more “printed” dollars are chasing fewer goods (money is not literally printed but exchanged for U.S. Treasuries, a seemingly innocuous balance sheet shift but one that has dangerous consequences if not handled correctly). Inflation, therefore, is the expected result, a consequence of more people spending dollars due to the creation of jobs that came about from the Fed’s juicing the markets.
However, what we are getting instead is deflation, the absolute opposite of what should have happened from unmitigated QE. And there is no greater evidence of this deflation than in the crude oil market, which has slumped to an astonishing low. At time of writing, the international benchmark index, Brent crude, dropped to $70.15, while the domestic index, West Texas Intermediate, languished until it closed at $65.99. Perhaps more telling is the price of Brent crude as a ratio of West Texas. Ordinarily, the international indicator is more expensive than the domestic one, and an inflationary dollar environment is generally supportive of a higher Brent/WTI ratio. In this case, the ratio is having difficulty breaking resistance at 1.10, and may challenge a one-year low set back in July of 2013.
Which brings the discussion back to Russia and the OPEC nations. It shouldn’t be a surprise to anyone that these are commoditized nations which, in a practical business sense, are wholly dependent upon crude oil exports. Critics regarding this view should ask themselves, is anyone clamoring to buy the latest Russian car? Is social media going wild over Middle Eastern smartphones? There’s nothing inherently wrong with being a resource exporter, but when the valuation of said export declines precipitously, a non-diversified economy becomes uncomfortably leveraged.
The irony of ironies is that this leverage came courtesy of the failure of American fiscal policy! While President Obama successfully corralled Western allies into sanctioning Russia for its military belligerence in eastern Ukraine, the reality is that the real pain is being leveled by nothing more than economic stupidity. None dare call it deflation, for its very admission would involve an embarrassing concession that America has sanctioned itself into financial purgatory by failing to prop the dying labor market and generate the promised inflation, a result of at least semi-happy workers spending money.
The media can spin this fairy tale all it wants, but the simple matter of the fact is, no one’s buying because no one has any money. Just ask the Russians.