The Economy: It’s Time to Worry

September 15, 2008

With the stock market dropping today, and financial institutions variously begging for federal dollars, restructuring, or looking desperately for (reluctant) buyers, radio and tv talk show host Glenn Beck is reminding his listeners, this morning, of a point he made several months ago. He said:

The time to worry about the economy is when the price of oil goes down when everything else indicates it should be going up.

Today a barrel of oil is under $100, Liberia (a major source of US oil) is having trouble, and hurricane Ike has just slammed offshore wells and onshore refining plants. All of the normal indicators point to an increasing cost per barrel. That’s not happening.

And that’s not good. Here’s why:

The supply of oil has temporarily declined. Normally that would indicate higher prices; but higher prices have not materialized. That can only mean oil demand has gone down. Lower oil demand is a clear indication of less production, less domestic economic activity.

The cause of our reduced activity can be found in the financial sector. Today there should be no doubt the problem has moved beyond the housing market. Large financial institutions are in trouble. Under that scenario, banks are not lending money; they’re keeping it to protect their own asset bases. And when lendable money is hard to come by, businesses can’t get business loans or lines of credit to expand their activity. They stagnate or retrench. In turn, their employees absorb the message broadcast by how their companies act, and decide to hold on to their own dollars rather than spend as they had before, which further depresses the demand for goods, further slowing the economy.

We are now in that downward cycle. It’s time to worry.