The crises are different, but the cause is the same

Economics In a global era, the next crisis is always just around the corner. The continuous expansion of debt is the cause at the bottom of all of them.

The sudden collapse of the crude oil price, down 45 per cent from early in the year, has produced a flood of analysis on its implications.

The vast majority of these have focused on supply and demand factors and concluded, not surprisingly, that the big winners will be global consumers. Naturally this will be at the expense of producers.

What might be called the second round of analysis has resulted in a much more ambivalent collection of conclusions. That's largely because there is no certainty as to the fundamentals of supply and demand.

To what degree is the slowdown in China affecting the demand side of the market equation? Alternatively, just how much impact is the output from the US shale oil producers having on the supply side? Are we witnessing a delayed and disorderly rebalancing of the market for crude oil or is this the collapse of a commodity bubble? This latter query has had little attention.

But if we look at the price behaviour of four of the world's most traded commodities – oil, coal, iron ore and wheat – the concept of a bubble cannot be dismissed. Since the beginning of the year, oil has fallen by 45 per cent, coal by 25 per cent, iron ore by 50 per cent and wheat by 20 per cent.

Australia is a major exporter of all these resources. Natural gas exports are priced off crude oil sales.

Does it matter whether we have a bubble or a cycle?

Bubbles by definition tend to be speculative, driven with harder landings. But when Alan Greenspan chaired the US Federal Reserve Bank, he was criticised for not taking action to deflate the bubble evident in the housing market and underwritten by dodgy mortgage practices.

His response was that it was not possible to differentiate between a bubble and a cycle in an active market place. His view was that the regulator should stand aside and mount a clean-up and restoration after the episode if necessary. In retirement Greenspan has revised his view to acknowledge that if you have a bubble inflated by debt, then proactive intervention could be warranted.


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Max Walsh


Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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