Economic Turbulence Ahead, Says the Gold Price of Oil: the Russian Angle

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Barrels of oil per one ounce of gold (Peaks: Oil surplus of the 80’s; Latin American crisis of 1994; Asian financial crisis of 1997; the Great recession in the U.S.; European debt crisis; Emerging markets crisis; we are here)

January 20, 2016


Blogger ‘Fritz Morgen’ (Oleg Makarenko)

Translated from Russian for Fort Russ by Kristina Rus

Is Russia prepared for the zone of global economic turbulence

Oleg Makarenko, top blogger, businessman and author of numerous articles on economic issues, argues in his blog what the global financial markets should expect in the near future, is Russia ready for the zone of global turbulence and the relation between oil and gold. 

As predicted earlier, the prices of some exotic varieties of oil have already dropped below zero. North Dakota Sour is now minus 50 cents per barrel. This means that buyers are willing to buy this oil only if they are paid for it.

Such madness is the norm for the capitalist world — it’s called “the crisis of overproduction”. However, if ordinary capitalist crises of overproduction smoothly transform into the next growth wave, the current crisis promises to be so powerful that growth may never materialize.

Let’s take a look at the history of oil prices — expressed not in traditional dollars, but in ounces of gold. We will see that almost each time oil sharply fell in price in relation to gold, the planet was rocked by a financial crisis.

As you may remember, Russia had experienced some of these crises on its own skin. The crisis of oil overproduction in the 1980’s became one of the secondary reasons for the weakening of the Soviet economy.

“The Tequila crisis” of 1994, when Mexico devalued the peso and for a long time lost its appeal to investors, has not affected us, as at that time the cheerful hyperinflation of “the blessed nineties” raged in Russia.

The Asian financial crisis of 1997, in turn, touched us in a very painful way — becoming one of the causes of the notorious default of 1998, which is still remembered among the people as a major financial crisis in modern Russia.

The great recession of 2008 perhaps doesn’t need any special introduction: this recession marked the end of the rapid recovery of the Russian economy and the entry into a regime of tireless daily climbing upward.

I note that contrary to popular belief, the Russian economy grew rapidly after 2008, it’s just that this growth was not so much quantitative as qualitative.

Some social Darwinians now claim that salaries and pensions in Russia grew in the last 8 years faster than our productivity. There is some truth to this statement: perhaps a hypothetical dictator with a “strong hand” could possibly squeeze more growth from the Russian economy. But do not forget that the devaluation of the ruble now ate a significant portion of accumulated imbalances, and the surge in life expectancy likely gave the country more competitive advantage in the long run, than low wages ever could. 

However, we digress from the study of the chain of crises. We have to consider only two more points on the graph — the European debt crisis of 2011, from which the West managed to escape only by turning on the printing press at full capacity, and emerging markets crisis, which we can fully observe in Russia.

What do we have now? Currently an ounce of gold is $1,090, while a barrel of Brent oil is $ 29. This means that one ounce of gold can buy 37 barrels of oil, more than ever in the past 30 years.

Planetary finance is definitely preparing for something big.
I’m constantly asked — why do I so often write about the global economy instead of writing about the Russian economy.

Answer. Because at the moment Russia can be compared to a ship during a storm — the weather forecast for us is now much more important than Parmesan cheese in the galley and the shiny gloss of copper interior details.

We are now moving in the right direction: battening down the hatches, tightening the nuts, preparing to cut costs.
However, every day I hear voices – sometimes emanating from the highest levels – offering to follow the example of our Western friends and partners and to stimulate the Russian economy by turning on the printing press.

To me, this situation reminds of the joke about the farmer who decided to implement some innovations at the barn — to increase the efficiency of the cow, by feeding her less and milking more often.

For some time the startup produced good profits, and farmer’s neighbors even talked about a “new paradigm” producing more milk than ever before. However, the farmer eventually stopped feeding the cow at all and began to milk her every half hour. It all ended quite predictably – the poor cow has died.

Thus if we do not carefully study the sad experience of our “developed” neighbors on the planet who drove their economies into the danger zone, we will risk stepping on the rake already tested by the Western world.

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