Even Good Change Sucks

"Saudi Arabia
70% of population under 30.
70% of labor force employed by the govt.
90% of govt revenue from oil.
yikes" ~Ian Bremmer

This FB post by Eurasia CEO Ian Bremmer made me think of a question my libertarian uncle asked me: "who exactly is hurt by falling oil prices in the USA?" I think I told him that there were some gas and oil companies that would be hurt, and certain regions like North Dakota might feel some sting, but I didn't really feel satisfied with the answer.

I think you see where I am going with this, but let me give you some background on why my uncle asked me this. I had previously said that there are several rules in economics that you should try to follow, and the first is that any quick change has the potential to be quite bad, as markets and other important institutions generally only prepare for gradual changes. The housing bubble wasn't a slowdown, but a crash in prices. Stocks in 2000 took a nosedive, not a slow ride, and it's fair to say that any crisis anywhere is manufactured from a sudden and sharp change. 

So oil. That changed quite suddenly. And who will it hurt? At first not US consumers, but pretty soon it may. The oil crash has sparked economic chaos in oil producing countries. Some that were on the edge like Venezuela have already fallen, while Russia, Saudi Arabia, and others are poised on the edge. What will a Russia look like on the edge? How will Putin try to distract from economic catastrophe back home? What would happen if Russia or Saudi Arabia fell into civil war? Unfortunately, I've been in Europe this year without a car, so I've been unable to take advantage of low gas prices, but by the time I get back will I have to start some of the costs of lower gas prices?

Apart from all of the foreign policy SNAFUs that could hit us from low gas prices, there are trade problems. Unfortunately for us, when the rest of the world sneezes, the US economy can catch a cold. China's poor performance and the general weakness of third world markets might spread to Europe which is in poor condition. If the rest of the world goes bad the USA will too because we export stuff and rely on foreign markets.

One way to look at when a recession might come is from US bonds. If people flood into what is generally considered a very safe asset, it means that markets are scary, and investors need some stability. If bonds don't get much attention then we know the economy is flying high and we might want to look for bubbles.

Things aren't that bad right now, even though the bond market says otherwise. However, things might just get really bad quite soon, which is likely what the bond market is trying to say.