The first major oil price spike is likely to send a series of violent quakes through the economy. Quite how violent will depend on the level of awareness of investors on the currency and stock markets. For as long as most continue to labour under the misapprehension that every short-term spasm in the oil supply is simply some disconnected local difficulty, the response of the financial markets may be relatively subdued – perhaps with the exception of Iran. But the moment the money men get it, the price of oil and other energy assets will soar, and almost everything else will go into meltdown.
Hmmmm… sounds a lot like June-September last year to me. Eventually the money-men started to realise that rising oil prices were not just one-off events linked to someone letting off a bomb in Iraq, but were linked to something longer-term. So they all rushed to throw their money at oil, its price soared – cue meltdown.
A major spike in the oil price is recessionary not only because of its direct effects on the global economy, but also because it is likely to cause stock markets around the world to crash, further reinforcing the recessionary pressures. This in turn will lead to second order effects, such as the deepening insolvency of many pension funds, which hold the bulk of their investments in stocks and shares… As the crisis deepens, pension payments may be slashed to derisory levels in both money purchase and the supposedly more secure final salary schemes. The value of endowment policies will collapse too, with devastating effect on the borrowers who were counting on them to repay their mortgage, and the housing market as a whole. The banking sector will also act as a multiplier: since so much lending is “secured” against future economic growth, as the outlook worsens lending will fall, leading to further contraction.]
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