In the process of saving capitalism (again) from itself, governments around the world have taken on huge amounts of debt and some are running large deficits. Sovereign debt crises are popping up among countries that were being managed as if the good times would never end and now find their balance sheets over-stretched (fortunately, Labour paid down debt, rather than cutting taxes like Ireland did).
To avoid cascading sovereign debt crises, countries need economic growth that will boost their tax so they can start getting their books in order. But have you noticed how the first thing that happens when any good economics news comes along is the oil price shoots up?
From a low of US$35 at the depth of the crisis, oil has been hitting US$88 on the promise of a return to growth. And vice versa – bad news, like the social unrest in Greece over its austerity measures and the threat of more European debt downgrades, sees the oil price fall. It’s down to US$80 at present (which was an all-time record in 2005).
This tells me something important. Investors obviously think that any economic improvement will result in higher oil demand and that supply capacity is so tight that marginally higher demand justifies significant price rises. That is only getting tougher with supply capacity projected to start falling from 2012.
So, good economic news = higher oil prices.
But we’re close to the point where the price of oil tips economies into recession.
If growth is going to lead to another oil price-induced recession, already over-stretched governments are going to be called upon to borrow more, or let parts of the capitalist edifice collapse. So, sustained good economic news contains within it the seeds of its own destruction.
The rock of unsustainable public debt levels. The hard place of unsustainably high oil prices.
Is this the limit to growth?