The markets watch the revolution, cont. - The Mindful Jay Walker
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The markets watch the revolution, cont.

February 24, 2011

CONDITIONS have deteriorated in Libya, where open civil war appears to have broken out. Some of Libya’s oil production has been disrupted, and prices continue to rise around the world. How serious are matters? Economist James Hamilton, who has done extensive work on the relationship between oil prices and business cycles, writes:

My bottom line is that events as they have unfolded so far are not in the same ballpark as the major historical oil supply disruptions, and are unlikely to produce big enough economic multipliers that they could precipitate a new economic downturn. They might shave a half percent off annual GDP growth, but I don’t anticipate a whole lot worse than that.

And I think that’s right. It’s a little worrying that Treasury yields continue to fall, along with non-energy commodity prices and equity prices, but so far these shifts are not nearly as large as they were during the first months of the European crisis last year.

But Mr Hamilton also notes:

But the worry of course is that the big geopolitical changes we’ve been seeing didn’t stop with Tunisia, and didn’t stop with Egypt. So maybe it’s not a good idea to assume it’s all going to stop with Libya, either.

The interesting thing about recent market moves is that they’re pricing in the possibility that instability spreads. And it well might. But for now, all eyes are on Libya, where the primary danger is not to the global economy but to those caught in the conflict.

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