Oil pulls back as QE2 shows economy still sick

Sell the Fat

Now are we going to "Sell the Fat?" The hangover is about to begin as doubts about Ben Bernanke's big ease is creating more unease. In the Wall Street Journal Fed Governor Kevin Warsh wrote an Op -Ed that warned that if the dollar continues to fall and commodities continue to rise, it might be time to reconsider the Fed plan of printing more money. In fact Mr. Warsh said that the economy is unimpressive and it is in what he calls a "new malaise", one that should not be accepted by policy makers. How does he plan to end it? He says that, "Policy makers should take notice of the critical importance of the supply side of the economy. The supply side establishes the economy's productive capacity. Recovery after a recession demands that capital and labor be reallocated. But the reallocation of these resources to new sectors and companies has been painfully slow and unnecessarily interrupted. We are feeling the ill effects.

“Fiscal authorities should resist the temptation to increase government expenditures continually in order to compensate for shortfalls of private consumption and investment. A strict economic diet of fiscal austerity has greater appeal, a kind of penance owed for the excesses of the past. But root-canal economics also does not constitute optimal economic policy. The U.S. would be better off with a third way: pro-growth economic policy. The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards.

“Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms – financial and otherwise – know the rules, and then succeed or fail. Regulators should be hostile to rent-seeking by the established, and hospitable to the companies whose names we do not know. Finally, the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade."

These comments and a rebound in the dollar are one reason why oil is pulling back from a two year high. While the main message from QE2 is a weaker dollar and higher commodity prices, the secondary message is the economy is still sick. The mixed messages should lead to wide trading ranges. The market will have to come off the QE2 high or the Fed will have to back off or risk creating the mother of all commodity bubbles.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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