What do you make of this implication?

“Implication 4. Depressing global real interest rates. The world still suffers from a problem of excess savings, in our opinion. As the US C/A deficit shrank (now below 5% of GDP, and expected to reach only 4.5% of GDP by year-end), the trajectories of the C/A surpluses of oil-exporting countries and China are fairly robust. This combination of a sharp decline in the US savings deficit and large savings surpluses in several parts of the world, including oil exporters, suggest that the world’s real interest rates should fall to equilibrate the world’s savings and investment. The G10 10Y real interest rate has just set a generational low of 1.35% – roughly half as high as the potential growth rate of the G10 economies. Another way to understand the low real yield is that the marginal propensity to consume is lower for the oil exporters than it is for the oil importers, despite the large spending on infrastructure by the former. As wealth is transferred from the latter to the former, the world’s interest rate should fall. Yet, another way of thinking about the low yields in the world is that SWFs could have invested their new proceeds in relatively safe sovereign bonds, waiting to deploy the capital into risky space when the global economic conditions improve.”

http://www.theoildrum.com/node/4092

Oil-importing countries create value by importing fuel, creating goods using the energy, and exporting the goods.

As exports decline, importing countries will not be able to create as much value, and the currency of those countries will drop. As the currencies drop the exporting countries will be more reluctant to sell the oil.

This is a positive feedback loop. It does slightly impact the other positive feedback loop:

As the exports decline, prices go up. As prices go up exporters earn more money despite the decline. Earning more money makes the local economy grow. Growing economies use more oil. Exports decline. Am I right?

I have lost faith in my capacity to predict when a country facing pressure for a currency appreciation will allow that appreciation. So I am not sure if Russia can sustain its euro/dollar basket peg. Pressure — judging from the pickup in reserves — seems to have increased. I am by contrast convinced that it would be in Russia’s interest to allow the Ruble to adjust. The current uptick in inflation seems to me to be at least in part a lagged response to very strong reserve growth around this time last year. Inflationary pressures now seem as strong in Russia as in the Gulf — and, well, real rates now look very negative, which adds to the pro-cyclical aspects of Russia’s current set of policies.

So I’ll try with Firefox, copyiing and pasting old comments, adding comment numbers:

2. koteli Says:
May 25th, 2008 at 7:49 pm

Dear Mr. Setser,
It’s nice to see that the oil math of an 10$ increase of a barrel has huge consequences in the USA bill.
And you call it transfer of wealth!

At the same time you are politically neutral on USA, and you just give us numbers, global numbers of transfers of wealth!

I’m not an economist, but as far as I know, in free-marker capitalism nobody buys what they don’t want. So, this huge transfer of wealth is voluntary!

You can complain about it as an alcoholic complaining about gin’s price. Nothing else.
On the other hand, where did the money come to USA from? From the work of their citizens? Watch, please, to James Bond’s 007 films…!
And the hundreds of military bases around the world? Ask Chileans about Milton Friedman… or to Chavez about free market.
Did you think that this discourse would last forever?

Do you think that the world is more scared by Chavez than by W. Bush or more scared of Blackstone than Citigroup?

You don’t have policies for USA, but you have policies for China and the Arabs. A bit too pretentious from a Kansas boy, or too politically correct?

The day USA economists make figures about weapon transfers, energy consumption of imperial policy, illegal wars, corrupt health care costs, and massive off-shoring… you’ll no be able to see what you’ve already lost, but stop talking about democratic countries.
Check China’s resolution on the earthquake and Katrina’s solution. Just compare and buy the best!

Let’s give a try to those barbarians that are sucking wealth from the West!
At least, we’ll have something to compare to, don’t you think so?

They won’t do it much worse if they don’t want to blow up the planet earth!
Best whishes,

4. koteli Says:
May 26th, 2008 at 12:10 pm

“This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks.”

Thomas Friedman

Maybe it’s the update to 10.5.3 and Safari 3.1.1, but I’ve seen comms in other post that I can’t read now.

I’ll try with Firefox.

“This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks.”

Thomas Friedman

as you point out, the effects of a $10 rise in the price of a barrel of oil are many, if you follow up the results further downstream. money isn’t just spent once.

and the effects that you choose to emphasise seem like sensible policies to me - (a) a more stable currency (b) more exports to oil exporting countries, and (d) heavy taxes on energy, and smaller more economical cars.

in fact these three of the four points seem to me so obviously prudent that i am driven to wonder if the united states actually desires a high oil price global economy from some perceived geopolitical advantage in generating middle east tension.

power, whether in the united states administration or elsewhere, always pretends to be solving the problems that it is in fact creating. it helps to bear that in mind when confronted by baffling policies.

the combination of dollar weakness and strong oil also suggests that oil exporters demand for $ isn’t what it used to be.

No doubt cheap financing helps the us sustain a bigger deficit than otherwise would be the case, but it is still debt that has to be paid back, or equity that no longer generates income for americans.

I would put more emphasis on:

a) the smaller increase in the price of oil in euros
b) European sales of goods to the oil exporting economies
c) UK financial intermediation (with all the fees) of the oil surplus, in part because the UK (despite all of its talk about the good of transparency internationally) has been very willing to accomodate the oil exporters desire for a lack of transparency ….
d) the fact that gas is already heaily taxed makes the % increase at the pump a bit smaller, and a bit less of a psychological and economic shock (in part b/c europeans drive smaller cars/ use less gas).

in other words extra money shelled out by e g european countries to e g saudi arabia ended up in the u s to a sufficient extent that it outweighed money paid out by the u s.

if as you claim, you don’t know - this may be so. it does not of course stop the long term transfer of u s assets to oil producers, but it must mollify the ‘oil shock’ effects of a $10 rise ?
.