Oil and the 'fiscal cliff'
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Tverberg explores the connection between changes in the oil market and growing concern of the 'fiscal cliff.'
The United States’ fiscal cliff is very much related to several changes we have been going through recently, and will likely continue to experience:
- High oil prices (more than triple their level ten years ago). High oil prices cause people to cut back on discretionary spending, leading to layoffs in discretionary industries and debt defaults. Governments get less revenue in taxes at the same time they need to increase spending for unemployment benefits, bailing out banks, and stimulus funds. Result: financial problems for governments of oil importing countries, including many Eurozone countries and the United States.
- More free trade with Asian countries starting about 2001, when China joined the World Trade Organization. This change sent many jobs to Asia, and also holds down wages in US industries that compete with companies using overseas labor.
- Lots of baby boomers becoming eligible for Medicare and Social Security, starting about 2011. This is a problem because taxes, in practice, need to cover the cost of benefits on a cash flow basis, which is the way US handles its financial accounting. As a practical matter, this is the way the world economy works as well–the goods and services used today are created by today’s workers, with resources pulled out of the ground today. Carryovers in terms of goods are very limited–mostly a little grain.
- A health care industry that is able to charge fees that are increasingly out of line with the wages of common workers.