The Oil Drum

64 comments on Minimal Behavioral Adaptations to Oil Shocks

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Bigelow on October 22, 2005 - 5:57pm

Bad investments or misapplication of resources should be traced back to behavior indicating market potential when no potential would exist if credit inflation and ensuing bubbles were not influencing individual's consuming decisions. It is not really a chicken or the egg situation because market conditions would differ from present conditions if the FED wasn't involved.

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Gloomy on October 24, 2005 - 4:22pm

Sure I agree (to some point).
What the FED has to balance is capital flow in market bubbles and bad credit (unproductive assets) and expensive money and investment mostly in T-Bills (also unproductive assets).

But there are also changes in environment that cause significant adjusments hence drop in GDP. Consider the oil shocks of the 70-s - much of the pain came from the USA auto industry which was totally unprepared for oil supply constraint. Or consider the number of the local boom-and-bust cycles, e.g. the oil shale mania of the late 70-s.

FED may cause economy slowdown/expansion by dropping/raising money supply but it can not control resource constraints or international market events. In other countries weak local currencies are also a factor of the business cycle.