Financial markets have not endured a day as brutal as March 9th since the global financial crisis of 2007-09
FINANCIAL MARKETS have not endured a day as brutal as March 9th since the global financial crisis of 2007-09. Stockmarkets were a sea of red ink. The S&P 500 index fell by 7.6%. The FTSE 100—laden with oil firms, such as Shell and BP, and other natural-resource companies—suffered a similar drop. Investors rushed for the safety of government bonds. The yield on ten-year American Treasuries dipped below 0.5% for the first time ever. Investors sought other havens, such as the yen.
But why the panic? Cheaper oil ought to be a balm to the world economy. The oil-price spikes of the 1970s and early 1990s led to recessions because they transferred income from oil-consuming countries in the West to oil-producing countries in the Middle East. The consumers were forced to cut spending, but the producers saved much of their windfall. The net effect was to squash aggregate demand. So a sharp drop should act as a stimulus.
Russia—the tactical target of Saudi Arabia’s price war—is different. Since 2014 it has run orderly monetary and fiscal policies. It has been a net provider of credit to the world, not a net borrower. And it has saved a lot of its surplus oil revenue for a rainy day, by basing its budget on an oil price of $40 a barrel. Middle Eastern and African producers have not been as disciplined. Saudi Arabia itself needs $80 a barrel to balance the books.
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