Here is an idea I don’t have the time to fully tease out but that I ask, especially my non-Keynesian, readers to think about.

Oil shocks seem to have a negative impact on growth.

The question is: why?

There are at least two possible answers.

  1. Oil is necessary input in productive activity and oil shocks generate a negative productivity shock by causing us to switch to less productive modes of production.
  2. Oil shocks sap consumer spending pulling down retail sales and especially motor vehicle sales.

My guess is that most of us will think the second effect is the stronger of the two and responsible for the immediate contraction we see in the wake of oil spikes.

However, the money has to go somewhere. In practice in fact when oil prices rise the money goes to oil producing countries and the balance sheets of major oil producers who then overwhelmingly buy Treasuries with it.

In other words it works exactly the opposite of fiscal stimulus. Instead of selling Treasuries and using that to put money in the pockets of consumers, you are taking money out of the pockets of consumers and using that to buy Treasuries.

The difference is that it is conducted by private companies or foreign government in the pursuit of profits. However, that really shouldn’t matter to any of the economics.

If we accept that oil shocks can slow the economy. Shouldn’t this open us up to the possibility that fiscal stimulus could speed it up?