On The Big Spending Boost Expected From Lower Gasoline Prices

The talking heads on the financial news are all agog about how much stimulus the lowering of gasoline prices will provide and how we are in for an awesome Christmas retail season with gas prices down. First of all, here in Minnesota, gas prices are holding above $3 or even $3.19, which represents an outsized spread to wholesale RBOB prices on Nymex of nearly $1 with Dec RBOB at about $2.20 today. Normally the spread here is about 60-70 cents.

In any event, I assert that while the lowering of prices will be a positive influence, the effect will be smaller than anticipated. Incomes are stagnant. Many people are resorting to credit to pay for ordinary expenses. So the reduction in gas just means they have to borrow less to pay for the stuff they would have bought anyway. Net sales will not be moved by the full amount of the reduction in spending on gasoline. So it is not a $xxx billion shot in the arm of the economy as much as some relief from having to run up more debt just to get along. Which of course in the new money regime actually means less money creation as credit is money, which is actually a net negative in the theories of some of the same people squawking the loudest about the boost from lower prices. Especially at $3. $3 ain’t cheap.

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