Swiss Franc History: Volcker Shock, Oil Glut and the Breakdown of Gold and Emerging Markets

A glut of crude causes tighter development budgets

Mexico, Britain, Ecuador, Malaysia. The list of oil-exporting nations that have cut their prices keeps growing longer. After years of feasting on high prices brought on by petroleum scarcity and soaring demand, the oil-producing states are discovering that the price of crude can go down as well as up. Drooping demand and a steadily swelling surplus production of some 2 million bbl. per day have created a miniglut that grows bigger by the week.
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… As longtime champions of steady, but moderate, rises in the price of oil, the Saudis have refused to mimic price hawks like Libya, Iran and Iraq. Instead, the Saudis for the past nine months have been pumping nearly 2 million bbl. per day above their self-imposed limit of 8.5 million bbl. daily in order to create an oil surplus and drive prices down.

For the United States, the slumping cost of crude will mean less inflation and at least moderately more growth than most experts had been forecasting for 1981 and 1982. Consumer prices will probably rise by about 10% for this year, as a whole, vs. projections of as much as 12% to 13% late in 1980. Lower oil prices may help the U.S. to avoid the recession in 1981 that many economists had also predicted.

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Are the Saudis doing the West a favor by producing 10 million bbl. per day or are they doing themselves a favor?

Some critics of Saudi intentions, like Washington Lawyer Douglas J. Feith, a staff member of Ronald Reagan’s National Security Council, assert that the Saudi Arabians simply could not afford to cut back much on output even if they wanted to. As Feith has argued, the Riyadh government needs every dollar it can get from its oil exports simply to pay the high cost of financing the nation’s rapidly expanding economy.

(Time Magazine 1981)

Gold Price Inflation Adjusted

Gold Price Inflation Adjusted - Click to enlarge

The maybe most important reason that the US dominance continued in the 1990s, was the US lead in the computer revolution.

With the decline of the US from the year 2001, this tendency completely changed again. The Dow-Gold ratio inverted from levels of 1.5 in 1980 with the strong US economy, positive real interest rates and weak emerging markets.

Dow-Gold Ratio 200 years

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Volcker and the Brazil Debt Crisis

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As opposed to 2014, however, the Swiss did not have a far lower current account surplus during earlier oil gluts.

Volcker saved the United States and made the emerging markets relatively poor, for nearly two decades. Oil was cheap.

Price Inflation Follows Monetary Expansion

Price Inflation follows Monetary Expansion ebrand SNB Source: snb.chf - Click to enlarge