The other night the telephone rang. It was my Uncle Harold, who only calls when he wants financial advice.
"Have you heard the news?" he asked in an agitated voice. But before I could reply, he continued: "OPEC may be breaking up, and they say it might wreak havoc upon the world economy. What should I do?"
"Wait a minute, Uncle Harold," I said, trying to conceal my joy at the best economic news in a decade. "What actually happened?"
"Well." he said, "their meeting in Geneva broke up with no agreement on prices, and there are fears that the price of oil might plummet."
"And that's supposed to be bad news?" I asked, somewhat incredulously. "Who is supposed to have all this havoc wreaked upon them?"
"The TV said something about perils to Mexico and to some U.S. banks," he replied anxiously. "And the stock market dropped today. Should I be worried?"
"That depends," I said. "Are you a filthy rich sheik?"
"What did you say?" came the faint reply.
"I asked if you were a filthy rich sheik. And of course I know that you aren't. My point is that it is mainly rich sheiks that should be worrying, not you."
"Oh," said Uncle Harold. "Only them? Shouldn't anyone else be worried? Why did the stock market fall?"
"Well," I continued, "do you own stock in an oil company?"
"Yes, yes," came the excited reply. "I knew I was in trouble. What should I do?"
"Calm down. How much do you own?"
"Oh, it's worth about $2,500."
"Well, don't worry about that. If you said $25,000 or $250,000 or more, then maybe you'd have something to lose. But with such a small holding, any loss you might suffer on your oil stock should be minimal. Besides, don't you own some airline stocks, too?" I asked.
"As a matter of fact, I do."
"Well those stocks should go up if oil prices fall," I responded. "But, really, any changes in stock prices should be far less important to you than the general improvement in economic conditions that lower oil prices will bring."
"But what about all this talk about the banks?" he inquired. "Should I empty all my bank accounts and stuff the money in the mattress?"
"Not unless your mattress pays money market rates and is insured by the FDIC," I answered. "Banks with large outstanding loans to oil-exporting countries like Mexico and Nigeria are exposed to some new risks by all this. Some payments might be late; it is even possible, but unlikely, that there might be some defaults. But I doubt that your local bank has any stake in this lending. It's mostly the big money center banks that are involved."
"But couldn't the collapse of a big money center bank set off a panic that would imperil the entire financial system?" he asked. (Uncle Harold had been keeping up on his reading.)
"Yes," I admitted. "That's true. So we shouldn't take the prospect of a major default too lightly. But central banks have ways of dealing with such problems. In fact, they just recently arranged a bailout for Mexico.
"And remember that for every bank with a shaky loan to an oil exporter like Mexico or Nigeria, there is another with a shaky loan to an oil importer like Brazil or Argentina. A drop in the price of oil would ease the plight of the oil-importing nations, and therefore make their debts more secure. So, while lower oil prices would make some loans more risky, they would make others less risky."
"Gee," said Uncle Harold. "Chuck Smiley never mentioned that on the Channel 8 news."
"Chuck may also have failed to remind you," I said, seizing the initiative, "that OPEC was the chief source of the world's economic difficulties during the past decade. Without OPEC, we probably never would have had much stagflation."
"Is that right?" he mused. Uncle Harold did not expect an answer, but he got one anyway.
"It's hard for us to remember now," I reminded him, "but unemployment was only 4.6 percent (and had not touched 7.5 percent for 32 years) when OPEC quadrupled the price of oil in 1973-74. Inflation increased right away: from 7.4 percent in the year before OPEC up to 12 percent in the following year. Recession soon followed, and by March 1975 the unemployment rate was up to 9 percent."
"Nine percent doesn't sound so bad now," Uncle Harold remarked absent- mindedly.
"Yes, you're right. But it should," I replied. "Because of OPEC, the whole industrial world was wracked by stagflation. Some European countries still have not recovered. And the poorer countries borrowed so much to pay their oil bills that many of them are now on the brink of insolvency.
"But that was not enough for our OPEC friends. They did it to us again in 1979-80. Rising oil prices helped push inflation back into the double-digit range, and induced governments around the world to adopt tough anti-inflation policies. These policies are the main cause of the current depression."
"You economists certainly talk a lot," my uncle said. "But now that we are all accustomed to paying high prices for energy, wouldn't it be better not to rock the boat?"
"Hardly," I objected. "All the bad things that rising oil prices did to us would turn around and become good things if oil prices fell. Inflation would decline, real economic growth would speed up (except in the oil- exporting countries), and unemployment would fall. Doesn't that sound good?"
"Yes, it does," said Uncle Harold, sounding more relaxed.
"So how's business?" I asked, changing to my uncle's favorite subject.