The world is getting larger again- policy clothes no longer a fit?

Open borders, fewer capital controls, the WTO and harmonized trade rules, floating (well fluctuating) exchange rates, cyberspace, yes all these things made the world smaller. But one factor is making it LARGER again.

HIGHER OIL PRICES

Having higher oil prices is as if things are farther apart since they make it more expensive to get from here to there and back again. And, a lot of goods go that route before they hit their final markets. Because of this added expense we are going to see more low value items made at home instead of shipped and re-shipped. The price of low-value high-weight items is greatly affected when shipped over long distances as transport costs rise and become a higher proportion of getting goods to the end consumer.

It's not a problem for high value goods since transportation will be small part of the final price. Still, it's a problem for some trade flows that could have a silver lining and BOOST jobs in the US for these so-called low unit-value items.

The TEST of CYBERSPACE
Now we may get a real test of cyberspace. Can internet meetings and cyber-discourse substitute for in-person meetings? Will we see... Is travel to be reduced in favor of web meetings? After 9/11 this was talked about, but since then, more and more have gone back to their old in-person ways.

High transport costs more completely ISOLATE the US
In truth this makes our own domestic COST STRUCTURE relatively more important in setting prices. Transport costs drive a wedge between US based and foreign based costs. So with higher transportation costs EACH central bank will have to be more careful to control its own domestic cost structure. Of course oil does not just affect overseas shipments of goods. And oil is a direct input into a wide variety of products, not just as a cost-of-transit line item. This a new wrinkle in central bank policymaking.

A new game in town
We now know that internationalization does not just cut costs by giving access to cheaper labor; it changes the game in many other ways - FX rates, energy costs, geopolitical balances etc. It's a new world and a new game.

This week we may get a taste of how the Fed wants to play it. While the OPEC/OCIC meeting (OPEC: Oil producing exporting countries; OCIC: Oil consuming importing countries) got agreement on oil prices being 'too high'. In the aftermath of the meeting prices, contrarily, moved even higher (...remind you of Greenspan and 'irrational exuberance?')

The OPEC/OCIC countries have no clue WHY prices are so high but there are 1,000 hypotheses. Mostly they involve blaming someone else. The trouble is always done by a person called 'Not Me'. Hmmm. 'Not Me' that sounds Asian doesn't it?

Monetary policy under the Macroscope
Monetary policy around the world WILL be conducted differently if central banks come to regard HIGH oil prices as here to stay. Well - NEWS FLASH! - high prices are here to stay, but 'how high?'

That is the question: how high... As to the Fed's new-found concern on the dollar and Bernanke's recent anti-inflation spew- will any of this come up for reappraisal at the Fed's upcoming meeting? With MTG rates higher and MTG applications off, the housing market is still weakening rapidly. COULD THE FED REALLY HIKE RATES in this environment?

With inflation high and well over any notion of acceptability or above any comfort zone and with inflation expectations in soft surveys rising and some in harder surveys being pressured CAN THE FED AFFORD TO STAND PAT?

Love it don't you? Irresistible force meets immovable object. One of my favorite themes. FOMC meets this week. Don't miss it. And don't expect much because for all its successes the Fed is still REALLY LOUSY on communication.