Naked Capitalism has a thorough discussion of the May 22 Morgan Stanley fixed income research report “Enjoy the Energy Subsidies While You Can,” by Stephen Jen and Luca Bindelli. The bottom line is that the emerging markets [EM] subsidies are suppressing demand destruction, thus causing oil prices and developing countries inflation to overshoot:
A quarter of the world’s gasoline consumption is subsidised, and, in terms of population, half of the world uses energy subsidies.1 This policy has created an important distortion, whereby rising oil prices have been effectively prevented from destroying oil demand. Subsidies have artificially raised inflation in the developed world (through artificially high oil prices) and suppressed inflation in the developing world (inflation would have been even higher in the absence of subsidies). As fiscal pressures mount, some countries will be forced to incrementally remove these subsidies. The net result will be an unwind of these distortions. For currencies, we believe that the net effect will be negative for EM countries, as this process will be stagflationary for them, and ‘Goldilocksy’ for developed countries…
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