“If you repeat a falsehood long enough, it will eventually be accepted as fact.”

In the financial markets and economics it is a common occurrence that the media and commentators will latch on to a statement that supports a cognitive bias and then repeat that statement until it is a universally accepted truth.

When such a statement becomes universally accepted and unquestioned, well, that is when I begin to question it.

One of those statements has been in regards to plunging oil prices. The majority of analysts and economists have been ratcheting up expectations for the economy and the markets on the back of lower energy costs. The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.

As an example, Steve LeVine recently wrote:

“US gasoline prices have dropped for more than 90 straight days. They now average $2.28 a gallon, which is remarkable considering that just a few months ago, some of us were routinely paying $4 and sometimes close to $5.

Not so coincidentally, the US economy surged by 5% last quarter, and does not appear to be slowing down. “

If you read the statement, how could one possibly disagree with such a premise? If I spend less money at the gas pump, I obviously have more money to spend elsewhere. Right?

The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.

Example:

• Gasoline Prices Fall By $1.00 Per Gallon
• Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
• Gas Station Revenue Falls By $16 For The Transaction (-16)
• End Economic Result = $0

Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of “rearranging deck chairs on the Titanic.”