First it was the current administration
being a tool of big oil. Then it was the oil companies gouging
the public. Then it was OPEC (Organization of Petroleum Exporting
Countries) controlling the price of oil, and now it is the
speculators. Congress says it is Intercontinental Exchange,
the futures market operator, that is to blame for high gasoline
prices. The exchange says that an increasing number of its
customers are American businesses that need to manage oil
price risks. These companies would be oil refiners and airlines
in particular. Now Congress wants to regulate the exchange.
Even George Soros, the billionaire who supports many environmental
issues, spoke up when he said, “Regulations may have
unintended adverse consequences. For instance, they may push
investors further into unregulated markets which are less
transparent and offer less protection.”
There certainly is plenty of blame to go around, just as
there is in any economic crisis, but usually the bulk of the
blame can be laid at the feet of Congress (both parties).
Now, we do not doubt the good intentions of Congress, but
as the man said, “The road to the graveyard is paved
with good intentions.” In order to avert a financial
panic in the 1930s, the Hoover administration increased tax
rates on upper incomes and passed the Smoot Hawley Tariff
Act, both of which helped lead us into the Depression. The
Federal Reserve then compounded these two errors by tightening
the money supply, thinking it would halt speculation in stocks
(talk about closing the barn door after the horses are out).
Instead, these three acts reduced economic stimulus at a time
it was most needed. Lest anyone think times are tough now,
remember unemployment reached 25% in the early 1930s and over
four thousand banks were forced to close. We are not even
in a recession now and the market gets skittish over a 5.5%
unemployment rate (the average unemployment rate over the
last fifty years has been about 6.1%).
The oil crisis is having the most negative impact on the
economy today. The mortgage crisis and the credit crunch will
straighten themselves out and are not causing as much pain
as increasing oil prices, and the people that can least afford
it are being hit the hardest. A recent chart in the June 9
issue of the New York Times shows a map of the US and indicates
what percent of personal income is spent on gasoline. While
California has some of the highest gas prices, its residents
spend a smaller fraction of their income for gasoline (in
most areas 2-4%). Whereas the highest percent of income spent
on gasoline is in Wilcox County, Alabama (16.0%) and Holmes
County, Mississippi (15.6%). Add on to that the increasing
cost of food due to ethanol mandates, and you have a recipe
for a major economic slowdown. We need action not good intentions
or finger pointing. We wrote at length last month about the
vast amounts of recoverable oil in ANWR (Alaska National Wildlife
Reserve), in the Colorado Rockies and offshore. These oil
fields would provide us with over a trillion barrels of oil,
and coupled with more nuclear plants (we currently have 104
operating in the US), we could be energy independent for the
next fifty years, and by that time, no doubt, alternative
sources of energy will be found.
Some politicians are getting it. Texas governor Rick Perry
and Texas Senator Kay Hutchinson have both called for a freeze
on ethanol mandates. It seems the cattle ranchers in Texas
have been forced into bidding wars with ethanol plants for
corn to feed their cattle.
Now, to compound the oil problem, we have this specter of
inflation looming over our heads. Make no mistake, the rising
price of gas and food is not the cause of inflation, but the
effect. An excessive supply of money is the root cause of
inflation. Any time you have too much money chasing too few
goods (gasoline), you have inflation. Germany in the 1920s
is a classic example as they printed money like crazy to pay
off war debts. We have been printing money excessively since
we went off the gold standard in 1974. Part of the problem
today is not a lack of money for economic growth (as in the
1930s) but an over supply of dollars that is holding down
the value of a dollar in relation to other currencies. As
oil is priced in dollars, it is inevitable that too many dollars
chasing too little oil will push the price of that commodity
and others skyward. We definitely need some form of monetary
discipline, but that’s a subject for another time.
Lest anyone think we have turned negative on the economy,
we have not. Our problems like problems throughout our history
are solvable. As long as the free market exists, there will
be solutions to problems. We have been here before with energy
problems. Many thought the sun was setting on the US in the
late 1970s also, but consumers adjusted their lifestyles,
and we came up with solutions.
Random thought for June 2008:
Money isn’t made out of paper; it’s made out
of linen.
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