I Guess the Greedy Oil Execs Took the Winter Off

So you’re wondering, how are gas prices going up all over again? An average of approximately $2 just this spring has skyrocketed 50% in a matter of months, leaving us with a $3 average 2 weeks shy of the July 4 holiday weekend. A barrel of oil has risen from about $35 to nearly $70 in this same time period.

But what about the greedy oil execs? Did they take the winter off from their rampant greed, decrease gas prices for us, and then decide to jack them up just in time for your summer vacation?

Or maybe global demand went into a slumber during the winter and has awoken just in time for the summer driving season?

Or maybe the Middle East conspirators decided to spring back into action and manipulate oil prices, after conveniently taking the last several months off from their…conspiring?

Or maybe, it’s none of the above. Maybe, just maybe, the flooding of the global marketplace with trillions of dollars has forced up the price of a barrel of oil (which of course is denominated in dollars), thus resulting in higher gas prices being passed along at the pump. Scary thing is, those trillions have just begun to make their way into the economic system, so we’re only experiencing the leading edge of the resultant effects.

But the above explanation is the hardest to swallow, because what it portends for the country is far worse than the $3/gallon pain you’re feeling right now. What it means is the US government cure for the recession has in fact sealed our fate with the promise of significant inflation, sparked by the money printing orgy that started in 2008 and came to a crescendo in February with the latest stimulus bill and Fed Reserve Treasury bond buybacks that promise to inject trillions of dollars into the economy.

This would also explain why your grocery bill has been rising steadily as well, as commodity prices are linked to dollars as well. In fact, it is generally true that inflation is going to show up most drastically in those goods that an individual or entity cannot do without: things like food, energy, and health care cannot be excised from people’s budgets…you essentially must pay the cost whatever it is. Even higher education, perceived as mandatory in developed countries, suffers at the hand of inflation, as institutions sense unlimited demand for their product and continually raise tuition costs. These costs are then absorbed through greater and greater leverage on the part of the student and/or their family, who are then saddled with crushing debt obligations upon graduation.

Of course the government will continue telling you inflation is under control at the standard issue 3-4% figure they disseminate every few months, but tell that to the family of four living on $45,000 a year, spending $300 a week on groceries now versus $225 a few weeks ago, and $50 a week on gas as opposed to the $40 a week recently as well. It’s no secret that families living anywhere near the median household income cannot well absorb 50+% increases in their standard purchases, like food and energy. But that’s what your “stimulus” bill will now demand of you.

In fact, the pain our country felt during the recent Great Recession was mitigated by the fact that commodity prices fell, leaving us with cheaper gas and food bills to offset rising unemployment and loss of home equity. The coming depression will put us through a period where prices will rise significantly as people lose their jobs and their homes. Then we will know what economic misery feels like, and the 2008 meltdown will appear pleasant by comparison.

You Need to See This Movie

http://www.iousathemovie.com/

Your Presidential Candidate Doesn’t Matter (Subtitle: You’ll Be Worse Off Economically in 2016 No Matter Who Gets Elected)

That’s right – it doesn’t matter who’s elected President of the United States this coming November. At least it doesn’t when it comes to the economy and our present difficulties therein.

I’ve been in various social and professional circles where I hear a great deal of enthusiasm expressed for one candidate or the other. Invariably, I have provided the individuals participating in those discussions with much the same message as you see reflected in the title of this blog entry. As long as a country maintains a central bank that practices inflationary monetary policy, particularly as a tool for resisting recessionary forces, that country will experience growing economic pains, a weakening currency, and a widening gap between its haves and have-nots.

To quickly summarize: when inflationary policies are instituted, and money is created out of nothing, that money flows to entities that can utilize it before its price-raising effects seep into the larger economy. These entities (investment banks, corporations, the wealthy) can invest it or capitalize it in a fashion that is advantageous to them, such as by investing in real estate, stocks, derivative investments (options, collateralized debt obligations), or anything else for that matter. Then when the added money trickles down to the consumer (read: you and I), we are left with one thing: higher prices. Less purchasing power. Smaller paychecks. Whatever you want to call it, it’s not good.

Given the above, here’s a question for you: which candidate is talking about the activities of our central bank in the context of our economic woes? Which candidate has come out denouncing the inflationary policies of the Fed Reserve? Which candidate has advised against resisting the natural, corrective recessionary forces underway in the US market? You guessed it…none of them.

So where does that leave things? Well, it basically means that your economic situation is going to deteriorate over the next few presidential administrations, no matter which one of the candidates is at the helm. The underlying, root cause of our economic distress is not just absent from today’s political discourse -- if it is broached it’s met with mockery, disgust, or apathy (exhibit A: former candidate Ron Paul in any Presidential debate from the last year or so). Worse, our society discourages reading in favor of mind-numbing entertainment, so it is unlikely the masses will independently awaken to the effects of central banking anytime soon. Educating oneself in the area of financial literacy is also difficult, due to the complete lack of outlets for this subject. (Anyone still wondering why our schools don’t teach basic financial literacy?) Efforts in this area are left to the self-directed (see previous comment re: reading vs. entertainment).

Allow me to proclaim with even more emphasis the following: no matter who becomes President – Barack Obama or John McCain – your economic situation will be worse after the presumptive two terms that individual will serve. By worse, I mean some combination of the following conditions: less home equity, devalued investments in stocks and bonds, lower purchasing power, less available savings, more reliance on credit to buy the essentials, you name it. It won’t be pleasant.

David Walker Doing Yeoman's Work

David M. Walker, the former head of the Government Accountability Office, has been conducting a "wake-up tour" across America, attempting to shine a light on the fiscal challenges facing our country. I encourage you to watch his appearance on 60 Minutes, which occurred last year, at the following link:

http://www.youtube.com/watch?v=QxoP_9W6FC8

Also, check out this link:

http://www.petergpetersonfoundation.org/

Walker is currently leading the Foundation's broad efforts in the areas of enhancing "public understanding of the nature and urgency of selected key sustainability challenges that threaten America’s future, to propose sensible and workable solutions to address these challenges and to build public will to do something about them."

The UN Got it Right

I hate to admit it, but it's true. I read an article today titled "World economy on thin ice - U.N." with the accompanying subtitle "The United Nations blames dire situation on the decline of the U.S. housing and financial sectors." What is the significance of this, and how accurate is the assertion?

To answer these questions, one must go back at least as far as to the 1944 Bretton Woods conference, at which the US was granted the status of holding the world's reserve currency. As mentioned in a previous posting on this blog, the reserve currency status essentially translated into the fact that foreign currencies would be linked, or "pegged," to the US dollar; commodities such as oil and gold would be priced in dollars; and these dollars would be redeemable in gold if a country so chose to make the conversion. An advantage of this system for the US has been the fact that we are allowed to maintain a "current account deficit" -- mainly, carry a trade imbalance by importing far more goods than we export. (In even more simplified terms, consuming much more than producing.)

In the 1960's, the US underwent a significant increase in federal spending, as Presidents Kennedy, Johnson, and Nixon indulged in "guns and butter" programs that ratcheted up the federal budget deficit. These expenditures included the Vietnam War, Medicare and Medicaid, various other Great Society initiatives under LBJ, and so on and so forth. With all this spending, and not enough economic output to match it, the US went to the tried and true method of simply printing the needed currency.

This decision did not sit well with foreign countries that, by way of the Bretton Woods system, were forced to accept US dollars as their reserves. You see, with all of the money-printing occurring in the '60's, the dollar was steadily being devalued, thus decreasing the value of foreign countries' monetary reserves. It was then that many of these countries approached the US government and demanded redemption of their US dollars in gold. The problem was, there wasn't enough gold in our possession to redeem all of our creditors.

So how did we solve this dilemma? Simple: President Nixon simply decoupled the dollar from the gold standard in 1971. This action amounted to the US government telling members of the world economy "trust us" when it comes to our currency; in other words, trust us that our word is good when we say the currency is viable, and can be accepted as a legitimate form of payment with the backing of the full faith and credit of the US and its Treasury.

Fast forwarding about 35 years, and here we are with foreign countries stockpiling US dollars in their reserves, with little choice but to trust the US that our economy and our currency are healthy and able to withstand the recent perturbations in our financial system. As the article pointed out, these perturbations include the overall credit and housing crises that have wracked our economy. Both of these crises can be traced back to the monetary policy of the US Treasury and the Fed, due to the expansion of credit and the money supply, and the resulting debasement of the currency as inflation naturally follows.

Or is the only choice to trust us? The dollar as reserve currency is not carved in stone, and already, entities like the economic Group of 7 (G-7) have hinted that extreme weakness in the dollar could lead to significant changes in the global economic system. Change such as de-emphasizing the dollar as reserve currency, and possibly switching to another, stronger alternative. If this becomes the case, the consequences for our economy will be dire in comparison to what we are experiencing today. The reason being, once other countries are no longer obligated to accept the dollar in their economic transactions, there will be little reason to accept it at all, as it will be worth so little these countries will have lost any incentive to deal economically with the US. And why should they? We hardly produce anything anymore, and our massive appetite for consumption could gradually be replaced by other emerging economies with more robust currencies and trading potential. It will be at that point that the standard of living for Americans will plummet, and our economy will resemble those of third world nations. Then we will understand what the term "Great Depression" really means.

Al Qaeda Understands the Gravity of Our Economic Situation

Now that I have your attention...

I'm posting an excerpt from the 2004 book "Imperial Hubris: Why the West is Losing the War on Terror," by Michael Scheuer. The book is an incisive examination of US foreign policy in the Middle East, but that fact aside, and given this blog focuses on economic issues, I want to hone in on a 2002 quote by al Qaeda's Abu-Ubayd al-Qurashi as provided by Scheuer. This quote appeared in the al Qaeda publication Al-Ansar and augurs prophetically as our economy teeters in 2008:

"On the other hand, we find that God has graciously enabled the mujahedin to understand the [American] enemy's essence and nature, and indeed his center of gravity. A conviction has formed among the mujahedin that American public opinion is not the center of gravity in America....This time it is clearly apparent that the American economy is the American center of gravity. This is what Shaykh Usama bin Ladin has said quite explicitly. Supporting this penetrating strategic view is that the Disunited States of America are a mixture of nationalities, ethnic groups, and races united only by the 'American Dream,' or, to put it more correctly, worship of the dollar, which they openly call 'the Almighty Dollar.' May God be exalted greatly above what they say! Furthermore, the entire American war effort is based on pumping enormous wealth at all times, money being, as has been said, the sinew of war."

Food for thought...how does America sustain a war that costs anywhere from approximately $500 billion to $1 trillion a year, while simultaneously meeting enormous fiscal social obligations to its populace and funding a gargantuan bureaucracy...while producing and saving little if anything?

Fire Up the Printing Presses

So this past week the government distributed tax rebate checks to the populace early, in order to attempt to jump start the ailing economy. The checks, part of an "economic stimulus plan," have made the whole of our citizenry unwitting participants in their own economic distress.

Before examining that statement closer, let's begin by firmly establishing the fact that any classical economist must surely be rolling over in his or her grave right now at the notion that an economy can be stimulated by the printing of fiat (paper-not-backed-by-anything-but-forced-to-be-accepted-by-government-decree) currency, thus adding to already staggeringly high levels of inflation. This illusion of wealth has consistently proven to be the downfall of once-vibrant economies and nations, yet our country remains in a halcyon state of economic perception.

Let's discuss inflation for a moment. Inflation is good...if you're one of the first entities to receive the freshly printed paper currency. This is because you have the transient opportunity to spend or invest that money before the effects of the inflation have seeped into the economy and prices have subsequently risen. A very good analogy here -- albeit one borrowed liberally from "The Creature from Jekyll Island" -- would be manifest in a game of Monopoly. Assume there were two participants in the game, and one of the participants opened a second Monopoly board game and took all the money from it for his own. By doing this he would immediately have magnified his purchasing and investing power. It's likely he could buy up all the real estate on the board before the other participant even had a chance to compete. Now consider what would result if both participants got their hands on the money simultaneously. Given the theoretical perfect timing of this event, all of the prices on the board for real estate and luxury items and whatnot would rise in unison. Thus, the extra money would have allowed for nothing but the payment of higher prices for the desired assets.

The problem with the second part of the analogy is that, in America, the average taxpayer doesn't even get that much of a break. You see, you and I are the last to receive the money on the financial totem pole in the form of our paychecks, and therefore, we are indeed left with the risen prices. But unlike the Monopoly analogy, we do not have the benefit of receiving a commensurate increase in wages to cope with the inflation. So each year, prices rise, goods become more expensive, and our wages fall further and further behind the price curve. Eventually, we turn to credit to be able to afford the things we want in life. When was the last time your friends, neighbors, or family members bought their car in cash? Or their plasma TV? New furniture? Vacation? Anything? The reality is, if you're anywhere near the median income in America, you buy necessities with your paycheck and finance almost everything else by loan or credit card. And now, with the latest financial debacle left steaming on middle America's doorstep, even the necessities like food and gas are rapidly cutting deeper and deeper into household budgets.

I'm sure by now most of you have seen the video clips on TV of US Treasury checks rolling hot off the printing presses in voluminous sheets. Those who save their check will soon regret it, as spiraling inflation will make the saved money increasingly worthless. The 2% the bank is giving you in your savings account will hardly make a dent in the 8-15+% inflation we're experiencing. Sure, the economic data like the Consumer Price Index (CPI) -- the official government barometer of inflation -- tells you that inflation is only 2-3%. (Isn't it amazing how the CPI is always either 2 or 3% every month? It hardly ever changes...in the context of a $14 trillion economy, shouldn't it fluctuate just a little bit?) The problem with this statistic is that it does not include the three things you care most about: food, gas, and the cost of your home. Interestingly enough, home prices died a recent death vis-a-vis the CPI...by 2006 they were going so high so fast the government just excised them from the CPI lest it end up skyrocketing. (They replaced them with rent prices.) Presto!...a little accounting adjustment here and there and we're right back at...2 to 3%.

Hopefully I've talked you out of saving the welfare check you just received. (If I haven't, save yourself the cost of an inflated postage stamp for mail-in deposits and just stuff the check under your mattress...same deal.) No, these checks are more likely to be spent by consumers on everything from the necessities to luxury items. And you might ask why I said earlier that these consumers are unwittingly participating in their own economic distress? The government printed this money with nothing of value backing it; therefore, the paper money will circulate into the economy, eventually raising prices and leaving cash-strapped consumers shaking their heads at the gas pumps and grocery aisles in 6 months, wondering how gas and food prices just jumped another 20%. The consumer has become the method of delivery for the inflation in this scenario: the government printed the worthless money, you spend it and inject it into the money supply.

Lastly, as if the above weren't bad enough, most of the items Americans will be buying with their checks at Wal-mart, electronics stores, and so forth are made in China or by other burgeoning economies. So not only will taxpayers be facilitating higher prices to be paid at a later date, but they will also aid in the enrichment of foreign countries. This is the reality within the US economy, one that is based 70% on consumer spending with a hollowed-out production base that has largely relocated to distant shores.