Tom Hurst writes on liberty, free markets, private property rights, government and the Constitution from Nevada, USA
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The Oil-Dollar-Fed Fiasco

By Tom Hurst, 21 May 2008

Seeing Ben Bernanke's Federal Reserve Bank printing and printing, and bailing-out and bailing-out, any student of economics knows what will ultimately happen. Over time, with a more or less fixed quantity of goods and services being chased by an ever expanding number of dollars, prices (in dollars) inevitably go up, i.e. the purchasing power of one's wages goes down. Of course, such rising prices have nothing at all to do with any marketplace supply versus demand imbalance per se, but only with an artificial inflation of the amount of digital and paper currency in circulation. So, yes, the Fed's bad monetary policy of perpetually increasing the number of dollars is the true definition of "inflation", no matter that the idiot politicians and bureaucrats try to convince us that inflation *is* rising prices. Rising prices, in reality, are just the obvious *symptom* of currency inflation by the Federal Reserve Bank. Unfortunately, the root evil - the incessant printing of dollars and issuing of bonds - is politically motivated, so this very bad monetary policy quietly continues because self-serving politicians want to spend and spend as usual to buy votes and power. When they don't raise enough money through taxation, the Fed just prints it for them.

Indeed, out-of-control spending - bad fiscal policy - is the second main driver of inflation. You see, as people and investors both here and around the world see the United States decade after decade spend far more than it afford, the sensible among them begin to wonder if the enormous debt to bond holders (both government and corporate) will *ever* be repaid. To put it in the context of our latest financial fiasco, they will come to view the United States itself as a seriously sub-prime borrower who may default and not repay its debt, and in the end no one wants to be holding worthless bonds. Ultimately, it will herald the end of the U.S. dollar as the world's reserve currency. Of course, when one considers the immense scale of our debt, it's quite clear that it cannot ever be repaid. Here are the numbers: If the United States were to balance its books according to international corporate accounting standards (where future obligations are counted as liabilities) instead of Washington-style fake accounting, the current national debt on a per person basis (not per adult or per family) would come to at least $350,000, and some economists think the real number may be several times that amount. So much for the $30,000 or so per person attributed by the "official" budget deficit so widely dispersed by the government cheerleader media! Does anyone really think that each and every American can fork out this kind of money? Of course not. So, when the Chinese, Japanese and Europeans - those buying the bulk of our government (and corporate) bonds - rightly get nervous about our obvious inability to repay our debt, they sell dollars to buy more stable currencies and commodities such as silver and gold, or spend dollars to buy things that have real universal value (land, etc.). Simply stated, when people don't want the dollar, it's worth less, and in an extreme case it will become worthless. So, between the Federal Reserve's perpetual bad monetary policy (inflating our currency) and Congress's perpetual bad fiscal policy (spending lots of money they don't have), it's certain that the dollar will fall in value forever, eventually to zero. After all, every paper currency in the history of man has been abused and eventually gone to zero, and evidently the U.S. Dollar will be no exception. M3 money supply versus CPI 1913-2008

Want to see some proof of that contention? The first graph here, made using actual Federal Reserve Bank data, shows this calamity in the form of two essentially parallel lines that both trend up through time: 1) the CAUSE (the increasing M3 Money Stock, sometimes called the money supply, i.e. how much has been printed and is in circulation, and 2) the related EFFECT (the rising Consumer Price Index, i.e. rising prices). Simply stated, as the Fed prints money and puts it into circulation, the cost of things we buy rises proportionally. It's a simple cause-and-effect relationship that this graph shows as plain as night and day. Well, if you didn't know before, at least now you know that the Fed - NOT "evil" businesses raising prices - is the primary reason the CPI, i.e. "the cost of living", continually increases (and even increases more slowly than it should, as the government has chosen to exclude fuel, food and even certain components of housing from the base CPI!). And the reason they print it? Now you know it is so politicians can spend money they do not have. When taxes don't raise enough, they just ask the Fed to print some. Also, I would hope, when you observe in the international currency exchanges that the dollar weakens against the Euro and other sounder currencies, you now know the primary cause (the Fed usually) and why a weak dollar is a very bad thing for Americans (it means our money buys fewer of the products and services that enrich our lives). Oil price in Euros and Dollars 2003-2008

So, what of the "oil" I mentioned in the title of this article? Well, the second graph shows the quite obvious effect of the above policies on what Americans pay for oil compared to what Europeans pay for it. Yes, there is a small supply versus demand premium in the price we pay for oil (many commodities are very sensitive to slight imbalances), and maybe even a bit of speculation and political unrest built into the price, but the graph clearly shows that much of the price increase that we experience here is NOT experienced by those in other countries with less fiat currencies like the Euro. Why is that, you ask? The important observation to make on the graph is that just five years ago, oil cost approximately $30/bbl. and ?30/bbl, i.e. parity. By early 2008, however, one will observe that oil price in Euros had roughly doubled to ?70/bbl, but that same oil in terms of Dollars had quadrupled to $120/bbl! So, residents of countries that use the Euro, use currencies pegged to the Euro, or use currencies that are at least as stable as the Euro, have only seen oil prices double over the past five years. Americans and our economy are obviously much worse off because we've seen oil nearly quadruple in that same time. The cause? Our increasing money supply, i.e. the Fed printing money for politicians to spend, thus making the dollar worth less (as explained above). That said, realize that the European Central Bank also prints and prints Euros (for the same sad reason), but judging by the divergence through time of the two lines on the graph, it's obvious that they don't do it with nearly as much gusto as our Fed. If they had, they would today be paying ?120/bbl. instead of ?70/bbl.

The solution? If our politicians could restrain their spending (fat chance, as it is usually done to buy votes and hence power), and our reserve bank would stop printing dollars whenever someone needs bailing out or politicians (via a wink and a nod) ask for more money to spend (waste), we, too, might have $70/bbl. oil today, and a healthy economy NOT in recession. So, when you see high gasoline prices, and everything else costing more because energy is more expensive, you now know it's not caused by oil companies. It's really our very own government and its perpetual bad monetary and bad fiscal policies that we have to thank! As a matter of fact, I think I'll thank the big players right now... Ben Bernanke, Alan Greenspan and all other Federal Reserve Governors and such, thank so you very much for doing everything in your power to make the dollar worth perhaps 1 cent on the 1913 dollar. Indeed, inflation was actually slightly negative (i.e. prices went down) for the first 100 plus years of this country's history - the period, I should note, when we had no reserve bank at all. So, without you all, a loaf of bread would still cost a penny or two. And thank you, Congress and the American presidents, for spending (wasting) so much money in my name that every individual in this country owes at least $350,000 in addition to their mortgage and other bills. Without you, we would be debt free and prosperous. Yes, without you we could afford to retire in style, put our kids through college, start a business, or just live the good life. Again, thank you all, so very much!!

Seriously, the one real solution is a return to Constitutional government and the gold standard it demands and limited spending it endorses. Indeed, as Thomas Jefferson noted, "[S]pecie [precious metal] is the most perfect medium, because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war;... [a paper currency] is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted." Simply stated, with a gold standard instead of worthless green-inked paper, we would have no inflation, no politicians spending money we don't have, and a much more limited government. So, everyone out there, you simply must stop voting for statists, socialists, democrats and republicans, and vote instead for patriots who believe in the Constitution and your unconditional rights to life, liberty and property. To do otherwise is to condemn America to the rubbish heap of history.

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