Economics

Fueling Fuel Inflation

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Jay Hancock blames the Fed for rising gas prices:

Lower interest rates have made things worse. Bernanke and the Federal Reserve have cut short-term rates by more than 2 percentage points since late summer to try to lower business costs and spur growth. That nudges investors to sell dollar-denominated paper and seek higher returns elsewhere.

Once the dollar was an automatic refuge, the first place international investors socked dough in uncertain times. Lately, however, the most popular safe harbor isn't the dollar, the Swiss franc or even the euro. It's energy.

People are piling into oil and gas futures, probably with money they raised by dumping dollar-denominated stocks and bonds. Oil investments are seen as protection against further dollar declines.

Bernanke's lower rates have fueled the trend by furnishing cheap funds for investors to spend on the New York Mercantile Exchange. So he's simultaneously hurting the greenback and driving up gas prices—even though inventories are at a six-year high. That won't help the economy recover.

Energy may be the next bubble investment. Each time the Fed breathes life into the economy with lower rates, the extra money floods into some fad asset—first Internet stocks, then housing, now oil?

The whole argument is here.

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  1. He makes it seem as if attempting to centrally control an economy is just plain stupid. What a strange concept.

  2. People are piling into oil and gas futures, probably with money they raised by dumping dollar-denominated stocks and bonds.

    I’ve been doing that for five years. And Ben ain’t been on the job that long.

  3. Forget about a Gold Standard. All that an economy is is an organized transfer of energy. We need an Energy Standard, and now. Hell, 1 barrel of oil = $100 American. No time like the present to get that one going.

    Too bad it would never happen.

  4. Postmodern Sleaze,

    While I have no problem with an oil standard (well, I have a few, but nevermind), wouldnt a “Fort Knox of oil” take up a lot of space? I guess it would be harder for a Bond villian to rob, however.

  5. When will they start minting the one dollar Oil Eagle and where can I get my hands on some light sweet crude bullion?

  6. Buying a commodity after it hits a record high? Sounds like a great idea! I think I’ll put the kid’s college fund in it.

    Just so you all know, when I’m rich, I’m not letting any of you ride in my limo.

  7. Dang it, I hate agreeing with joe.

  8. robc:
    If my math is right, which is not a good assumption, there’s about $72 billion worth of oil in u.s. strategic reserve and about $215 billion in u.s. gold reserves.

  9. And I think you just wrote the next Bond movie, robc.

  10. robc,

    You should note that the plot of Goldfinger was not to rob Fort Knox, but to contaminate the gold there with radiation making it unusable and thus driving up the price of gold everywhere else, making Goldfinger’s stocks far more valuable.

  11. The devalued dollar as inflation tax is the main cause of oil’s ramping prices. Price oil in euros or pound sterling and you’ll learn that prices haven’t risen all that steeply. The oil’s worth a little bit more, but the dollar’s worth a lot less.

  12. Citizen Nothing,

    That’s interesting! Assuming the gold is still there? It hasn’t been audited in decades…

  13. You mean I’m a Bond villain?

    Sweet! Where’s my hawt assassin?

  14. Um, joe, you think Oddjob was hot? Egad.

  15. Ugh! Get me Grace Jones circa 1985, STAT!

  16. The devalued dollar as inflation tax is the main cause of oil’s ramping prices. Price oil in euros or pound sterling and you’ll learn that prices haven’t risen all that steeply.

    Price oil in gold and it turns out to be about the same price it has always been.

    We are on a gold standard even though our dollars arent.

  17. Um, joe, you think Grace Jones was hot? Egad.

  18. But, but… the Cato Institute says the Federal Reserve is doing the Lord’s work! (i.e. whatever’s good for big business)

    “Lower interest rates have launched a huge mortgage-refinancing boom, and the resulting drop in monthly payments will have the same effect on household finances as a pay increase. Businesses, too, will roll over their debts at lower rates – a more pleasant way to pare costs than layoffs.”

    http://www.nypost.com/seven/02012008/postopinion/opedcolumnists/the_fed_does_right_167450.htm?page=1

  19. “So he’s simultaneously hurting the greenback and driving up gas prices — even though inventories are at a six-year high. That won’t help the economy recover.”

    That’s a bit of a non-sequitur, no? “Hurting the greenback” in reality means cutting interest rates and putting more money into the economy to make it more affordable for businesses to finance capital investment. That DOES help the economy recover.

    High oil prices might be an externality of implementing that policy, but I don’t think it’s the catastrophe the author seems to.

  20. I guess I’d better start stocking up on cigarettes; they are much easier to store than oil. And draw an extra zero on all my Federal Reserve Notes.

  21. rofl draw an extra zero on my federal reserve notes… priceless

  22. When will they start minting the one dollar Oil Eagle

    aka the “Oily.”

  23. Wasn’t there a gentleman running for President who wanted to abolish central banking??

    Damn, I wish I could remember who it was. I remember something about him being against having a debt and deficit as well.

    Ah yes, here it is, Andrew Jackson.

  24. Energy may be the next bubble investment. Each time the Fed breathes life into the economy with lower rates, the extra money floods into some fad asset — first Internet stocks, then housing, now oil?

    If it does turn out that way, government bailouts will be seriously proposed and discussed.

    Me? I’m waiting for the tulip market to rebound. Any day now, any day.

  25. so the average life of a fad runup is 5 years…correct?

    atleast now I know when the next oil bust is…woot!!

  26. Me? I’m waiting for the tulip market to rebound. Any day now, any day.

    It’s “bubble” investment, not “bulb” investment

  27. And there are those Cafe Standards…..which by making it cheaper to drive, cause people to drive more.

    Actually, I’ve heard that argument made rather eloquently but I’m not certain I buy it. Truth is that there are a whole bunch of oil consumers that didn’t exist 35 years ago. They’re called Gen X and us old farts are still consuming as well (at least the ones of us who didn’t come down with consumption).

  28. There is undoubtedly some speculative excess in the price of oil. Not all of that is due to dollar weakness. There is still a political risk premium built into the price.

    But the long term fundamental factors driving supply and demand still indicate high oil prices on an ongoing basis. Demand from the developing world is still going to be increasing and we still have boneheaded domestic policies that are blocking us from exploiting our own engery supplies (ANWAR, the outer continental shelf, etc.)

    By the way I just learned that one of the provisions of the so-called “engergy” bill that passed recently bans importation of Canadian oil extracted from tar sands. It seems that the methods required for extracting that oil don’t meet with the approval of the environmental wackos who are apparantly running the country’s energy policy.

  29. Stop propagating the myth that rising prices = inflation. Inflation is one and only one thing: an increase in the money supply. One of the effects of an increase in the money supply is that each unit of money is worth less, thus causing prices to rise across the board.

  30. government bailouts will be seriously proposed and discussed.

    I am eagerly awaiting the day the government sends General motors a check for the difference between the profit on a Hummer and the profit on a Aveo. Or, perhaps, they could use that other agriculture model, and just pay GM to not build any Hummers at all (based, of course, on a report from GM as to how many they *would have* built, in the absence of the price support program). The return of Yankee Automotive Hegemony is nigh!

  31. each unit of money is worth less, thus causing prices to rise across the board.

    Excess money is not absorbed equally across all asset classes; particularly in the early stages.

  32. I love circular logic.

    Scientists and policymakers say we should use less carbon-intensive energy sources.

    Yeah, but we can ignore them, because they’re a bunch of environmental wackos.

    How do you know they’re a bunch of environmental wackos?

    Because they said we should use less carbon-intensive energy sources. Weren’t you listening?

  33. Excess money is not absorbed equally across all asset classes; particularly in the early stages.

    Absolutely. Some people do not recognize the loss in value of a particular currency, or do not have the power to charge more for their goods or labor. That doesn’t mean inflation isn’t occurring, but it also doesn’t mean people shouldn’t properly distinguish rising prices for certain asset classes (the effect) from the increased money supply (the cause).

  34. joe, you forgot to say “Oops, wrong thread.”

  35. Um, joe, you think Grace Jones was hot? Egad.

    I think Grace Jones was hot in the 80’s, so there!

    Scientists and policymakers say we should use less carbon-intensive energy sources.

    No, Scientists say the consumption of fossil fuels is increasing CO2 in the atmosphere, and that is causing global climate change.

    Policymakers then make suggestions on what to do about climate change – however, strangely enough, they tend to support methods of fighting climate change that tie into their already established policies – The Left want to fight climate change by destroying capitalism and centrally planning the economy (suprise, suprise), the right want to fight climate change by huge supsidies for midwest farmers to grow corn as fuel (suprise, suprise).

    To lawmakers, all climate change is, is an excuse to say “The sky is falling, pass this legislation now”, and the legislation is something they would have tries to pass anyway. But if you listen to the scientists, it is really far less sentational than that.

  36. I love circular logic.

    Me too. Try this:

    Scientists and policymakers say we should use less carbon-intensive energy sources cause global warming.

    Yeah, but We can‘t ignore them, because they’re a bunch of environmental wackos experts.

    How do you know they’re a bunch of environmental wackos experts?

    Because they said we should use less carbon-intensive energy sources cause global warming. Weren’t you listening?

  37. Actually, I’ve heard that argument made rather eloquently but I’m not certain I buy it. Truth is that there are a whole bunch of oil consumers that didn’t exist 35 years ago. They’re called Gen X and us old farts are still consuming as well

    TWC, don’t forget the fact that East and South Asia are much wealthier than 30 years ago, and all 2 billion or so of them are using more oil.

  38. Oops, wrong thread.

    RC Dean,

    Do you actually have so little contact with the educaitonal and scientific establishments that you think one becomes an expert on climatology by venturing an opinion on global warming?

  39. The Left want to fight climate change by destroying capitalism

    Hey, look everyone! It’s one of them there chicken littles I’m always hearing about!

    Rex, did you know that if we ban leaded gasoline, there will be no automobile manufacturing industry by 1975?

  40. Anyway, Rex, what makes your suspicions so important is that your criticism don’t at all match up your own pre-existing policy preferences.

    I can say right now that my position on the need for government involvenement in a whole host of environmental issues would be vastly different if there was no global warming vs. if there is. How about it, Rex? Can you say the same?

  41. “Stop propagating the myth that rising prices = inflation. Inflation is one and only one thing: an increase in the money supply” (Squarerooticus)

    Unless there’s also an increase in goods and services. Inflation = too many monetary units chasing too few goods and services. See “Venezuela, inflation in.”

  42. I’m still waiting for these global warming “experts” to show me a perfectly linear one for one correlation between variations in man made so-called “greenhouse gases” and variations in global temperature that tracks consistently over every single second of the entire timespan of human existence on this earth.

  43. I’m still waiting for these global warming “experts” to show me a perfectly linear one for one correlation between variations in man made so-called “greenhouse gases” and variations in global temperature that tracks consistently over every single second of the entire timespan of human existence on this earth.

    Lol!

    I love Gil.

  44. Buying a commodity after it hits a record high? Sounds like a great idea! I think I’ll put the kid’s college fund in it.

    DEpends on when the kid goes to college. If the kid is in 8th grade now, it’s probably not a good idea. If you’re kid is three years old, it’s probably an OK idea. But putting all of one’s college fund eggs into one commodity basket is generally a bad idea no matter the price.

  45. I’ll start selling my energy holdings when the US pulls out of Iraq.

  46. Do you actually have so little contact with the educaitonal and scientific establishments that you think one becomes an expert on climatology by venturing an opinion on global warming?

    No, but I have noticed:

    (1) An awful lot of the “scientists” who signatures established the AGW “consensus” aren’t climatologists. Aren’t the people who tout those signatures as proof of a scientific consensus “thinking one becomes an expert on climatology by venturing an opinion on global warming”?

    (2) I seem to recall a certain poster here at H&R dismissing the professional bona fides of any climatologist who doubted the sacred consense. It seems to me that saying that you can’t be an expert on climatology unless you proffer the right opinion on AGW is a close cousin.

  47. Rex, did you know that if we ban leaded gasoline, there will be no automobile manufacturing industry by 1975?

    Um, I wasn’t even born until 1975, so trying accuse me of being against unleaded gasoline is a bit silly.

    But if we are discussing unleaded gasoline – What if the people who wanted to ban lead in gasoline, also wanted to ban the technology required to build cars that run on unleaded gasoline? In that case, it would be a fair assesment that the people for banning leaded gasoline really where trying to destroy the auto industry, wouldn’t it?

    Right now, the core of the enviornmental movement oppose clean enegry sources like nuclear power, or GM biofuel crops. They only support energy sources like solar and wind, that can’t as of yet replace fossil fuels to maintain our current industrial society.

    Anyway, Rex, what makes your suspicions so important is that your criticism don’t at all match up your own pre-existing policy preferences.

    What are my pre-existing policy preferences?

    I made it clear that I oppose the government doing anything on principle, but pragmaticly I would be willing to support a ban of fossil fuesl and a massive federal push to nuclear power (similiar to what has already worked in France, but on a larger scale) as a compromise. In exchange I would expect the Green movement to compromise its position on nuclear power.

    If I am going to compromise my libertarian beliefs, I am not going to do it for bullshit policies designed for nothing but getting a politician re-elected. If you expect me to support any sort of government initiatives to cut carbon emissions, your initiatives better damn work, otherwise NO DEAL!

    But given that the Greens are never going to compromise on nuclear power, my position is largely academic.

    I can say right now that my position on the need for government involvenement in a whole host of environmental issues would be vastly different if there was no global warming vs. if there is. How about it, Rex? Can you say the same?

    I don’t get what you are saying? Are you still trying to accuse the people who may disagree with you on how best to address climate change as being “climate change deniers”?

  48. RC,

    “Signatures established a consensus?” What the does that mean? The phrase “scentific consensus about global warming” isn’t about some sort of document. I was referring to the actual, existing state of knowledge among climatologists who’ve studied the issue.

    I seem to recall a certain poster here at H&R dismissing the professional bona fides of any climatologist who doubted the sacred consense. First, what’s a “sacred consensus?” Second, you do? Who was that? I can’t say for certain that there aren’t people who would say such a thing, but I’m having trouble coming up with any right now.

  49. “I was referring to the actual, existing state of knowledge among climatologists who’ve studied the issue.”

    That would be claimed knowledge – not proven knowledge.

  50. Sure, Gil. And don’t even get me started on those self-deluding evolutionary biologists.

  51. It doesn’t really matter what the evolutionary biologists think – they aren’t trying to impose massive taxes and regulations on everyone to cure the “problem” of evolution.

    Of course I also have the advantange of knowing that it is physically impposible for there to ever be any higher value outcome on this earth than MY absolute individual freedom to the max, so it doesn’t really matter whether there is any man made global warming or not.

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