Everything I've been warning about regarding the
fallout from global central bankers' love affair with inflation is coming to fruition.
Consumers are once again dealing with the fact that the cost of filling up
their gas tank is eating a significant portion of their disposable income.
The price of a barrel of oil is now soaring above $100 a barrel; just as it
always has done when the Fed has gone on one of their counterfeiting sprees.
And it's not just dollars that have been eroding in value because the price
of oil in Euros is now at a record high. The sad truth is that with each
iteration of QE, either in the U.S. or around the globe, it has sent oil
prices skyrocketing, inflation rising and the economy into the tank.
But our nation's Treasury Secretary continues to
display how very little he understands about markets and the economy. Timothy
Geithner said last week that there is "no quick fix" to higher oil
prices and that there's no easy solution for spiraling energy prices. What he
does recommend is a long-term approach, "...to encourage Americans to be
more efficient in how they use energy." My guess is what Mr. Geithner
means by "encouraging Americans to be more efficient" is to make
sure our economic growth is anemic.
In contrast to what Geithner believes, there are two
things he, the Fed and the Obama administration could do today to bring oil
prices down below $75 per barrel in less than 30 days. First, is to raise the
Fed Funds rate to 1% and repeal Bernanke's pledge to keep interest rates at
zero until the end of 2014. The second is for the president to proclaim that
the U.S. does not support, in any way, a preemptive military attack on Iran.
These two simple measures would dramatically strengthen the dollar, backing
out at least $25 from the crumbling currency premium; and removing the $15
war premium built into the price of oil.
But seeing as neither of those things are likely to happen, we can look to recent history for
what we can expect from soaring oil prices. In the summer of 2008, oil prices
hit an all-time record high of $147 per barrel and gas prices hit a record
$4.16 per gallon. This helped send the global economy into the Great
Recession. Then in Q1 of 2011, QEII sent oil prices back to $114 per barrel
and gas back above $4 a gallon. Predictably, U.S. GDP once again plummeted,
falling from 2.3% in Q4 2010, to 0.4% in the following quarter. Today, oil
prices are back to $110 per barrel and gas prices are surging back to $4 per
gallon. Expect a slowdown in the economy similar to what occurred
every other time gas prices hovered around the $4 level. We received a taste
of that slowdown today with the release of the Durable Goods report. Orders
for U.S. durable goods fell in January by the most in three years and capital
goods expenditures, less aircraft and defense fell 4.5%.
The main reason why oil prices are rising is the same
reason why food and import prices are soaring as well. Paper currencies
across the world are losing their purchasing power against real assets that
cannot be increased by fiat. Of course, the Pollyannas
on Wall Street will tell you that oil is rising because of a rebounding
economy. However, the facts are that gasoline demand is down 7% YOY, while
oil inventories are at a six month high. If the global economy was indeed
recovering why is the demand for gas at the pump falling? In reality, the
global economy is very weak and the U.S. is very far removed from a
sustainable recovery.
Japanese GDP dropped 2.3% in Q4 and the European Union
is in recession, with last quarter's GDP falling 0.3%. And Greece has entered
into a depression with GDP down 7% last quarter and falling sharply. Emerging
market economies will be hard pressed to keep up their ebullient growth rates
when the developed world's demand for foreign made goods is collapsing.
Meanwhile, the U.S. continues to run trillion dollar
annual deficits and the unemployment rate is 8.3%. Inflation is destroying
the nation's desire to save and invest, as the economy is suffering through a
protracted period of stagflation. But perhaps the worst situation of all is
that the Fed's free-money policy has set the economy up for the biggest
interest rate shock in history. It's really not much of a mystery why
investors have fled to gold and oil as an alternative to owning paper, which
can only offer a negative return after inflation.
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