The Obama Administration’s Dollar Devaluation lowers the Cost of Living in Britain

Posted by PITHOCRATES - October 6th, 2013

Week in Review

The British economy appears to be turning the corner.  Of course, they have an advantage over the American economy.  They’re not stuck buying petrol with a devalued American dollar (see UK economy growing at fastest rate in the developed world by Philip Aldrick, and Steve Hawkes posted 10/3/2013 on The Telegraph).

And there were hopes tonight that the signs of life could help tackle the cost of living, with a strong pound helping to push down the cost of petrol, which is traded globally in US dollars.

There are two primary forces that determine the price of gasoline.  Supply and demand.  And the strength of the US dollar.

Thanks to the worst economic recovery since that following the Great Depression, gasoline is not in as great of demand as it once was.  Before President Obama became president.  With so many people having left the labor force people just don’t have the money to put into their gas tanks.  Hence the ‘staycation’.  Spending the family vacation at home.  Doing fun things in the backyard.  Like cutting the grass.  And then when the kids’ chores are done there’s hotdogs on the grill.  Can a week at Disneyland compare to that?

Even though we’re buying less gas gasoline prices are still pretty high.  Why?  Because unlike the British we buy our gasoline with devalued dollars.  Due to all of that quantitative easing.  Printing money to buy treasury bonds.  To stimulate the economy.  Where only the rich Wall Street traders who buy and sell these bonds are getting stimulated.

With more money in circulation chasing the same goods and services in the economy it takes more dollars to buy what they once did.  Including gasoline.  Especially gasoline.  For the higher price of gas can be hidden in other products by reducing the package size of the product sold.  Such as smaller cereal boxes.  The prices may not be going up on cereal but we have to buy cereal more often.  Spending more money in the long run.  The higher price of gasoline (due to a weaker dollar) makes everything more expensive in the supply chain that ultimately puts those boxes of cereal on the supermarket shelf.  Ditto for everything else that is moved with gasoline or diesel.  But they can’t shrink the package size of gasoline to hide the added cost from the devalued dollar.  Because they sell gasoline by a fixed measurement.  We buy it by the gallon.  We don’t buy it by the box.  If we sold cereal by a fixed measurement we’d see cereal prices rising a lot higher than they are now.  But they’re not. So the boxes are getting smaller.

The British pound is stronger than the US dollar.  So when the British buy oil on the world market they exchange stronger pounds for weaker dollars.  Getting more dollars in exchange for their pounds.  Removing the U.S. price inflation (due to the devalued dollar) from the price of oil.  Lowering the cost of oil in Britain.  And lowering costs throughout the British supply chain.  Which will help lower the British cost of living.  Making life easier for the British consumer.  Because the British are more responsible with their currency than the Obama administration is with the American currency.


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Can’t see the Fiscal Forest for the Monetary Trees

Posted by PITHOCRATES - June 24th, 2011

He won’t Drill but he will Draw from the Strategic Reserve

The Great Recession lingers on.  As high oil prices hit consumers hard.  Gas prices are back to $4/gallon territory.  Leaving consumers with less disposable income.  Home values are declining in a deflationary spiral.  Wages are stagnant.  Unemployment is high.  And there’s inflation in food and consumer goods.  All driven by the high price of oil.  And all that quantitative easing (QE) that has depreciated the U.S. dollar (which we buy and sell oil with in the global market).

The demand for oil is soaring.  And yet President Obama put a moratorium on drilling in the Gulf of Mexico.  In fact, the U.S. isn’t drilling anywhere.  Which has forced the U.S. to import more foreign oil.  Because of this squeeze on supply.  Economics 101 tells you when demand increases supply should increase to meet that growing demand.  When it doesn’t, prices rise.  Like they are.  And the QE just compounded that problem.  When the dollar is worth less it takes more of them to buy the same amount of oil it used to.  Which means higher prices at the pump.  From demand outpacing supply.  And a weaker dollar.

The president’s solution to the high gas prices?  Blame the oil companies.  Because their profits were too high.  It had nothing to do with his policies that restricted the supply of oil on the market.  Of course, with an election coming up and gasoline prices too close to $4/gallon, he’s changed his position on that (see Loss of Libya oil bigger disruption than Katrina: IEA by Simon Falush and Zaida Espana posted 6/24/2011 on Reuters).

On Thursday, the International Energy Agency which represents the major oil consumers agreed to release 60 million barrels from emergency stockpiles, sending crude prices tumbling.

Imagine that.  Increase supply.  And prices fall.  For awhile, at least.  Because once these 60 million barrels are gone, the prices will just go back up where they were.  Unless there is a real increase in supply.  Like more drilling in the Gulf.  The Atlantic.  The Pacific.  In Alaska.  We know it works.  Increase supply.  And prices fall.  So why not just increase supply with more drilling?  Instead of drawing down our strategic reserves (America’s share being 30 million of the 60 million barrels).  Which, incidentally, we’ll have to replace.

Energy Policy Driven by the 2012 Election

Even the White House is all but admitting this move is purely political (see The wrong reason for depleting the strategic oil reserve posted 6/23/2011 on The Washington Post).

So on Thursday Obama administration spokesman Jay Carney argued that oil demand is likely to rise over the summer. In other words: It’s vacation season, and the White House is worried about high prices through the summer driving months.

Therein, perhaps, is a political emergency, at least in the White House view: President Obama’s reelection prospects will be harmed if national discontent over high gasoline prices continues. The oil release could be seen as a way for the president to take credit for gas prices that are falling anyway, or as an indirect, pre-election stimulus.

Personally, the president doesn’t have a problem with the high cost of gasoline.  His administration wants it high.  The higher the better.  They’d like to see it European high (see Times Tough for Energy Overhaul by Neil King Jr. and Stephen Power posted 12/12/2008 on The Wall Street Journal).

In a sign of one major internal difference, Mr. Chu [who became Obama’s Energy Secretary] has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work.

“Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,” Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.

To make the more expensive green energy less expensive in comparison.  And an easier sell to the American people.  Pleasing his liberal base.  But there’s an election coming.  And high gas prices don’t help you win elections.  Especially during record long-term unemployment.  Even though it goes against every fiber in his body to act to bring down the cost of gasoline, he will.  If it’ll help his reelection chances.  It’s not like he’s going to lose his liberal base.  Who else are they going to vote for?  The conservative?  Not likely.  They’re always going to vote for the most liberal candidate in the race.  And that will still be him.  Despite encouraging more oil consumption.

The Fed doesn’t know why the Economy is in the Toilet

The president needs to get the price down at the pump.  Where people really feel the full weight of his economic policies.  Because the economy isn’t going to get better anytime soon (see Serial disappointment posted 6/23/2011 on The Economist).

THE Fed attracted attention this week for downgrading its forecast not just for this year, but for 2012, as well. More striking is how often it does this. As my nearby chart shows [follow the above link to see chart], the Federal Open Market Committee has repeatedly ratcheted down its forecasts of out-year growth. The latest downward revision is particularly large, and in keeping with the pattern: when the current year disappoints, they take a bit out of the next, as well.

There’s been a steady downward progression of economic projections.  Despite the stimulus.  And the quantitative easing.  Nothing has worked.  When the chairman of the Federal Reserve, Ben Bernanke, was asked why the economy was not responding to the government’s actions his reply was rather Jeff Spicoli: I don’t know.  And he’s supposed to be an expert in this field.

Mr Bernanke does not need lessons about the painful deleveraging that follows crises. His pioneering work with Mark Gertler on the Great Depression introduced the “financial accelerator”, the mechanism by which collapsing net worth crushes the real economy. This concept has been rechristened the “balance sheet recession” by Richard Koo. Stephen Gordon admits he is new to the term and notes (with some nice charts contrasting America with Canada) “it’s not pretty”. (HT to Mark Thoma). Yet until now Mr Bernanke seemed to think America had learned enough from both the 1930s and Japan to avoid either experience. Reminded by a reporter for Yomiuri Shimbun that he used to castigate Japan for its lost decade, Mr Bernanke ruefully replied, “I’m a little bit more sympathetic to central bankers now than I was 10 years ago”…

Mr Koo has argued that quantitative easing cannot help in a balance sheet recession; only fiscal policy can. Does Mr Bernanke secretly agree? He may believe as strongly as he did a decade ago that sufficiently aggressive monetary policy can prevent deflation, but not that it can create enough demand to restore full employment. This does not rule out QE3; it only means it will be pursued with less hope about the results than a year ago.

The Great Depression (during the 1930s) is a complex topic.  And monetary policy played a big role in making a bad situation worse.  In particular, the numerous bank runs and failures can be blamed on the Federal Reserve.  Starving the banks for capital when they most needed it.  But there was a whole lot more going on.  And it wasn’t the stock market crash that caused it.  World War I (1914-1918) is probably more to blame.  That war was so devastating that it took the combatants a decade to recover from it.  And during that time America exploded in economic activity and fed the world with manufactured goods and food.  We call it the Roaring Twenties.  But eventually European manufacturing and farming came back.  Those lucrative export markets went away.  And America had excess capacity.  Which had to go away.  (A similar boom and bust happened in the U.S. following World War II.)  Then all the other stuff started happening.  Including the Smoot-Hawley Tariff.  Kicking off a trade war.  It was all too much.

Japan’s lost decade (the 1990s) followed their roaring Eighties.  When the government partnered with business.  And interest rates were low.  The economy boomed.  Into a great big bubble.  That popped.  Because they stimulated the economy beyond market demand. 

The lesson one needs to take away from both of these deflationary spirals is that large government interventions into the private market caused most of their woes.  So the best way to fix these problems is by reducing the government’s intervention into the private market.  Because only the private market knows how to match supply to demand.  And when they do, we have business cycles.  That give us only recessions.  Not depressions.

Like a Dog having Puppies

The market is demanding more oil.  But the U.S. is not meeting that demand.  So gasoline prices are up.  To lower those prices we need to bring more oil onto the market.  And you don’t do that by shutting down the oil business.

We have high unemployment.  And excess capacity.  That’s not a monetary policy problem (interest rates).  It’s a fiscal policy problem (tax and regulation).  No one is going to borrow money to add jobs to build more stuff when no one is buying.  But if you cut taxes and reduce regulations to make running a business highly profitable, people will build businesses here.  Create jobs.  And hire people.  Even if they have to ship everything they make halfway around the world to find someone who is buying. 

Running the economy is not rocket science.  Because it runs itself.  Like a dog having puppies.  Everything will be fine.  If greedy politicians just keep their hands out of it.  But they don’t.  And they love printing money.  Because they love to spend.  But the problem is that they can’t see the fiscal forest for the monetary trees.


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LESSONS LEARNED #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 11th, 2010

The Bolshevik Revolution Gave Russian Peasants Freedom.  And Famine.

Russia was one of the most backward nations at the turn of the 20th century.  Feudalism was still the economic model.  The only European nation still using it.  There were two Russias.  Hungry and impoverished peasants.  And a rich and well-fed ruling elite.  Then World War I came.  Russia bled on the Eastern Front.  There was a lot of discontent.  Germany took advantage of this by returning the exiled Vladimir Lenin to Russia via Germany.  And it worked.  Marxist revolutionary fervor forced Tsar Nicholas II to abdicate.  Russia pulled out of the war.  Lenin led the Marxist Bolshevik Revolution against capitalism.  White and Red Russia plunged into civil war.  And a few assassination attempts later, Joseph Stalin launched the Red Terror to kill all enemies of the Soviet state.  Including the Romanov family.  When Lenin died, Stalin consolidated his power.  Through terror.  And he would rule by terror.

With capitalism suppressed, Stalin was ready to build the new socialist/communist state.  He industrialized the state (with foreign engineering and machinery).  He collectivized farms to increase output.  Soviet industry made a great leap forward.  But the cost was devastating.  Famine.  Forced deportations.  Terror.  Millions died.  And the quality of life for the common Russian peasant went into the toilet.  Anyone who complained was an enemy of the state.  There were chronic grain shortages.  Which were blamed on farmers hiding grain to force prices higher.  The solution?  Stalin deported or executed these farmers as enemies of the state.  But they never found any ‘hidden’ grain.

Dictators rise to power through terror and violence.  And they hold power by even more terror and violence.  To silence their enemies.  These enemies of the state.  You see, if you disagree with the dictator, you disagree with the state.  For they are one and the same.  So they get a little testy when their policies fail.  They blame others.  Attack those who are clinging to capitalism and liberty.  Who don’t submit themselves completely to the state.  And herein lies their fatal flaw.  Slaves don’t willingly work for the greater good.  They only do the bare minimum to minimize their pain and suffering.  Either the work or the state will kill them.  They know that.  So they work hard enough to keep the state from killing them.  But not too hard that the work does.  It’s a bleak world.  But that is the life of the slave.

China’s Great Leap Forward Resulted in Even Greater Famines

The communist/socialist movement spilled over into China from Russia.  Mao Tse-tung rose to power much like Stalin.  Ruthlessly.  He industrialized China.  And collectivized their farms into giant collective communes.  He forced peasant farmers into these communes.  Which lowered the quality of life for millions.  The result?  China’s industrial output did increase.  But, like in Russia, the cost was devastating.

The Great Leap Forward was their second five-year plan.  The plan was to increase grain harvests by using the power of the state to collectivize and direct giant farming communes.  Party members (i.e., career politicians who kissed communist ass) ran these communes.  They reported to Mao.  None of them were farmers, though.  But they acted like they were.  Trying some screwy new ideas that only reduced the harvest.  But, being good party men, they lied.  They reported record harvests.  As the lying went up the party chain of bureaucracy, party leaders made decisions based on the lie.  They took so much of the harvest for party members, cities and for export that the peasant farmers working on the communes starved in history’s greatest famines.  Note that ‘famines’ is plural.  Yeah, it was that bad.  Tens of millions starved to death.  All in the name of helping the poor and oppressed.

Everyone lives in fear in a totalitarian state.  Even members in the ruling elite.  The communes were supposed to increase the harvest.  So those responsible for that increase lied.  To minimize their own pain and suffering.  For they knew if they failed the greater common good, the state would come after them.  So they protected themselves.  At the expense of the peasant.  The life of the peasant/proletariat only got worse.  The Bolshevik Revolution was supposed to free them from the oppression of the bourgeois capitalists.  It only oppressed them more.

Using Capitalism to Attack Capitalism

The socialists/communists learned some valuable lessons.  Although they may be good at terror and violence, they didn’t have any real talent or ability.  And though they hate capitalism (because they lack any real talent or ability), they understood that they needed capitalists to be their bitch.  They couldn’t kill them.  Because if they did, nothing would get done.  No wealth created.  And they needed these people to create wealth.  Because they can’t take wealth if the wealth creators don’t create it.  With no wealth to take, they have nothing to give the masses.  To keep them dependent.  And subdued.  So this was the next phase in the socialist/communist revolution.  To exploit the wealth creators for state gain.

The social democracies followed the same general plan.  Attack capitalism.  Oppress the poor by making them dependent on the state.  But instead of using physical fear and intimidation, they used psychological fear and intimidation.  At election time.  They, the compassionate state, wanted to give them stuff.  The mean, cold-hearted capitalists wanted to take away their Social Security.  Eat their children.  And other nasty things.  It worked.  It got votes.

The problem they ran into was that populations grow.  And costs go up.  That meant the social democracies had to give more and more people these ‘benefits’.  While at the same time the costs of these ‘benefits’ kept going up.  And herein lies their fatal flaw.  To keep the people dependent (and docile) you have to keep raising taxes.  But if you raise taxes too much, you kill the golden goose.  Because you can push the wealth producers only so far.  If the state makes them work harder for less so others can enjoy the fruit of their labors, the state is for all intents and purposes enslaving these wealth producers.  And what do we know about slaves?  They don’t willingly work for the greater good.  They do the bare minimum to minimize their pain and suffering. 

Communist China Concerned About the United States’ Anti-Capitalistic Behavior

There are all sorts of ways they can do this.  If the cost of hiring employees is too great, businesses will hire fewer employees.  If taxes are too high, people will cut back on their spending and businesses will lay off workers because of the weaker demand.  If the investment climate is too unfavorable (say, because of a high capital gains tax), investors will invest their money where the climate is more favorable (and not create jobs).  If taxes get too high, the economy will go underground where people pay no taxes.  As more of this happens, the government collects less and less in taxes.  They get to a point where they simply can’t raise them anymore.  So they borrow.  And when they borrow to excess and cannot borrow any more, they have to do the unthinkable.  Cut the benefits that have so successfully enslaved so many people to the government.  And when governments try, the enslaved fight back.

Following the financial crisis of 2008, some debt-ridden nations tried to do just that.  Cut benefits to avoid bankruptcy.  Greece tried.  France, too.  Both had riots.  Other nations are at the tipping point.  Great Britain is making draconian cuts that the people aren’t too happy with.  Ireland is staring down bankruptcy and may need a Greece-like bailout.  (Interestingly, Ireland’s problems don’t stem from a fat social welfare state.  Their troubles resulted from a real estate bubble fueled by the European Central Bank keeping interest rates low.  They, like the U.S., saw no downside in cheap, risky mortgages.)  And, of course, Communist China is lecturing the United States about the evils of currency devaluation as a solution to our problems.  Which we’re doing.  In a last-ditch attempt to stimulate our economy.  A weaker dollar would help.  It would make our exports cheaper.  And make our massive debt cheaper to pay off.  Which really concerns the Chinese as they’re holding the majority of that debt.  So they are not going to sit idly by while we slash the value of their U.S. holdings.  They’ll fight back.   And do whatever it takes (capital controls, tariffs, etc.) to protect their investment.

Whether by physical fear and intimidation or by bribery and deceit, socialism ends the same.  In failure.  For it to work people have to work hard so others can live better.  And people just don’t willingly submit to slavery.  When they’re forced into it, they do the bare minimum to minimize their pain and suffering.  And when people do, the economy will never reach its full potential.  Which is why the United States won the Cold War.  Capitalism encourages people to do their best.  Socialism encourages them to do the least they can get away with.  And you just don’t achieve greatness with mediocrity.


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