Unintended Monetary Consequences
Recent news about the advent of rapidly rising gas prices has brought the subject of energy into the forefront of public opinion. Unfortunately, the majority of the discourse occurs over typical “political football” issues such as profits from oil companies and proposals for higher taxes. Recently, the topic has shifted toward the topic of exporting domestically produced oil to other countries. Naturally, this is being portrayed as unpatriotic greed on the part of the oil companies who are subverting the national interest of the United States for their own selfish interests. What this phenomenon really represents is a signal. It is a signal to the United States that the “loose money” policies of permanently low interest rates and perpetual monetary expansion has consequences. The government is clearly attempting to inflate values in the stock market and real estate sector by pumping money into the economy. The problem is that this has the net effect of reducing the real value of dollars that are already in circulation. It also has the effect of making products & services we sell to other companies less expensive, while making products & services they sell in the United States more expensive. One of the products made less expensive by a loose money / weak currency policy is oil. When the US intentionally devalues its currency to support government spending programs and financial markets, it increases the relative purchasing power of other global currencies. As the purchasing power of these other currencies increases, it allows them to purchase more energy than they otherwise would have bought. This translates to increased incentives for oil companies to export their product instead of sell it domestically, unless the domestic price increases. Thus, the phenomenon we are seeing is not any kind of conspiracy or the result of evil intentions by corporate plutocrats. It is nothing more or less than the predictable result of loose money policies. It is certainly convenient for politicians to blame the usual suspects of “corporate greed” or “big oil” … however, the current situation is one that has been intentionally created. It was not created to reward oil companies, it was created in an attempt to avoid a double-dip recession and conceal the sluggish growth of the US economy.
Canary in the Coal Mine
In years past, coal miners would take a canary down a mine shaft as a signaling mechanism. If the canary died, it meant the air was becoming toxic and that they need to vacate the mine … quickly. Similarly, these rapidly rising gas prices should be viewed as an indicator of what is going to happen as a result of continued easy money policies by the government. It is an indicator of what the future holds for our economy. Unfortunately, addressing the underlying problem that causes these higher prices carries with it separate problems.
A Rock and a Hard Place
The most certain remedy to the recent rash of price inflation is to begin tightening the money supply. By raising interest rates and pulling-back money from circulation, it will increase the relative purchasing power of dollars. This will make it (relatively) more profitable to sell oil in the United States than in other countries, so more supply will be attracted to the US. This increase in supply will drive prices down to a new equilibrium. The same effect will happen for food, which has also experienced a dramatic run-up in its price over the past few years.
The problem is that if interest rates are not constrained, and if money is removed from circulation, it will place significant downward pressure on both real estate prices and stock market values. Increasing the cost of borrowing will also suppress business investment in new plants & equipment. The unfortunate truth is that inflation has become the price we are paying for cheap money. The irony of this observation is that the result of this policy, which is being pushed by the self-proclaimed champions of social justice is to disproportionately impoverish those at the bottom of the wealth and income ladder.
Since people who earn less income or are dependent on government subsidies tend to spend a higher percentage of their income on things such as food and energy, inflating the prices of these commodities to artificially reduce the costs for stock market investors and home buyers results in a net transfer of real wealth from those at the bottom to those at the middle and the top.
An even more concerning fact is that the current government entitlement liability has grown so large that long-term inflation is all but inevitable unless significant changes are made within the next few years. Since entitlement programs are very popular with the people who receive the payments, it has become a matter of political suicide to propose any changes to these programs. Unfortunately, the people who rely on these ‘safety net’ programs are the same ones who will be the most intensely impacted in the future when prices continually increase as the government prints money in an attempt to meet their financial obligations.
In the end, we must all decide what we will personally do to ensure that we are able to personally resist the coming inflationary wave.