What’s Wrong With America: Money

My stepson and I occasionally have this debate: Would drilling in Alaska really slash the price of oil? He says yes, since supply and demand dictates that a larger supply means lower prices. I said no, because Exxon, et. al. would just sell all that oil to China and India, flooding the market with cheap American crude to undercut the Saudis, the Russians, and Hugo Chavez (who sells crappy crude anyway), thus driving the price right back up.

Turns out we’re both wrong. Why?

The price of oil is set against the price of gold, which, in turn, determines the price in various currencies, all of which are fiat money. And apparently, oil is actually pretty damn cheap now. So why are we forecasting $5 a gallon gas this summer?

Well, virtually all money these days is fiat money. Basically, each nation’s central bank makes it up, or “prints money.” Actually, they don’t literally print money as hard currency only represents a fraction of the actual cash out there in any given nation or superstate.

So what’s that got to do with gas prices? Simple. Money is “printed” according to a certain formula. In the US, it’s the Consumer Price Index, which determines how much a dollar can buy. And according to the CPI, the government is printing just the right amount of money in line with inflation. Only, there’s a fundamental flaw in the CPI.

It excludes the prices of energy and food. Back in 2006, I remember a local financial expert bemoaning that we really hadn’t exited the dotcom recession because the CPI did not reflect that food and fuel were excluded. The result?

It takes more dollars to by cheaper fuel, and we have an atrocious deficit that, while not going away anytime soon, would go away a lot faster if we weren’t printing so much damned money. In other words, according to the textbook, we’re doing everything right. According to reality, the Consumer Price Index does not reflect reality. Result? Gas headed for $4.70 a gallon, astronomical grocery bills, and a deficit that needs no spending to grow even bigger.

Mind you, the finance guy I listened to said this six years ago. We’ve been screwing this up a lot longer than that, likely back to Reagan, if not earlier.

So would changing it tomorrow reverse the course we’re on?

It’d help. The weaker the dollar gets according to the CPI, the less inclined the Treasury is to print money. The less money the Fed has to print, the stronger its value gets. A stronger dollar would mean a smaller deficit, cheaper gas, and cheaper food. Now, we can talk about going back on the gold standard or even bring back the bi-metallism debates of the post-Civil War era, but that’s a different topic altogether. In the here and now, we need to make a long-overdue adjustment to the current standard.

It’s laughable when people demand that the president do something about gas prices, something that made me giggle back in the Bush days. The Fed has to change the way they manage the money supply. The president has some control over that, but if you fired Ben Bernanke tomorrow, it’s unlikely his successor would change much. Inertia is a fact of life in large institutions. What needs to happen is that Congress and the President need to find the political balls to push such a change through. (That breathing sound you hear is me not holding my breath.)

The first step toward getting the nation off shaky ground and shoring up the economy is to start including energy and food in the Consumer Price Index. Not as sexy as tax breaks, spending cuts, or drill, baby, drill, but who cares if it puts more money in your pocket?

Cincinnati anchorman Ben Swann explains it so much better than I can. Here’s what he had to say on the matter. If my facts contradicts Ben’s, go with Ben. He’s researched this more closely.

Advertisements

2 thoughts on “What’s Wrong With America: Money

  1. Paul Krugman talked about the exclusions to the CPI in his blog a couple of years ago. I thought like you do until then, but he convinced me the reason energy and food are removed from the base CPI is they are volatile and seasonal. making monetary adjustments with them in the formula would skew the numbers, causing the money supply to bounce up and down, which could be worse yet, as no one would know what a dollar is worth.

    A stronger dollar could also limit our ability to export goods, as they would be more expensive to our potential customer. A weaker dollar also helps with the foreign debt balance, as we’d be paying off the debt with less valuable dollars than we borrowed.

    Strong dollars have their place, and there are benefits to be had from them even in a situation such as ours. The trick is in finding the right balance.

  2. You might also find it interesting to know that the supply of oil is in a surplus. There is PLENTY of it. The real battle going on is about TRANSPORTATION of oil in the pipelines. If you do a little research you will see what I’m talking about. The US doesn’t want to drill in Alaska because they are making too much money of controlling the pipelines in Iran, Syria, etc.

    It’s a very interesting angle.

Comments are closed.