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 $70 per barrel in less than 30 days. First, is to raise the Fed Funds rate to 1 percent 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 is 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 percent in Q4 2010, to 0.4 percent 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 with the release of the Durable Goods and ISM manufacturing 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 percent. And the Institute for Supply Management's factory index fell to 52.4 in February from 54.1 a month earlier.
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 6 percent 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 percent in Q4 and the European Union is in recession, with last quarter's GDP falling 0.3 percent. And Greece has entered into a depression with GDP down 7 percent 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 percent. 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.
Michael Pento is the president of Pento Portfolio Strategies .
Follow Michael Pento on Twitter: www.twitter.com/michaelpento1
Misrepresenting Inequality: http://mises.org/daily/5882/Misrepresenting-Inequality
A COHERENT energy policy would also bring prices WAAAAY down. A "permitorium" has drilling in the gulf moving at a snails pace. The gulf once accounted for 30% of our domestic production.
The Keystone pipeline would be an ADDITION to the 153,000 miles of pipeline already in use in the US and would bring 700,000 barrels of oil to US refineries.
Obama is ALL IN on Solyndra which went belly up. Obama threw millions more of taxpayer dollars at Abound Solar which has cut 50% of its workforce and is struggling to stay in business.
The Chevy Volt plant is being shut down for 6 weeks(?) and 1,300 workers sent home due to LOW SALES!!
In 1958 the US was struggling through a deep recession and Ford sold 63,107 Edsels.
In 2011 Chevy sold just over 7,600 Chevy Volts with a $7,500 government rebate to entice buyers!!
What is even MORE REMARKABLE is Spain, once the liberal model of green energy development, gave up on government support of green energy when they figured out their private sector lost 2.5 jobs for every 1 green job the Spanish government created.
It seems the millions of Americans living in poverty, on food stamps and unemployed will have to wait while the Obama, no hands on experience, bookworm, academic geniuses figure out what Spain learned the hard way.
This simply doesn't add up to anything but greed. Is anyone else questioning how does a $40.00 per/bbl price difference equal only a $0.16 difference in gasoline price? If oil companies can obtain record profits, as they did in 2008, with oil at nearly $150.00 bbl, and gasoline at $4.16 /gal., why is gasoline at $4.00 /gal now, with oil at merely $106.00/bbl? This logic states that for every $40.00 /bbl of oil should equal $0.16/gal for gasoline!
And people ask why the rich keep getting richer and the middle class keeps getting poorer...
2011 Inflation would be close to 6% if Gasoline and Food were counted.
"Paper currencies across the world are losing their purchasing power against real assets that cannot be increased by fiat." Sorta...
The US is Exporting most of it's inflation to other countries, which winds up negatively effecting their fiat currency against our fiat currency.
This does drive inflation. The after burst lows seem consistently higher which was a feature of previous inflationary eras. Frankly, I think so long as we intend to finance our government with debt, we have to learn to live with inflation. The higher prices have to be regarded as a compounding tax. The critical point is to share the pain more equitably and resist a spreading poverty where the very few become very rich.
The first paragraph is what I was looking for, but I think in your second paragraph you ventured into another area of discussion.
Are you implying that without a national debt there would be no inflation? If so, wouldn't the benefit of no inflation be nullified by the appearance of spiraling deflation as liquidity is inevitably reduced?
Goldman Sachs set up the Inter Continental Exchange (ICE) back in 2000, which is an exchange with no limits on the commodities contacts like those that were governed by the Chicago Mercantile Exchange.
This is absolutely the main reason that why you and I pay more at the pump.
Here's an example: In 2008, worldwide oil demand had actually shrunk that year by 5% while oil rose from $30 a barrel to $147. Lehman Bros, Merryl Lynch, Bear Stearns, and every other investment house was making so much money that they bought up stacks and stacks of oil contracts that they were just sitting on their desks while you and I struggled to pay nearly $5 a gallon gas. Remember burn baby burn? When the stock market crashed they had to liquidate these positions at huge losses and the price crashed right back down to $30. Now the same exact thing is happening to us again!
President Obama and the CFTC absolutely have the power and could bring oil right back down by putting contract limits on the speculators.
http://finance.yahoo.com/news/insight-wall-street-fed-face-182249160.html
The Fed giving QE to these sociopathic 1%er's funds this highly profitable speculation which is much better than loaning out money at 4% for 30 yrs for buying a home or going to college. They can make this level of profit in days or weeks. The best part of this deal for the banks is that if they screw up in the commodities market they get bailed out because they are "too big to fail".