Comments on Soon to be lapping up on a shore near you… by Rex Caruthers

Should have found a way to put this on a different thread… though maybe while I’m out walking the dogs I’ll find a way to link this to ecologism…

I got a strong connection. OIL OIL OIL John Tamny and I are having a long distance love affair.

Oil Isn't 'Expensive', the Dollar Is Cheap
By John Tamny

{In his classic book, The Theory of Money and Credit, Austrian School economist Ludwig Von Mises plainly observed that "Whenever money is valued by anybody it is because he supposes it to have a certain purchasing power."} Von Mises's views on money loom large considering the nosebleed price of oil that American consumers continue to suffer.

Though it's well down from highs of $147/barrel that it reached in the summer of 2008, that the price of a barrel of oil still trades in the $79 range is a certain signal that something is amiss.

{Perhaps unaware of the dollar's undefined, floating nature, commentators continue to point to the oil price to support their suggestions of foul play on the part OPEC, too much global demand for what is allegedly a limited commodity, or greedy "speculators" keeping the price of the world's fuel at abnormally high prices. Influential newsman Bill O'Reilly frequently fingers speculators when attempting to explain the price of oil to his viewers.}

{In each instance commentators mistake the symptom of expensive oil for its true cause. Von Mises frequently touched on money values in his brilliant expositions on markets, and it's because the dollar has no true value or fixed definition that oil is presently expensive. In short, oil is dear because the dollar in which it's priced is cheap.}

For background, it's worth mentioning that not long after he was inaugurated as our 40th president, Ronald Reagan predicted a fall in the price of a barrel of oil. What made Reagan so confident?

{Aware of the historical relationship between gold and oil,} Reagan deduced that oil was due for a correction based on a 20% drop in the price of an ounce of gold since his election. Sure enough, by December of 1981 the price of a barrel of oil was nearly 20% lower than it had been one year before.

(Looked at over a longer timeframe, from 1970 to 1981 the price of gold rose 1,219 percent, versus a rise in the price of oil 1,291 percent.) (This wasn't coincidental. With gold and oil both priced in dollars, and with gold serving as the best proxy for the latter's value, a jump in the gold price neatly foretold the oil "shocks" of the 1970s that were merely dollar shocks.)

{Given the strong price correlation between the two commodities, many economics writers took to explaining the gold/oil relationship in terms of a 15/1 ounce/barrel ratio. As the late Warren Brookes wrote in his 1982 book, The Economy In Mind, "In 1970 an ounce of gold ($35) would buy 15 barrels OPEC oil ($2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl).}

More modernly, in March of 1999 The Economist predicted $5/bbl oil in the future because "the world is awash with the stuff, and it is likely to remain so." Instead, with the gold/oil ratio of roughly 25/1 historically out of whack, crude proceeded to rally beyond the 15/1 ratio; reaching $24/bbl by September of 2001.

Considering oil's aforementioned spike to $147/barrel in 2008, an ounce of gold then only bought 6.8 barrels of oil. What this meant at the time was that oil was due for a major correction as its price fell back to historical ratios. In that sense, oil's collapse from nearly two years ago was less a function of reduced global demand and allegedly "benevolent" speculators, and largely a function of it returning to its normal relationship with the gold price.

{Right now gold trades in the $1176 range, and the price of oil is roughly $79 per barrel. That an ounce of gold buys 15 barrels of oil signals yet again that the real price of oil has hardly changed at all over the last 10 years of allegedly costly crude. Still, $79 oil ensures $3/gallon gasoline as far as the eye can see, and it's a fair bet that the price will stay there so long as gold continues to test all-time highs.}

The good news, however, is that this can be fixed. As evidenced by the dollar's major decline versus gold this decade, the dollar is very cheap. The dollar's debased nature explains expensive spot oil prices, high prices at the pump, and most important of all, it helps explain a difficult job outlook. {With so much soggy money flowing into commodities least vulnerable to dollar weakness, the entrepreneurial economy where most jobs are created is losing out.}

{So the answer is really quite simple. If we want cheaper gasoline, we need the U.S. Treasury to target a stronger dollar, and for it to even threaten intervention if markets unexpectedly fail to comply. If a $500 gold price is targeted as so many gold-watchers would prefer, the stronger dollar will sooner rather than later reveal itself in greatly reduced oil prices; roughly $33/barrel if historical gold/oil ratios once again prevail.}
For now though, it's a waste of time to bemoan what many deem "expensive oil." Time is wasted because there's no such thing as expensive oil, and there never has been. {Instead, we have a problem of Americans supposing that the dollar is fixed in value, when in fact the dollar floats.}

{Oil hasn't become expensive this decade; rather the dollar has become very cheap. Strengthen the dollar, and worries over nosebleed gasoline prices will quickly become a thing of the past. Absent that, to hope that something will become inexpensive when the unit of account in which it's priced continues to fall is to indulge in fantasy.}
John Tamny is editor of RealClearMarkets, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.
http://www.realclearmarkets.com/articles/2010/05/06/oil_isnt_expensive_the_dollar_is_cheap_98450.html

the Federal Reserve system was structured to serve two related purposes

CK,you omitted currency stability and predictability.

What I’m suggesting, Rex, is that this fulcrum of your “obsession” may run very deep – much deeper than the gold standard per se – which may be why it’s so intractable.

I have told you,I got my teeth into these issues quite a while ago. I also remembered my lessons from what was then called a Liberal Education,now it would be called a Classical Education,The unexamined Life,Appearance vs Reality,the nature of Hybris,tragedy,comedy,eros etc etc,including a reverence for learning and the learned,somehow I can't shake the hold these forces from antiquity have on me,anyway, we have,in my opinion,been handed a grand illusion about our money,which does run deep,and we need a Don Quixote to spar with that windmill;and yours truly is the Sancho Panza of this drama.

broaches the subject of the carry trade, and most of the other stuff you obsess
on

It's a lonely and dangerous obsession leading to madness.

He doesn’t really believe in the system, anymore

If you're referring to our economic system,who does? Here's a remark dear to my heart:

"Think for a moment about what goes into a typical CDO. Start with a thousand different individual loans, be they commercial mortgages, residential mortgages, auto loans, credit card receivables, small business loans, student loans, or corporate loans. Package them together into an asset-backed security (ABS). Take that ABS and combine it with 99 other ABSs so that you have 100 of them. That’s your CDO. Now take that CDO and combine it with another 99 different CDOs, each of which has its own unique mix of ABSs and underlying assets. Do the maths: in theory, the purchaser of this CDO is supposed to somehow get a handle on the health of 10m underlying loans. Is that going to happen? Of course not." AND

"The nature of a fiat,debt-based money managed by a fractional-reserve banking cartel is inherently fraudulent. Fiduciary media created out of nothing but promissory notes is not real money! Real money is commodity money, gold or silver preferably, and loans have to be made only from prior savings of such money, not ex nihilo according to the whims of bankers legally empowered to turn us into indentured servants to a privileged financial class. The interest rates on such loans have to be hammered out in a true free market in capital, something we have not had since 1913 with the passage of the Federal Reserve (a prime example of a regulation gone astray"

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7675641/Nouriel-Roubini-forget-sub-prime-mortgages.-Its-the-sub-prime-financial-system-we-need-to-fix.html

"flaws in the conservative approach"

Speaking of flaws in the "Conservative Approach,does the Conservative approach include bailing out the Fed at the expense of the taxpayer? This won't make it to the Glen Beck show,but it smacks of Socialism considering the nature of the "Ownership" of the Fed.

"--- the American Enterprise Institute, is helping the Federal Reserve to develop a strategy to transfer $1.25 trillion in toxic mortgage-backed securities (MBS) and non performing loans onto the public's balance sheet. Although it's unknown whether Fed chair Ben Bernanke will act on the AEI's recommendations, it does show that the Fed's Quantitative Easing program (QE)--which moved the bulk of garbage assets from the banks to the Fed's balance sheet--poses long-term problems that will need to be addressed. Bernanke never intended to keep these assets any longer than necessary. Now he is actively exploring options for getting rid of them."
http://www.counterpunch.org/whitney05042010.html

bob wrote:
@Rex

Sure, but the “regulators” are more geared by their natural tendancy to “fix” everything,to “fix” a disaster.
The point I’m pursuing, is that these regulators are in fact the embodied expression of the people’s desire to remedy a problem.

I'm the choir

In truth, aren’t we all?

Sure, but the "regulators" are more geared by their natural tendancy to "fix" everything,to "fix" a disaster.

But I wonder if it is what CK is talking about in the above quote.

I know CK's thinking fairly well;I believe he's talking about Deniability in the PR sense. Sucessful Republicans like W and Reagan projected a sense that all the bases are covered whether it's called compassionate Conservatism or "take down that wall" In truth,they are fairly helpless when things go wrong. Reagan's instincts were excellent,however,in the case of the attack in Beirut. He pulled out,smart man. And Obama is our CIC in Afghanistan,a "Nation" that sucks in the armies of various empires to play with. Even Jed Babbin is selling this war Short.
http://www.realclearpolitics.com/articles/2010/05/04/are_we_losing_in_afghanistan_105426.html

BTW,BP's total liability under American law is capped at $75M.

BTW, Rex, do you have a link to the “Cheney’s fault” thing?

I heard it on an NPR interview.

Enviromental whako terrorists did it,ask Rush. OR Maybe OBL was behind it. Or Iran.