Hello, I was discussing with someone that the rise in oil costs is due from increases in the money supply. They shot back that oil speculation is raising the cost of oil, and that higher oil prices are the factor behind the general rise in prices throughout the economy. What is the economic rationale behind this arguement? Also, I asked them about the higher prices in the past few years and they didn’t really have an answer for that one. Thanks
The increase in the price of oil is the result of inflation, not the cause of it. It’s interesting that when inflation sets in, corporations, ‘evil speculators’, immigrants, foreign governments, et cetera are the typical scapegoats.
Speculators cannot indefinitely inflate or depress the price of something. If you are speculating in an attempt to prop up the price above equillibrium, then i need only short my position and wait for my windfall of cash when the price corrects. If speculation worked over the long run then it would only require a sufficiently large pile of money to corner each market (mr buffett anyone?). If you watch Nixon’s speech in 1971 http://www.youtube.com/watch?v=iRzr1QU6K1o ,when he announced that he was taking the US off the gold standard, he blames speculators as the root of the problem. The problem wasn’t the market adjusting the price of gold to reflect the number of dollars in circulation, the problem was the US federal government printing too many dollars to support gold at the fixed exchange rate.
Today the inflation rate in Zimbabwe is estimated at somewhere between 150,000 and 200,000% per annum. The only way prices can increase at that rate is for government to print money. The government recently introduced their new 50,000,000 dollar note. In an attempt to combat inflation they have outlawed ‘hoarding’ of money, exchanging zimbabwean dollars for foreign currency, instituted price controls, and siezed businesses that closed their doors rather than lose money at the government dictated prices. The government has completely wrecked their economy. Zimbabwe now has the lowest life expectancy of any nation on the planet (37/34), unenployment of 80%, and the highest inflation rate anywhere. Government and government alone created these problems by printing too many bank notes.
Yet the government there doesn’t accept any blame for the problems. If you read the official government statements the causes of inflation are labor unions, greedy businesses, “evil” speculators, and foreign governments. Central planners are experts at song and dance routines.
Here in the US the price of oil has more than quadrupled since Bush entered office in january 2001. If you price oil not in USD but in gold, however, the price is barely changed in that same 7-year span. With the price of oil, and gasoline, and food, and gold, and housing, and medicine, and education, et cetera increasing rapidly politicians here in the US increasingly scapegoat greedy corporations, speculators, mexican immigrants, and foreign governments for the problems. Do you see a pattern here?
Members of congress are talking about ‘unfair, windfall’ profits of oil companies, ‘speculation’ in the housing market, ‘open’ borders, and ‘manipulation’ by opec nations as the causes of our increasing prices. They are scapegoats. The cause of widespread increase in prices in the US (including oil) is from a marked and sustained increase in the US money supply.
Again, to be crystal clear rapidly increasing oil prices (as measured in US dollars) is the effect and not the cause of inflation. An increase in the money supply is the culprit, the increase in the price of a barrel of oil is the result of federal government action.
Does this mean that the price of oil would be static without the government printing presses running overtime? Of course not. We have a fixed supply of oil on the planet, and an increasing demand from an growing population and industrialization around the world. WIth a fixed supply and an increasing demand we would expect the price to rise over the long run. Demand, however, hasn’t increased enough in the past 7 years such that the price of oil is four times more expensive than it was in 2001. Nearly all of the price increase in oil isn’t from the increase in the cost of oil, but from the decreased value of the dollar.
I hope that helps.
don
The prices in everything has risen recently due to inflation.
Eggs, for example, have jumped in price by 40%, partially due to inflation. Gas prices would be lower w/o gas taxes and increased demand in China and India, but inflation is still the MAJOR contributing factor here.
Following on from what donmc and Krazy Kaju say, I think it is worth stressing that governments have given themselves a 100% monopoly on the issuing of currencies in their economies and that they are therefore the sole cause of inflation.
It is also worth asking who the main beneficiary of inflation is, big debtors and governments in particular; who has most to benefit from the public thinking inflation is low when it is high, governments again; and who is trusted with producing the statistics showing the level of inflation in an economy, government once again.