In his column today, Spengler says the economic misery upon us is not due to peak oil or to oil and commodities speculators. Rather, it's a rational response of investors who have lost confidence in the US dollar, which is to say in the US's ability to manage itself out of this crisis. Excerpt:
The oil price has doubled in the past year because the US Federal Reserve panicked over risks to the over-leveraged financial system and flooded markets with excess liquidity. The world is willing to pay arbitrarily high prices to hedge against inflation, but the cost of inflation hedges drags down the world economy. Last week's spike in commodity prices and swoon in global stock markets points the way to a deep and prolonged fall in economic activity.Breaking out of the death spiral still is possible. With mixed emotions, I propose a simple solution. In fact, a crash would not be an altogether bad thing for the United States. At least it would exorcise the something-for-nothing culture of the past two decades.
Spengler goes on to say that we got out of this mess the last time by severe economic pain delivered by Paul Volcker's Fed, which broke the back of inflation, and by the Reagan tax cuts. We have fewer tools today with which to address the crisis, Spengler says. Interestingly, the columnist appears to endorse Mike Huckabee's "fair tax" as a spur to get Americans to save more, and put their personal economic houses in order.
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I agree with Bruce.
The trouble with Spengler's article is in its simplistic construction: "The problem isn't X, it's Y." It seems to me that almost every article about the oil crisis is in this form.
The reality is likely much more complicated. "X and Y are both separate problems leading to a single consequence," or "X is only a problem because of Y," or "X and Y are mutually aggravating problems," or any of a number of other possible complex relationships.
For some reason, we're conditioned to try to find the root cause, even when there might easily be more than one. Every new identified cause does not disprove the last one.
Rod, why do you keep quoting Spengler? I can't remember anything he's been right about for quite a while.
Regarding his current topic, that the rising price of oil is an artifact of the falling dollar: the fact is that the dollar has dropped about 60% compared to other currencies, while the price of oil has more than tripled. Doesn't he know about this disparity, or is he just ignoring it?
If I'm reading Spengler right, I don't think he's saying that "falling dollar = higher oil price". Rather, he's saying that a loose monetary policy on the part of the Fed is leading to _both_ a decline in the dollar, _and_ rising commodity prices (as loose monetary policy causes investors to seek inflation hedges via commodities speculation)(*). Both are defensible positions, AFAIK.
One quibble about his economic history. IIRC, a major cause of oil price declines in the '80s was lack of production discipline among OPEC members. The advent of alternate supplies of oil, and some degree of conservation, also helped.
I do like the idea of indexing capital gains tax to inflation.
(*) Re. interest rates & commodity prices, see here: ksghome.harvard.edu/~jfrankel/CP.htm
I don't think Spengler endorses the FAIR tax, he only states the fact that any good government should tax consumption, not savings and investment. What form it takes is a separate debate.
Spengler may be wrong on oil and the dollar though. Right now we are deflating, not inflating. The dollar will go up and everything priced in dollars, (except maybe gold depending on how bad the economy gets), will go down.
I draw your attention to the linked C-Span program.
It is a hearing by the House Energy & Commerce subcommittee. The four panel members are all investment industry leaders. Their testimony begins around 45 minutes into the video.
While they disagree on some details, they all agreed on some basics:
1) Oil commodity speculation has a significant impact on the US economy, in particular by speculators who have no intention of taking delivery of the oil the "purchase".
2) The margin limit for equities and bonds is 50% (if you don't know what margin is, look it up right now). Oil commodities are being purchased with a 5% margin right now. That must stop.
3) The short-term effect on consumer prices can be significant if the government acts to replace commodity profits with controls on prices. Oil supply is not the only pressure on prices, but commodity speculators have a significant impact on supply.
The above is how I understood it, watching the taped testimony on C-Span on Sunday.
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