Rising gas prices are beginning to “shock” American consumers. In response, America is left wondering “why,” and the media generates all sorts of answers, few of which - Peggy Noonan notwithstanding - are true. The chart below shows what has happened in the past 36 months, roughly the period since Obama has been in office:
While factors such as the geopolitics of Iran’s oil embargo, Obama’s banning of the Keystone Pipeline, and oil speculation are effecting the price, but these reasons are not totally to blame. The truth is, the price of oil has been climbing steadily for more than a decade now, although supply and demand have been relatively constant.
What we are witnessing is the decline of fiat currency, and this is having a direct effect on the price of oil. In this post, I will try to show why, using a deluge of charts. The price of oil is increasing as denominated by paper currency, like the Euro and the USD. Denominated by gold, the price has stayed constant. Below shows the how oil has trended in Euros, Dollars, and gold; if you remember any of these charts, this should be it:
The sharp increase in the money supply through Treasury Bond sales is the primary driver for both oil and gold prices. Inflation of prices occurs due to dilution of the currency:
Oil and gold are commodities treated like currency, because they have inherent value that fiat currency does not. Over a longer term, commodities are more of a “money” than fiat currencies are.
Increasing the monetary supply is achieved by the issuance and repurchase of bonds. Bonds are treated like assets on either side of the transaction; what is really a liability is treated as an asset on balance sheets:
Monetizing our debt is no recent phenomenon, but the measures the Federal Reserve has gone to in order to keep interest rates low are historic. Low interest rates have not spurred economic growth; in this regard, do not confuse “market” with “economy.” In real terms (as opposed to nominal), interest rates in the US are negative, as rates of return are not keeping up with inflation. These low interest rates discourage saving and encourage spending, at both the individual and government levels, thereby enabling debt accumulation:
Another historic Fed policy is the record purchase of assets - including Treasury Bonds - known as Quantitative Easing. As I noted last month, through QE1 and QE2) the Federal Reserve has surpassed China as the largest holder of US debt. We are now our now both lender and debtor to ourselves. As the maturation of these bonds would flood the market with money and dilute the USD faster, the Fed began a policy of extending the maturation dates of these Treasury Bonds with purchases of new Treasury Bonds. This enabled a faster pace of debt financing: the Federal Reserve has purchased 91% of 20 and 30-year Treasury Bonds at auction since Operation Twist began in September:
China is, for the most part, out of the US Treasury Bond market as of December:
China is, however, buying gold:
So what happened in December? To “help” with the European debt crisis the Federal Reserve guaranteed “unlimited” currency swaps to other world central banks, most notably the ECB. While we issue cash to Europe, we enable them to increase debt issuance by financing its insolvent member nations. Therefore, global debt has increased exponentially in efforts to right the very world economies fiat currency has destroyed. Inflation is being hidden on the world’s central banks’ balance sheets in a Bond Bubble, which will pop at maturation.
The Fed is not alone: nearly $7 trillion has been pumped by global central banks into the world stock markets just in the past 4 years. The aggregate global central bank balance sheet has doubled in four years, after doubling in the 5 years before that. The central banks have injected $2 trillion in the past four months alone.
As long as this continues, fiat currency will continue its decline.
Commodities like oil and gold don’t behave like fiat currency, as they have inherent value. As this is hard to explain to the average America consumer, blaming Iran, Keystone, or speculation is the easy way out. War with Iran, however, won’t solve the problem; neither will building a pipeline, or banning speculation. As long as debt is monetized to compensate for overspending, and more debt is created (whether through bailouts, stimulus, or bond issuance) to alleviate the effects of inflation created by overspending, this will continue, as more debt cannot solve the debt problem.
Today, the US Dollar suffered its biggest drop in a month. The upward trend in the price of oil will continue until the world’s monetary rules are rewritten after global fiat currency spirals out of control – as history shows it always does. This is my greatest fear, as hyperinflation is usually followed by confusion, chaos, revolution, and war… Which is why our mistakes with Iran may not be mistakes at all.
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