Tuesday, March 18, 2008

Tuesday of Holy Week-Economic reality

By now we know that Bill Hobbs' optimistic view of the economy was just that-overly optimistic, and it isn't talking down in the least to say that the economy is down the toilet:

The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. By every available indicator, investors are fleeing the dollar for other currencies and such traditional safe havens as gold and commodities. Oil has surged to $110 a barrel, up from under $70 as recently as September. Gold is above $1,000 an ounce, up from $700 in September, and food prices are soaring across the board. The euro has hit record heights against the buck, and for the first time the dollar has fallen below the level of the Swiss franc.

Speculators are adding to this commodity boom, betting that the Fed has thrown price stability to the wind in order to ease U.S. housing and credit woes. The problem is that dollar weakness is making both of these problems worse.

No doubt strong world growth explains part of the commodity price rise this decade. But the dollar price of oil has surged by some 60% since September, even as U.S. growth has slowed sharply. If the dollar had merely retained its value against the euro, oil would be in the neighborhood of $70 a barrel. Dollar weakness explains a large part of the oil price surge.

The truth is that, as ever, the fate of the dollar is in our own hands. Inflation is always a monetary phenomenon, determined by the supply and demand for a currency. The supply of dollars is controlled by a monopoly known as the Federal Reserve, and at any moment the Fed can produce more or fewer dollars. The Fed can also influence the demand for dollars by maintaining a commitment to price stability, or it can reduce that global demand by squandering its anti-inflation credibility the way it is now.

While it is true that the Bush Administration could help speed the economy along by increasing its own rhetoric in favor of a strong dollar (right now the Administration is giving the opposite impression), the Federal Reserve is not helping matters by giving global investors and currency traders no confidence in American price stability. The Wall Street Journal is also right to point out something that the average American is probably not aware of: The global price of oil is measured in U.S. dollars. That means that if the dollar is weak and is suffering from an inflationary trend-as it is now-the price of oil will increase as the value of the dollar decreases. Oil is trading at around $110 a barrel, so what does that say about the current value of the dollar on the world market? As oil prices (pegged to the value of the dollar) increase, so do the prices of gasoline and diesel fuel, and with them the price of everything we eat, drink, and wear.

The Democrats are proceeding to engage in the same tired politics and blame the Republicans for the entire problem. While there is little doubt that the present economic situation certainly favors the Democrats in the fall, we should remind ourselves that if a Democrat were in the White House, Republicans would be playing these political games with the economy as well. The hard fact is that both sides are somewhat to blame and banks, investment firms, and even consumers all bear part of the responsibility for the current crisis. The spiral really began in the 1990's when banks and credit firms began to make loans to people who weren't good for the money-and a lot of these firms were very much aware of that risk. Consumers acted irresponsibly in spending money they did not have, thereby taking on too much debt. The Democratic solution is always to raise taxes on someone, but in this present climate "blame the rich" can only go so far. Raising taxes on anyone will not solve the present crisis, but stabilizing the dollar will go a long way toward that end. The Fed should remember that reality, and so should all of our presidential candidates.

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