Friday, May 30, 2008

The Oil Problem, Part II

Excellent article by J. R. Nyquist posted over at Financialsense.com (a couple of snippets below)

The Oil Problem, Part II

It may be argued that Federal Reserve policy is responsible for a commodity bubble, just as Fed policy previously sparked bubbles in the stock market and real estate. Perhaps we are approaching the hour in which there are no safe havens because every haven has, in turn, been “bubbled.” Is the civilized world about to suffer the greatest, most total “correction” in economic history? As our civilization has lost its sense of reality, its taste for truth, recent economic growth may have been more fictional than real. We think there is money in our pension funds. We imagine that our homes are worth twice their previous value. We believe our stocks and bonds are worth holding onto. But thinking, imagining and believing in wealth doesn’t make it real. Perhaps we are on the brink of the greatest revaluation of economic values in all history. And it’s all connected to oil.

Consider the fate of the dollar: If the dollar is doomed, what will replace it? Perhaps the new global currency is the hydrogen bomb. As the free world is shaken the dictators arise. In their world power isn’t measured in dollars. It is measured in missiles, bombs and guns. Someone recently suggested that the Fed won’t exist in a decade. Perhaps the Fed won’t next year. If oil prices continue to rise, if the recession worsens, if the red flags indicating defaults on car loans, housing loans and credit cards plays out: we will be living in a different world come January 2009.

How quickly we have forgotten, and how quickly we congratulated ourselves at getting out from under the stock market debacle of 2000 and the financial hit of 9/11. What we managed, I suspect, was a postponement. More recently the Fed spent half a trillion in support of teetering financial institutions; and American citizens are losing billions more in higher gasoline prices. To avoid catastrophe we have weakened our currency. And now we’re at the end of the tether.

The addiction to easy money comes to grief, as all addictions do. Yet there’s been no panic, no crash, no Great Depression. Instead, a giant pillow has been applied to the financial sector, smothering the gasping victim quietly. We cannot let the air out of the Great Bubble. We forget that one must exhale as well as inhale. And so we continue to suffocate. The dollar will continue to fall and oil will continue to rise.

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