Part 2 – Why the Bush Presidency is one of the Worst in History – Economics

I hit the argument for Tax Cuts pretty hard when I wrote about it here. However, I did not mention one of the classic problems with the Supply Side Economic model when I addressed it. When the government fails to take in enough revenue to cover expenses, it creates a deficit. This is economics 101. When this occurs long enough over time, it causes inflationary conditions to develop, and it devalues the currency against the world market. Let’s start this part of the discussion with the cost of oil.
Is it just me, or is it odd that the price of oil has spiked from $28.00 a barrel in 2001 to $88.49 in 2007? How about the fact that the 50 year trend in oil pricing prior to 2001 saw the median for oil at less than $24.00 per barrel with the exception of times when conflicts around the Middle East were occurring, yet it is projected to potentially go as high as $110.00 a barrel within the next year? You can find an analysis of the past 100 years worth of oil sales and figures here. The most common justifications that has been given for the increase in oil price are that a)more countries are consuming it (i.e. China and India), b) the market is just catching up for 30 years worth of inflation, and that the cost of oil is really low considering what was paid for it in 1980 and c) the weak US dollar is driving oil prices up, which means that the commodity in the world market is right where it is supposed to be.
Sorry, not buying it.
Can you honestly tell me that the chairmen of two oil companies, who just happen to be occupying the #1 and #2 political positions in this country, had absolutely no control whatsoever over the 300% increase in crude oil pricing over a 6 year period? Oil prices (and the corollary, gasoline prices) affect just about every aspect of the economy. The cost of gas is figured into everything from freight bills to school district budgets. Oil prices directly affect electricity and heating costs. Anyone paid any attention to the cost of milk recently? At the local grocery store, it will cost you approximately $3.50 for a gallon of milk. Contrast that with $1.40 in 2003. Why the rise? Increased costs for everything from cow feed to trucking to send the milk to market.
My point is that there are already inflationary storm clouds starting to form on the horizon. Do we really want to return to the economic model of the late 1970s, with 16% interest for a home mortgage and double-digit inflation? So how could the Bush administration prevent this from occurring? Simple. The National Strategic Oil Reserve currently holds 690 Million barrels of oil out of a possible 720 Million. In other words, it is currently holding over 95% of its capacity, which also happens to be the most it has ever held in history. OPEC affects the price of oil by setting price controls and then turning the tap on or off as appropriate to get oil to the level they want. Let’s take a page out of their book. If the President was to release 15% of the existing reserve (100 Million barrels) in a controlled manner over the next year to two years, it would probably have a huge dampening effect on the market, bringing the cost of oil back down to around $50 a barrel (if not lower). The argument could be made that this is a garden hose next to the OPEC fire hose. It doesn’t matter. The economic principles that drive the oil commodity market are keeping it artificially inflated. All it takes is puncturing the balloon for the prices to reset to where they should be. Will this administration even consider it? Probably not, because it is not in their political interests.
Let’s talk about the free-falling dollar against world economies. In February 2001, then Treasury Secretary O’Neill made the statement that “We are not pursuing, as often said, a policy of a strong dollar. In my opinion, a strong dollar is the result of a strong economy.” Federal Reserve Chairman Bernanke, when asked about it recently, made it clear that it is the role of the Department of the Treasury, and not the Fed, to control international currency valuation policy. Since 2001, this administration has given lip-service to supporting a “strong dollar,” but always with the caveat that market conditions would set the price. In other words, where the dollar falls is where the dollar falls. This is the first time in history that the US has not used the Department of Treasury to ensure a strong dollar.
So where has it fallen? Let’s look at the Euro for a price comparison. In February 2002, $0.87 bought €1.00. If you wanted to buy a new BMW from the factory in Bavaria that cost €50,000.00 it would set you back $43,500.00. In today’s world, the Euro just closed at an all time high against the dollar, where it costs $1.43 to buy €1.00. That same BMW at today’s conversion…$71,500.00. Pick a different currency? The Canadian Loonie reached parity with the US Dollar for the first time in over 30 years this month. In February 2002 $0.66 bought $1.00 of our northern Strange Brew cousin’s money (Cool, eh’). What does this mean for America? In the short term, it means that the US gets to act like a kid in the candy store. Our goods cost less in other countries, which means we sell more. Other countries goods cost more, which means we buy less. Our trade deficit lowers and American manufacturing makes a comeback. Everybody sings Kumbaya.
Not so fast.
Remember oil? We buy it from other countries. A lot of it. We also happen to buy a lot of other products we use in our day to day lives from foreign countries. Most of our fruit and produce this time of year comes from South and Central America. Electronics from Japan, China and South Korea. You get the picture, there is a reason it is called the “Global Economy.” In the long term, a devalued US dollar can cause long-term double digit inflation. There is no such thing as a free lunch. It is a lot like one of the scams you see advertised on TV. A company offers to give you a large lump sum as long as you sign away your monthly pension to them. They’ll give you $100,000.00 right now, as long as you give them your retirement check of a paltry $800.00 a month. Of course, this means that at the end of 10 years, they’ll continue to collect your pension for the rest of your life, a long time after you’ve spent the $100,000.00. If the math is confusing you, in 10 years at $800.00 a month, you would have earned $96,000.00 not including any compounding interest. For a short term gain, in the end you get royally screwed. In other words, the Bush administration has utilized a sledgehammer to attempt to dictate fine economic policy. And just like hitting a stained glass window with a sledgehammer, it’s hard to put the pieces back once you’re done.