Monday, March 12, 2012
Understanding why gas & everything else costs more
At a Congressional Hearing on higher gas prices back in late February, Energy Secretary Steven Chu was asked if the Administration had any interest in bringing down the price of gasoline. His response: No, the overall goal of the Obama administration is not to get prices down; the overall goal is "to decrease our dependency on oil."
In fact, prior to Obama's victory in 2008, Chu, a Nobel-winning physicist and director of the Lawrence Berkeley National Laboratory said, "somehow we have to figure out how to boost the price of gasoline to the levels in Europe"
Of course later that day, the Administration vehemently denied this was their position and Chu backtracked on such statements at another Congressional hearing that week.
Maybe that's why a recent Washington Post/ABC News poll showed that "59 percent of Americans give Obama negative ratings on the economy, up from early last month... 50 percent give him intensely low marks.."
But this posting is not about Obama's political intentions or what power (if any) he has to lower oil prices. Truth is, a President has little to no power to do anything short of tapping reserves or a temporary Federal tax 'holiday' on gas.
In fact what is causing the price of gas to go up is the Fed's devaluation of the US dollar. Yes, your friend and ours-- Bastard Ben Bernanke.
See, oil is sold worldwide in US dollars, called petro-dollars. So for instance when France or Japan buys oil, they don't use euros or yen. The money has to be converted to US dollars first, then that currency is given to the oil producing nations in exchange for their product.
Now when the Fed prints Trillions upon Trillions of freshly printed dollars into the global economy its done to prop up corporations, banks and the stock market to entice speculation. It helps corps expand their profits when exporting because the other currencies are artificially made stronger. And, its also done to devalue the debts owed to its creditors, namely China.
It also makes everything more expensive for US consumers and those using petro-dollars to acquire that oil.
The simplest way to explain the concept is to start by imagining each dollar not as paper currency but as a silver coin. It has a specific weight-- so let's say each dollar coin weighs 3oz. And let's say to buy 1 gallon of gasoline, you need $3 in coin, which equals 9oz in weight.
Prior to the advent of paper currency, governments would devalue their own currency by altering the physical nature of how the coinage was made. They'd put cheaper alloys to weaken the cost to produce and by extension, its value. We do this currently in the US by using 75% copper vs 25% nickle to make a 5-cent 'nickle', and pennies aren't made of copper, but of zinc.
So, let's say the silver dollar coins mentioned previously, are made of zinc, and what was once a 3oz coin, now weighs 2.25oz each, a devaluation in its weight by 25%... And you try to buy a gallon of gas with $3... so what happens? The business selling the oil doesn't care that each coin says $1. If they took your $3, they're getting 6.75oz of weight and why should they as merchant, take the loss?
They want 9oz of coin. So, that means you better add one more 2.25oz coin to make it 9oz.. and Ta Daaa!! The Fed devalued the currency by 25% and you now make up the difference by paying 25% more..
You're now paying $4 for gas that before you paid $3 for.
This concept works for everything- food, clothing, vehicles, insurance... This is why everything you buy is costing more today than 3years ago. Normally prices go up due to inflation with wages at least closely following. Now the inflation is artificially created by the Fed and their money creation is compounding things.
A strong dollar means you get more value and purchasing power for your money. It also means interest rates go up to levels where savers can get some kind of real return on savings, CDs and other safe investments.
Of course it would kill the banks because they're zombie to begin with and desperately need that half of one percent interest rate to borrow from the Fed to survive, so.. here we are.
When you see gas prices rising, while its easy to blame rat speculators on Wall St or Iran determined to have nuclear weapons to intimidate the Middle East, or simplified concepts like supply v demand (this places blame on you for having the audacity to own a car) ultimately the source of your financial pain is a quiet soft spoken man that most people could not identify if you showed his photo and offered $1,000 to correctly guess.
And its that deep ignorance of the Federal Reserve, who runs it and its purpose which is part of the reason we as a nation are in such a long-term mess.