Benson's Economic &
Market Trends
Oiling the Wheels of Inflation
Richard Benson
Archives
August 26, 2004
It's time for a paradigm shift. Just when the consensus view
has begun to focus on the buying of United States' Treasuries
by Asia to finance our country's trade and budget deficits (to
hold their currencies down), the price of oil pops up. The financial
markets are now left to try and sort out what it all means and
many economists are lowering their forecasts for the United States
and world economic growth.
We agree that in the very short run, rising oil prices act like
a tax by allowing dollars to pile up as Saudi holdings of US
Treasury securities. However, it is naive to stop there when
it comes to economic consequences. If we trace the cycle of cash
and the response by central banks, in a short period of time
the world could see an increase in world spending and higher
general inflation, with an increased likelihood of major currency
realignment.
The problem for world economic order has been the Asian propensity
to save. Instead of spending the dollars we give them, they sit
tight on the cash and allow the funds to pile up as investments
in US Treasuries. To a large extent, if oil prices remain high,
this problem will go away.
If you look at countries that produce oil such as Mexico, Nigeria,
Venezuela, Iraq, Iran and Indonesia, you'll realize they will
want to spend every last oil dollar that comes in. Moreover,
even the Saudis and small Gulf States have a propensity to spend
(the motto of the 3000 Saudi princes should be "there is
no amount of money that can't be pissed away"). Sure, in
the short run, Russia and the Gulf oil producers will buy more
of our Treasuries; however, they will gear up their spending.
The big immediate change is the trade balance for Asia, particularly
China and Japan, which are massive importers of oil. If you think
it's expensive to fill up at the gas pump in our country, think
about China. Asia will be spending a lot more of their dollars
on oil and a lot more of the cash will go to a country that immediately
spends it. This will result in less excess dollars to buy US
Treasury debt because cash will be needed to buy oil today. Countries
holding US Treasury debt may begin to realize it would have been
wiser to buy something other than dollar assets as a store of
value now that the price of oil can go over $40 a barrel. Just
a short time ago, when other countries were buying our Treasuries
with their hard-earned dollars, they were counting on buying
a barrel of oil for $25 - $30.
When it comes to inflation, rising oil and gas prices will absolutely
be a factor. Unlike housing and stock prices, energy counts in
the CPI. At the same time, while rising oil prices feel like
a tax to those who pay it, higher oil prices increase the incomes
of countries with many needs, and their newly found cash will
support higher spending. This new spending, in turn, supports
rising prices. The trick for the central banks is to stay accommodative
so those paying the oil tax, like American homeowners, can still
borrow against their homes. We have seen this play before - it's
known as stagflation.
We expect that the Federal Reserve and other central banks will
be accommodative a few more months and only act to rein inflation
in long after the inflationary process is well ingrained. Indeed,
rising oil prices will give the Federal Reserve "cover"
to run the inflationary policies necessary to start inflating
away the massive public and private debts that have built up
and can never be paid back with real value.
When it comes to currency values, think about our Asian friends.
America causes the Asians much grief because they buy Treasuries
and don't want their currencies to appreciate. With the price
of oil up big in dollar terms, isn't this a perfect excuse for
China and Japan to lead Asia to revalue their currencies so they
don't have to pay the higher oil prices? In addition, if Russia
and other oil producers are buying more from the Europeans, the
Europeans can't complain if the Euro goes up against the dollar
because at least their cost of oil is held down!
When the Presidential election is over in November, wouldn't
it be nice if all those goods at Wal-Mart made in China were
marked up 20 percent for the Holidays? A major currency realignment
will help to raise inflation for just about all goods and services
in America.
Think about it. With higher oil prices, an accommodative Fed,
and world-wide currency realignment, the Federal Reserve can
seriously "oil the wheels of inflation." Finally, Alan
Greenspan can bury the threat of deflation and get back to a
central banker's usual job of fighting serious inflation fires.
Finally, if you would like to know who's actually going to pay
for the higher cost of oil and a lower value of the dollar, just
look in the mirror.
August 25, 2004
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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