Demand Destruction Stops at
Jul 11, 2008
As the price of oil reverses
course again and closes in on the unheard of price of $150 per
barrel, Americans are finally responding to the pressure and
have cut back on gasoline consumption. According to a report
this week, Americans used 3.3% less gasoline than at the same
time last year and usage now stands at a five-year low. Although
the relative merits of slowing energy consumption is a subject
upon which reasonable minds can disagree, the drop is nonetheless
an extremely rare event in American economic history. Many on
Wall Street are cheering the possibility that further "demand
destruction" will ultimately lead to significantly lower
oil prices. After all, this is basic economics. Prices are a
function of supply and demand, and as demand drops, prices must
follow. This is simple logic, wrongly applied.
What is missing from this analysis is that oil is a global commodity,
and its price is not simply a function of demand in America.
As demand is destroyed here, it is being created abroad. The
result will be rising oil prices, despite the fact that Americans
will be using much less.
In countries where currencies have risen against the dollar,
oil price rises have been much milder. Given the strengthening
economies overseas, and the slower price increases in those markets,
foreign demand continues to rise, just as higher U.S. dollar
prices cause it to fall here. In addition, central banks in nations
where currencies are pegged are continuing to print huge quantities
of money. This huge monetary stimulus is feeding oil demand,
as foreign consumers use the new cash to buy gasoline.
In addition, as economic growth abroad far exceeds it here at
home, foreigners are using their increased wealth to buy more
automobiles. So while car sales are falling though the floor
in America, they are rising briskly around the world. Take a
look at what is happen in Russia, where booming car sales have
resulted in Russia surpassing Germany as Europe's largest automobile
market. We are talking about the former Soviet Union, where not
too long ago many comrades still traveled in mule-drawn buggies.
So as poor Americans drive fewer miles, wealthier Russians more
than make up the difference.
Here lies the source of our problems. When the dollar was king,
demand here was strong. American consumers, armed with the mighty
greenback, flexed their muscle and priced foreign consumers out
of the market. Now that the dollar is a 98 pound weakling, foreign
consumers are returning the favor, and are kicking sand in our
faces. So as more goods and resources are consumed abroad, Americans
will be forced to consume less. Demand creation abroad leads
to demand destruction at home.
More importantly, demand destruction in America will not be limited
to gasoline, but will encompass a wide variety of resources and
consumer goods, as strong demand abroad prices more Americans
out of more markets. In the end, America's gargantuan trade deficit
will return to surplus, not because of a highly overhyped export
boom, but of an import bust.
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
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Jul 11 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.