Wednesday, April 30, 2008

MSM finally catches up

NEW YORK ( -- Crude oil prices and the value of the dollar have been marching in different directions for months. But that may shift if the Federal Reserve signals on Wednesday that its rate-cutting campaign has come to a close.

One factor that has sent the dollar down and oil up recently has been the Federal Reserve's months-long round of rate cuts. In an attempt to stimulate the ailing U.S. economy, the central bank has cut rates by three percentage points since September. But the rate cuts are also inflationary, weakening the dollar and sending oil prices higher.

Aww gee thanks MSM for coming to the party. This has been going on for a year or more and finally the brilliant minds in the MSM figure out what happened. Which has me really confused because CNN also had a story not too long ago on how 45% of the people thought Bush was deliberately controlling oil prices to help his EVIL OIL buddies. Come on CNN pick a side here. Both arguments can't be the cause of high oil. I know this phrase I am about to use may be a little above your pay grade understanding of things, yet the two arguments are mutually exclusive.

Anyway they go on to say that if Benny B "pauses" in his zest to annihilate the $US, oil another commodities will drop. I'm on the same page there and have put a little of my money where my mouth is. I sold my GLD a little early when gold was $900ish. Didn't ride it all the way up, but I'm happy I sold when I did. Now I have been buying up some puts on USO. I don't see oil going back to $50 any time soon. I do think $120 is just so out of whack with fundamentals it has to go down somewhat. Even with the devaluation of the dollar, China, India, etc, this price run-up is still partially due to speculation and that portion of it has to collapse sooner or later.
Plus with the recession here, it just makes no sense for oil to keep on climbing in 2008.


Zach said...

One of my problems with the MSM is that they blame everything on US policies. Have they ever heard of supply and demand? When you have a billion Chinese, a billion Indians and another billion in Brazil and other developing countries raising their incomes and demanding energy, then the price rises! It's as simple as that. The US government doesn't have nearly the control over oil prices that everyone would like to think.

On the devaluing of the currency, low interest rates certainly cause the currency to depreciate and the price of oil to Americans to increase. I'm not convinced that it's such a bad thing. Low interest rates encourage investment, which is the key to long run growth. In a country with essentially 0% savings, any encouragement is a good thing. The weaker dollar helps exporters and reduces our trade deficit. These are good things. Not only that, but high gas prices encourage us to make smarter driving decisions, including purchasing more fuel-efficient cars. These are not bad things. The MSM seems to think that, because of its name, a weak dollar is a bad thing. It has a lot of benefits.

Ed said...


I agree that a low dollar has some benefits. But long term, a weak currency makes a country poor. I don't think you can find any example of a country that has devalued its currency and prospered. Germany in the 20s. Japan in the 90s. Zimbabwe today.

And I also agree that supply and demand ultimately determines price. However oil is up 1000% over the past 10 years. Demand has certainly increased worldwide, but not anywhere near 1000%.

Zach said...


In the long run, the relationship between currency valuation and prosperity depends on your relative taste of imported versus domestic goods. If you have a taste for imported goods then yes, you will be poorer with a weak currency. However, is this 5-or-so-year trend of a falling dollar long-term? I don't know if it is or not.

I think most everyone would argue that China is prospering. They've purposely devalued their currency for years. While I don't think this is sustainable, it's certainly helped them in the short term.

I also agree that demand is not 1000% higher than 10 years ago. That 1000% price increase you're talking about is in US dollars I assume. Yes, some of that is attributed to declining purchasing power of the dollar. But, as I argued in my last post, this is not necessarily a bad thing in the case of gasoline. Part of the demand increase can be attributed to speculative demand. When you combine increases in actual consumption demand with speculative demand, that growth makes much more sense.

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