July 11th, 2008 is a very important date in American history. It is the date that crude oil hit an all-time high of $147.27 a barrel. Nationally, gasoline topped $4 a gallon.
Suddenly, one no longer needed to be a tree hugger to drive a Prius. SUVs began disappearing from America’s highways. Where was it all going to end?
Housing prices had begun to fall across the board in 2008, but for most people the gasoline run-up was the first shake of the economic earthquake to come. For many, this was the first time the reality of broader economic issues had made their way into their otherwise-insulated worlds in a very long time. Suddenly the prospect of loading the kids up in the SUV and heading down to Disneyworld seemed less appealing. That’s to say nothing of the fact that one’s daily 50-mile commute suddenly increased in cost by 20 to 25 percent.
The run-up in oil prices had many causes. To be sure, some of it was momentum building on momentum in the markets. But the real issue was the fact that the dollar in 2008 had started to decline in value at a significantly above-average pace.
Why would this affect the price of oil? Because oil, like most commodities, is priced in dollars. As the dollar declines, the “price” of oil goes up.
We are told that supply issues, momentum issues and broader economic issues determine the price of oil. They often do in times of economic stability. But 2008 (really 2007) was the beginning of the end of stable economic times.
As the housing crisis began to take hold in the United States and around the world, the dollar looked increasingly unappealing. Dollar-denominated debt gave little return, which made the Greenback less attractive generally. As the dollar declined, oil, denominated in dollars, climbed into the stratosphere.
Of course, it came crashing back as the pressure of high oil prices helped push America into a recession. As the stock market melted down along with other markets around the world, there was a rush back to the dollar, as bad as it was, because it was the only perceived safe haven in the midst of calamity. The price of oil crashed as the dollar strengthened in the fall of 2008.
The dollar-crude “mirror effect” is exhibited by the comparison chart of the dollar index and crude oil prices in 2010 seen here. When the dollar goes up, oil goes down, and vice versa.
OK, so why are we again looking at the possibility of $4 (or higher) gasoline?
The Federal Reserve is now engaged in a money-printing policy, often called “quantitative easing.” What it means is that the Treasury is issuing debt, and because pretty much no one wants it, the Federal Reserve is buying up the debt itself. The Fed is creating money out of nothing to buy debt that is used to finance the American economy. This pushes more dollars into the world system and, in doing so, decreases the value of the dollars already in circulation.
With each passing day this QE policy reduces the value of Americans’ savings. It makes it more difficult for the poor (and everyone else) to buy food as oil is not the only commodity priced in dollars — corn, sugar, rice, etc. are also priced in dollars.
In other words, because the Fed is seeking to force inflation into the system (by weakening the dollar deliberately) to save a tenuous economic system built to benefit those who have first access to the newly printed money (the large banks), life for most people is likely to get more difficult in the short term.
The middle class is now presented with a double whammy. The prices of their homes are in decline, and are likely to remain in decline for a while. At the same time, the price of everyday staples is on the rise. The only thing that middle-class Americans can cling to is the fact that at least their 401(k)s have turned around.
Yet the “flash crash” of last May 6th, when the Dow lost 10 percent of its value in minutes, can’t give anyone who is paying attention too much confidence even as the market continues its march upward.
In July of 2008, things had not hit the wall yet. People didn’t like $4 gasoline, but they made due. They got to work by putting gas on credit cards, which were to be paid off when things weren’t quite as tight. But as we know, for most people, things only got tighter.
Now, after almost two years of full-blown recession, we are again presented with rising oil prices, and much higher gasoline bills, yet this time many people no longer have the credit card to put the fuel on. It was maxed out the last time gas was at $4 a gallon. They are still paying for the gas they bought two years ago, and the bank that issued the card is likely insisting on a higher rate of interest than it did originally. But many consumers now have few options in the face of a huge “tax increase” on fuel created largely by the Federal Reserve.
Four-dollar gas was one of the triggers of the Great Recession; now we are revisiting it as much of America is already bruised and battered by the economy. All of those people who have hung on through the past two years are going to be pushed even further toward fundamental economic hardship. Some will be pushed too far.
What’s worse is that the dollar is no longer perceived as a safe haven. Yes, the dollar is still by far the world’s most important currency, and yes the Euro looks terrible. But China is rising. Much of the East is rising. There is a perception that power is shifting from America and Europe to China.
China has huge structural problems that may keep it from achieving the success that most of the world thinks it will achieve, but the fact remains that in two years China will likely eclipse the USA as the world’s largest economy.
What this means is that a general strengthening of the dollar due to the world being scared out of its wits by another rumble in the world economy is much less likely than it was in 2008, while another drop in the cost of oil is far less likely.
As the Federal Reserve continues to print money to shore up the banks, rising consumer prices will make it much harder for people to make ends meet. As Christmas bonuses are handed out at record levels for those who have direct access to the Federal Reserve, most of us will watch the totals at the gas pump creep higher and higher as the weather gets warmer.
That ought to be good for the economy. Thanks, Mr. Bernanke.
Nick Sorrentino is the Editor of the Liberty and Economics Review, and the CEO of Exelorix.com a social media management company.