The View From 1776

The lead editorial in the January 4 edition of the Wall Street Journal presents a graph that ought to lead citizens to demand a halt to profligate Federal spending.

Higher taxes are not the solution.  Every tax increase slows economic growth or leads to a recession, in either case reducing Federal tax revenues.  Only coming to grips with our ever-upwardly spiraling entitlements programs - Medicare, Medicaid, and Social Security - can reduce Federal spending sufficiently to permit economic growth and a return to a sound currency. 

At the beginning of this decade, in 2000, the price of oil was about the same - $30 per barrel – in dollars, Euros, and in the market value of gold.  At the end of 2007, the price of oil paid in gold was almost unchanged, but was 3.3 times higher in dollars at $99 per barrel.

The gist of the editorial message is:

Oil prices finally hit $100 a barrel this week, albeit briefly, but breaking through that symbolic barrier is ominous and higher gasoline prices are sure to follow. Supply disruptions in various places and surging demand in China and India are part of the explanation for this decade’s upward trend in oil prices. But perhaps the biggest factor has been largely overlooked: the decline in the value of the dollar.

Since 2001 the dollar price of oil and gold have run in almost perfect tandem (see nearby chart). The gold price has risen 239% since 2001, while the oil price has risen 267%. This means that if the dollar had remained “as good as gold” since 2001, oil today would be selling at about $30 a barrel, not $99. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a U.S. monetary that is supplying too many dollars.

It all started under President Franklin Roosevelt’s New Deal, when he deliberately debased the dollar and reorganized the Federal Reserve to create phony money to fund his massive increase in Federal deficit spending.  His liberal-progressive-socialistic program failed by a mile to end the Depression, but it left the nation with a political faith in taxing the “malefactors of great wealth” to provide a presumably free lunch to everybody else.

For more background on this inflationary surge and the role of the Federal government and its socialistic management of the economy through the Federal Reserve, read:

How FDR Destroyed the Dollar

Stoking the Fires of Inflation

Macroeconomics and Market Meltdown

Pyromania and the Fires of Inflation

Ben Bernanke and the “Barbarous Relic"

Echoes of 1929?

Central Banks Need Lots of Luck

Chickens Are Returning to the Roost

Chickens Coming Home to Roost?

Exporting Inflation to China

Exporting Inflation to OPEC

Federal Reserve’s NewSpeak