Oil and Inflation
Up is down. The sun rises in the west and sets in the east. The price of oil does not affect inflation.
The price of oil, nearly hit $100 and an all time high, and many economists would have you believe that it doesn’t matter. Our economy has changed, the price of oil doesn’t affect us as much and besides, nothings happened so far? Right?
This line of reasoning coming from many “respected” economists, and oil traders, is nothing more than economic laziness and stupidity.
Our economy has changed. We have become a service economy instead of a manufacturing economy, and therefore the impact of rising oil prices on the cost of production, is much less than it used to be. That’s the good news? No, that’s the bad news.
It means that we have replaced, higher paying manufacturing jobs, with lower paying service jobs. It means that the average American worker is earning less than his father did. It means that our trade defecit grows and our currency declines. It means the end of our economic superpower status.
High, and more importantly, rising oil prices is still inflationary. Besides gasoline at the pump, every single thing you purchase, involves oil in some way. When the price of oil rises, the cost of production and transportation, of that item rises as well.
But nothings happened so far? That’s right, “nothing” that you “see” besides rising gasoline prices, has happened so far. But a lot, that you don’t “see” is happening, and a lot more that you are going to “feel” will happen.
So far, rising oil prices, they were $20 a barrel at the beginning of the Bush administration, have in combination with the spending for the war in Iraq and the tax cuts for the rich, resulted in the devaluation of the dollar and modest interest rate hikes.
Because we outsourced our manufacturing to China and other low wage countries, the cost of production dramatically declined, our CEO’s became very wealthy pocketing the difference between your wage and that of the Chinese laborer. In return you got cheap products, which kept inflation down, and helped mask your lower wage.
Oil prices began rising, the cost of production even with lower wages began to rise, but U.S. corporate earnings remained strong and inflation low. Why? The Chinese and other manufacturers, could absorb the rising costs of production, because of increasing demand (volume) and by keeping wages low.
Where was this increasing demand coming from? You and your house. At the same time that oil prices were rising, the U.S. housing market was booming, and Americans were spending their home’s equity. The increasing demand, in combination with low wage manufacturing, was reducing the effect of oil on inflation.
But the housing market is declining? Exactly. The party is over. Now comes the hangover. The smart money has already left the country for euros and gold.
You are going to lose your jobs. As demand slows, the Chinese manufacturers who have been maintaining profits from shrinking margins (due to higher oil prices) but increased volume, are going to get hurt. When they pass the pain onto the U.S. corporations, the corporations are going to pass part of the cost onto you, and take lower earnings.
When the CEO’s bonus and job is tied to corporate earnings, they will try to maintain earnings, by cutting costs. When they cut costs - they cut your job.
Economics has not changed. Your house, and low Chinese wages, fueled the Chinese and U.S. economies, and only delayed the effect of oil on inflation.
The U.S. and Chinese economies are going to go through a very hard period until the price of oil begins to decline.