Wednesday, May 28, 2008

Energy Crisis - the Fed's fault?

Kimberly-Clark announced plans to raise prices on Huggies diapers, Kleenex tissue and other consumer products in an attempt to offset rising energy costs. Today Dow Chemical said it will raise product prices by up to 20 percent because of soaring energy and raw material costs. The company casts guilt on authorities in Washington for a failure to address rising energy costs and creating a "true energy crisis". Another industry in a deep crisis, the airline industry, is "not build for $130 oil".

The blame game is on, and its going to get a lot worse, so who are the authorities we are talking about here. The Federal Reserve, the authority that is supposed to watch out after the nations currency, is certainly an important part of it. Bill Gross in his latest IO from June 2008 pleads for joining him in lobbying for change "in the market’s assumption of low relative U.S. inflation in comparison to our global competitors". As a first step "a change in U.S. leadership" will be necessary to make a change for the better.

The chart below compares foreign CPI composite with Just Foolin' US headline CPI.
click to enlarge ( source: Gross, IO June 2008)

Paul Van Eeden, president of Cranberry Capital, thinks it is the Fed's fault that we have an energy crisis. His views are somewhat radical but hit right into the nerve center of monetary authorities. The constant urge of asset price deflation is met with expanding money supply and this is causing inflation.

Here are some of his thoughts:
Oil price:
"Adjusted for currency and inflation oil would have been 13 dollar if it was not for the increase in the money supply since 1970. Oil went from 3 dollars in the 1970s to 13 dollars but it is at 130 dollars today, so 90% of the rise in the price of oil is merely the expansion of the money supply, which is under the control of the Fed."

money supply and the growth in the economy:
"...if the money supply does not increase as the economy grew than any productivity gains that manifest in the economy would cause prices to decline. The smaller amount of money in circulation would just go a longer way, your money would buy more goods and services."

inflation statistics:
"For a long time now head line inflation is pulling away from core inflation. The reason for that is that hedonic adjustment and geometric averaging does not impact things like food and oil.

Fed and monetary aggregates:
Murray Rothbard created an aggregate called TMS (true money supply). Since 1980 TMS has increased by a compound annual rate of 6.8 percent which is identical to the annual increase in M3 money supply. So there is something to these monetary aggregates and the fact that the Fed don't want to use them well that's their decision."

click for video

video: Oil Crisis: Blame It on the Fed?
Discussing whether the Fed is to blame for the current oil crisis, with Paul Van Eeden, of Cranberry Capital, and CNBC's Steve Liesman

Investment Outlook, Bill Gross | June 2008

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