080302 The Four Dollar Gallon Of Gas

READERS: THIS BLOG WAS ORIGINALLY POSTED ON MYSPACE ON NOVEMBER 26TH BUT, AS IT APPEARS MYSPACE IS TRIMMIMG SPACE FOR ARCHIVED BLOGS, NEWS THAT THE EVENTS OUTLINED IN THIS BLOG WILL BE CONTINUING AND THE RON PAUL VIDEO ECHOING MY SENTIMENTS PULLED FROM YOU TUBE, IT SEEMS APPROPRIATE TO RERUN IT HERE.

Not many of us like to think too much about the Federal Reserve Board and its chairman, Ben Bernanke but, at this moment in time, they have an extraordinary impact on the daily lives of each of us. For months, as the housing market and then the credit market struggled, short sighted investors howled for the FED to cut interest rates and the FED resisted. It seemed that everyone who had anything to say about finances demanded that the FED cut rates. In September, the FED gave in and made a half of a point cut. Investors rejoiced and the stock market surged briefly. It was, however, the end of the good times on Wall Street.

The stock market had continued growing throughout the year with vigor even though there was nervousness due to the housing and credit markets. Cutting the interest rate did not address the issues in the two weak sectors. They merely gave investors better access to cheaper money.

What the cut did do by dropping interest rates was make money less valuable. Because of this, less foreign governments were interested in holding on to dollars and, since they owned a lot of them, they sold them. That is why the dollar suddenly dropped when measured against almost every other currency in the world. On the plus side, that makes it easier for America to export goods, but on the down side, everything we import becomes more expensive. We are, by the way, an importing nation.

For years, every time the price of gas went up, we were told that we had it better than other places like England where gas was nine dollars a gallon. Of course, England developed earlier in history so its infrastructure is not dependant on the automobile. Also England does not measure with the dollar or the gallon. The reason why the price of gas is not nine dollars a gallon in the United States is that oil is priced internationally by the dollar and the dollar has been a strong currency. A weak dollar equals expensive gasoline, so the price at the pump has gone up.

While the stock market reacted favorably to the Fed's actions, since the underlying needs of the economy were ignored, the gains were quickly lost. The FED responded by goosing the market again with another rate cut in October. This time the market did not buy it and began a fresh series of losses.

What we have from this is a stock market taking on huge losses which amounts to eliminating wealth. In my case, it's a paper loss in what I consider long term money. For people who depend on a pension fund it means their retirement check is less secure. For employers who need to fund their own pension funds, it means profits will not be there which will mean that stock will fall farther faster. We also have record prices for a barrel of oil and a gallon of gasoline. Now we have nervousness in the retail sector. If that drops off, we will be in a recession.

The FED meets again in December. There are still some who are hoping for another rate cut to make the dollar worth even less and credit easier to obtain. The price of gas is 3.29 a gallon in my corner of the world and one more rate cut will drive it over four dollars in time to encourage consumers to cut back on Christmas and cause retails to miss estimates. The late seventies will be relived again. Stagflation, when inflation keeps climbing even though the economy is falling will happen for the second time in history.

As for myself, I will be leaving my long term money in the indexed funds. It will fall for a while, but history says that in the long run, I will make back my money if I let it ride. This fall, I moved a large percentage of my short term money to Brazil, Russia, India and China via what is known as a BRIC fund. It is performing spectacularly. (Perhaps because oil is relatively cheaper as the dollar falls compared to these countries' currencies.) By spring, I imagine I will be cashing in CDs and bonds and buying up cheap stock that was sold off in a panic.

I would rather see the real problem addressed and the interest rate raised. I will make less, but maybe old ladies in Portland will be able to afford to heat their homes this winter. Of course, if no one pays attention to what the FED does, it is free to screw up royally.