The Law of Unintended Consequences Part 1: Government Bailout and Oil Prices



Just when you thought it was safe to take an extra trip in the car to stimulate the economy with a non essential purchase those nasty oil prices are heading north again!  When the Oil prices began to spike it was because the dollar was so weak and in the intervening time the government has labored mightily to make it even weaker.  It’s very simple, really, if you think the dollar isn’t worth the paper it’s printed on you use it to purchase hard assets like gold and oil and that’s the bases of the commodities boom that gave us the abominable gas prices of a few months back.  Guess what?  The government’s throwing dollars around like it’s Monopoly Money,  funding bailouts it hasn’t the money to fund and sending commodity prices into orbit. The single minded fixation to fix the financial system may end up destroying confidence in the dollar which would make any depression, coupled with the destruction of the currency, many orders of magnitude worse.  Consider the following quotes from CNBC online:


Oil prices spiked more than $24 a barrel Monday as anxiety over the government’s $700 billion bailout plan battered the dollar and touched off frenetic buying of safe-haven investments including crude.

U.S. light, sweet crude jumped over $24 to almost $130 in afternoon trading on the New York Mercantile Exchange. 

The Nymex temporarily halted electronic crude oil trading after prices breached the $10 daily trading limit. Trading resumed seconds later after the daily limit was increased to $20.

Oil’s sharp gains came as energy traders grappled with the implications of the government’s proposed initiative to stem the U.S. financial crisis by absorbing billions of dollars of banks’ bad mortgage-related securities.

“There is no logical reason as to what we are seeing now,” Stephen Schord, editor of The Schork Report told CNBC. “My biggest fear now is that we’re right back to where we were last September.”

“The Fed is signaling that they’re going to make money cheap again, cheap money is going to start piling into commodities—this is my biggest fear and it looks like this fear is coming into reality right now. We could be back on the road to what could be $150 crude oil, regardless of the supply-demand fundamentals,” he said.

“They’re going to have to continue auctioning off a whole lot of Treasuries’ to finance these projects, so the dollar is going to suffer,” said Matt Zeman, head trader at LaSalle Futures in Chicago.


            All of the bail out plans are coming at an amazing speed and are lacking deliberation typical of  moves made by pure desperation.  This hasty ill advised government intervention is not restoring safety and security to the market its raising Cain with the markets by introducing more shocks to commodities and oil prices.  What do the geniuses at the Treasury Department and the Hall of Greed otherwise known as the Nefarious Federal Reserve think is going to happen when China says “Hell no” or when we don’t have enough printers to print the money fast enough to stave off disaster? As I’m sure we can all recall, the oil shock was one thing but then the price of EVERYTHING started to go up especially groceries.  That’s going to happen again while the value of the dollar goes into the dumper.

            They may have saved the financial industry; but a dozen eggs is going to cost you $50 and a tank of gas for your car will be $500! Somehow I don’t think the market rescue plan is ready for prime time just yet and these hastily conceived stop-the-imminent-disaster moves seem to be making things worse.  This is like undergoing a long painful course of chemo therapy whose aim is to kill the cancer without killing the patient.  The end result of a massive economic depression is the same if you get there from the collapse of the world finance industries or the destruction of all business by running oil up to $700 a barrel and the dollar to 2 cents.  The end result is the same: a broken economy and lots of suffering unseen in our living memory.

            The Federal Reserve is playing its own nefarious game, and the US Department of the Treasury is just trying to keep it all together, but it’s becoming clearer and clearer that we can’t avoid an economic crash.  Truly the system is broken and the solution hinted at on Thursday afternoon, and sent to congress on Saturday afternoon, is not systemic enough to steer us away from a massive economic event.  The government has been run on debt for many years, like too many of our American households, and debt is not the way of a wealthy society.  Now you have a fiscally out of control and out of touch congress trying to give fiscal responsibility lectures and moral instructions to Wall Street.  As this keystone cops spectacle plays out on the world stage you have the rest of the nations of the earth looking at us with an understandable lack of confidence if not contempt for our greed and foolhardiness.

            How much longer is it going to take before the world writes off the Dollar and the USA as unsalvageable?  When will China and the Saudi’s move to mitigate the fallout because it’s clear America can’t fix this mess?  If you were China, would you buy any more American Debt?  Neither would I.

            Our congress can’t control the spending, the Republicans turn out to be bigger spenders than the Democrats, the President is a lame duck and the Presidential Candidates haven’t got the first clue of what to say or do. Bush has given us massive debt, entitlements we can’t afford, and now: back door socialism. Our Presidential Candidates will either pretend it’s not socialism, in McCain’s case, or institutionalize the socialism, if Obama wins, and make it the law of the land.  

            The proposed rescue plan creates as many problems as it’s supposed to solve, and the spectacle of commodities going through the roof and the dollar going through the cellar is not acceptable.  Neither the government nor Wall Street has a handle on this yet and it’s crystal clear to the whole world.  If this doesn’t work; do they have a plan H, I, J, K, L and so on?  At what point does the government admit the reality that this is too big for them to fix and what happens then?  Such a day is coming and I haven’t heard a plan to stop it that won’t lead to the same financial devastation by way of a different road.  Heaven help us all.


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