Could they want higher gas to slow the economy? Since they cant raise interest rates fast enough because it will cause a stock market crash. With a controled rise in the price of oil they could tap on the brakes just enough to make a soft landing? Any one think this is possible?

-- ROB MERDOCH (MRLOVE99@HOTMAIL.COM), March 04, 2000

Answers

Rob:

Seems to me that this exactly the opposite of what the Feds want. Higher oil prices directly lead to higher inflation. Inflation, rather than slowing the economy, tends to heat it up. I also can't imagine that the PTB would want to have an oil shock just before the elections since a good economy is about the only thing that can get Gore elected, IMHO.

-- Jim Cooke (JJCooke@yahoo.com), March 04, 2000.

(sarcasm mode OFF)

Jim, Inflation is caused by printing more money. Oil prices could rise and not cause inflation as long as the Fed doesn't "print" any more Federal Reserve Notes. Money would be directed to oil dependent goods, leaving less money for other areas of the economy, creating a downturn. Remember "stagflation"?

Also, don't assume TPTB want Gore over Dubya. Significantly, properity in the Texas Oil Patch would favor Dubya's election prospects.

-- INever (inevercheckedmy@onebox.com), March 04, 2000.

Rob:

In response to your question. I found the following in the archives. NHis on the right thought pattern. Once this board understands the correlation between Oil-Gold-US Dollar and the Euro Dollar, one will have a better understanding of what is "really" going on. (See my post below on the main board.) I wanted to touch on the subject to pave the way for a better understanding of the real problems facing America today. The American people can bury their heads in the sand until the cows come home, that will not change what the future holds. The sooner America, as a Nation begins to understand what is really going on -- when it comes to OPEC and the price of Oil, the better we will be prepared to deal with the changes on the horizon. Keep your eyes on the Euro. Little do you know now the major impact that currency will have on you (all of America) in the future.

------------------------------------------------------------------- Do you understand the relationship between gold and oil? Everytime I think understand it something happens to prove me wrong. It is my understanding that we have been giving OPEC gold as well as dollars to keep both the price of oil and gold down. With gold so cheap a gold derivitives market was played on the side hedged forward for years. The eruption in the price of oil has introduced volatility that wasn't there before. The gold derivative players are very nervous. I would appreciate your comments. I am very confused. Thankyou, nancy

-- NH (new@mindspring.com), February 29, 2000.

-- (Primus2000@learning.com), March 04, 2000.

In answer to the question, is the Fed responsible for higher gas prices: yes, but only indirectly.

For convenience, the worldwide price of oil is denominated in US dollars. Oil producers, for obvious reasons, want to recieve payment in a "hard" currency and the US dollar is the most easily converted currency in the world.

The Fed controls the supply of US dollars. As a result of the Asian monetary crisis, the LTCM bailout, and pre-Y2K liquidity fears, the Fed allowed the supply of US dollars to grow much faster than the real economy. Much, much faster.

The first, most obvious beneficiary of this largesse was the US stock market and other dollar-denominated financial instruments. But these are mere paper instruments. Eventually, all that new money must flow into real assets. OPEC happened to be the first to suss this out. As a cartel, they are using their muscle to divert some of this larger flow of money into oil, and then into their pockets. It was theirs for the taking.

Since land and commodities comprise the real assets that paper will eventually buy, gold and oil are both set to rise. So will copper and a lot of less glamorous things. The Fed will continue to raise rates this year, you betcha. The squeeze is on.

-- Brian McLaughlin (brianm@ims.com), March 04, 2000.

Addendum:

I forgot to add that the Fed has other options than just raising rates. They could drain liquidity. In fact they should have been doing that in February if they had any real intent to keep inflation down. But they didn't. The price of draining liquidity would be to drive down the price of financial paper, such as stocks.

The Fed clearly thinks that higher interest rates are politically more palatable than a steep fall in the stock indices. As soon as the equity markets fell, the clamor for easy money would begin, and they'd be right back where they started. Too much liquidity.

Economically speaking, draining liquidity would be the more fair and less damaging option, IMHO. But doing so would drive the Fed into the open and start people asking hard questions about policy that the Fed would prefer not to answer.

-- Brian McLaughlin (brianm@ims.com), March 04, 2000.

Brian

Thanks for the insight. I get it, the "extra" money's already been "printed"...

-- Inever (inevercheckedmy@onebox.com), March 04, 2000.