The Oil Drum

Greetings -

I'm currently reading America's Great Depression by Rothbard. I may not know anything about geology or oil field properties, but I know a little something about economics and finance. What's interesting is that there are so many parallels between the 1920's run up to the depression and what is happening now with our financial system. We've had a big run up in Gold prices as you would expect, although adjusted for inflation we should have seen a much greater increase given the real problems with our currency valuation and real inflation over the past 6 years.

But what we have also had is a greater run up in oil prices. And I fully understand the supply and demand characteristics of a potentially depleting resource. But, let's face it, there haven't been any REAL shortages. And I haven't read any real discussion or news about this potential parallel. There has been a little talk about hedge fund managers 'driving up the price of oil futures' but a four fold increase in 6 years of a commodity which currently TRANSFERS over $3 Trillion dollars of value between countries each year is a big deal.

I'm not smart enough to figure out what all the connections are. But in reading this book and seeing how in the 1920's each Country manipulated their interest rates to control the flow of Money (Gold) between the countries (mainly so as not to completely bankrupt Britain) you can't help but draw parallels to our modern day valuation of oil in USD. Since there really is no 'Gold Standard' any longer your basis for international trade has effectively become the USD as it is the denomination 'backed' by being able to exchange it for oil. That's good news for us as we can easily and cheaply print more USD. Although we all know where that story eventually leads.

So it appears to me that oil has to a great extent become the new gold. If you look at the run up in oil prices in six years in those terms and relate it directly to USD you get a much more realistic model of the real, and likely actual, devaluation of our dollar - Based on our increase in the number of 'dollars printed' including debt, and our real rate of growth and legitimate expansion of true net wealth and value as a country. (You can't expect to print money and export it to China and oil producers without them, eventually, bringing those dollars back and buying our companies - which sends the very wealth we create directly to them in the future.) You didn't think they would bring those trillions of dollars back to the US and buy McMansions, Suburbans and happy meals did you?

In conclusion. We now know how and if not why then what the main factors were, in the Great Depression happening. And we need to figure out how this relates to oil today and the current state of our US financial system. It's obvious (to me) there are tremendous parallels and that something has to give. Usually in the start of a depression there is a huge devaluation of the currency (since the 'gold' has a set and real value.) We've already seen that in some sense as described above but we Americans have continued to borrow in unbelievable amounts to try and maintain our standard of living against that devaluation. Which is, by the way, precisely the wrong thing to do.

It's true that oil may again drop substantially in price but only when the credit runs out, and we have to take a (now) major hit to our standard of living. The only other way out is for the 'King' to artificially lower the price of the 'gold'. But in this case, if he did, he couldn't give out enough to satisfy the demand and things would get ugly anyway. So we are pretty much the same place we were in 1929. And unfortunately we are trying to 'fix' it in the same way we did then.

D.