In a 1979 speech given amid skyrocketing oil prices, President Jimmy Carter noted about Americans that “too many of us now tend to worship self-indulgence and consumption.” Carter wanted Americans to consume less, to essentially practice self-denial on the way to what he thought would be lower prices across the board.
Of course Carter was merely parroting a book titled Limits to Growth produced by the Club of Rome. The book, popular in the 1970s, suggested Malthus was in fact correct, that we were running out of resources – oil specifically – and that a growing global population (the U.S. population easily consuming more than any other country) would have to learn to get by with less due to commodity supply depletion.
Not understood by either Carter or the Club of Rome was that oil (NYSE:USO) and commodities weren’t rising, rather the value of the dollar was in sharp decline. Money is a veil, and the real price of oil wasn’t rising much at all.
Indeed, while the price of oil from 1975-79 increased 43 percent in dollar terms, the global story was a great deal different. Over that same timeframe the price of oil in West German marks and Japanese yen rose 1% and 7% percent respectively. In Swiss francs the oil price actually fell 7%.
What economists and journalists to this day term “oil shocks” were nothing of the sort. For countries that maintained the value of their currencies, oil for them didn’t spike in the least.
OPEC of course explained the dollar-driven “oil shocks” to the U.S. political class in a communiqué sent out five weeks after President Nixon severed the dollar’s link to gold. As the letter stated:
“….Member Countries shall take necessary action and/or shall establish negotiations, individually or in groups, with the oil companies with a view to adopting ways and means to offset any adverse effects on the per barrel real income of Member Countries resulting from the international monetary developments as of 15th August 1971.”
With the dollar lacking a gold definition, it went into freefall, and oil (NYSE:USO), per OPEC’s warning, spiked. As Robert Bartley put it in his classic book, The Seven Fat Years, “There the ‘energy crisis’ was born.”
Happily for U.S. consumers, investors and wage-earners, dollar policy in favor of strength improved greatly in the Reagan ‘80s and Clinton ‘90s. And with the dollar rising over those two decades amid gold’s logical collapse, so too did all commodities decline, including oil. The price of the latter fell to $10/barrel in 1998.
Far from a world running out of resources, the price of oil and most other commodities didn’t change much at all in the 1970s; rather the dollar’s value plummeted. Indeed, as Warren Brookes put it in his essential 1982 book, The Economy In Mind, “From 1970 to 1981 the price of gold rose 1,219% – the price of oil rose 1,291%.”
Once the dollar rose, and gold fell in ‘80s and ‘90s, so did oil. The notion of a “finite world” promoted by Carter and the Club of Rome was a myth, and easily discredited once dollar policy improved.
Fast forward to the present, and the reliably obtuse Paul Krugman is channeling the notions of scarcity so roundly exposed as folly not long ago. In a New York Times column titled “The Finite World”, Krugman reminds the mildly sentient among us that history always repeats itself in ways that fool the gullible.
In an article meant to explain the ongoing commodity boom, Krugman argues that it has “no bearing, one way or the other, on U.S. monetary policy.” To him the run-up is firstly the result of a “global recovery”, but more to the point, he asserts that “the commodity markets are telling us we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices.”
Specifically Krugman notes that “Oil is back above $90 a barrel” as evidence supporting his claim of a global scarcity, but the problem for him is that $90 oil wrecks the very foundation of his argument. Had he simply bothered to do a currency comparison of oil prices he would know that oil’s rise in recent months is once again a dollar phenomenon; thus exposing as false his suggestion that the commodity boom is unrelated to U.S. monetary policy.
Sure enough, since the middle of 2010 the Australian dollar has risen 27% against our wilting greenback. During that time oil has risen 33% in dollars against a fairly pedestrian 6% increase in the cost of crude measured in Aussie dollars. The recent commodity spike that Krugman deems global has in fact confined itself to the countries that have mimicked our devaluation.
Sadly, this is usually the case. When we devalue the dollar, history shows that it’s frequently a global event (thus explaining the global nature of the housing boom amid the Bush Treasury’s dollar debasement in the decade just passed) as countries naively weaken in concert with us on the false supposition that this helps exports.
Since 2001 gold has risen over 400% amid the dollar’s collapse, and as foreign central banks once again mimic U.S. Treasury policy to varying degrees, gold has spiked in all currencies on the way to a global “commodity boom” that has served as evidence of nothing more than global currency weakness. “Scarcity”, or “finite” supplies of commodities are mythical notions, and Krugman should know this.
That he apparently doesn’t seems unrealistic. Indeed, for those who tend toward conspiracy theories, Krugman’s latest attempt to explain commodity prices might point to something else; as in the Princeton economics professor existing as a right-wing plant meant to promote arguments so historically absurd that anyone with access to a Bloomberg terminal can expose them. It’s hard to imagine Krugman’s a plant, but it’s similarly hard to imagine that he’d present an economic thesis so easily disprovable by history, past and present.
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