People have been calling fiat currency, including the US dollar, a fraud for a long time. Credible people. But this does not really catch on as absolute truth with the masses on its own merits because other people who are also viewed as credible (despite the fact that they are just good liars) come up with cover stories. The average sheeple is left with a cacophony of raw data to sift through that is so convoluted and so complex and so utterly conflicting that their human minds simply give up trying to understand it all. They sense that they are living with a ticking time bomb but since they don't understand how bombs work they have to listen to the words of "experts" on the matter. On one hand, some experts are saying "This is a bomb with a timer. It will eventually explode and you will be destroyed. Move away now and save yourself from future pain and suffering". On the other hand, people who rely on the productive output of the masses (because they live by taxation of that output and not by their own productive endeavors) tell the people "There is no danger. The bomb is well understood and we have it under control. The ticking noise should be ignored. Please keep working. After all, it hasn't gone off yet and thus it will likely never go off". You can see how normal, undereducated economically but really good hardworking people would have a dilemma here.
Moving away from analogies into the real world, some people have been warning that the historic result of government money printing has been massive inflation or worse, hyperinflation. They point to things like rising food and energy prices as evidence that they are right. Their government counterparts argue that rising prices are caused by other things like unrest in the Middle East, Greedy Arabs, Greedy Farmers and anything else under the sun. Joe Sixpack (and even Joe White Collar Worker) watches all of it not knowing what to do. Both sides seem to make credible arguments. After all, there is civil unrest in the Middle East and North Africa (MENA) and oil prices have been rising. Rising oil prices lead to higher costs for farmers and grocers so perhaps the problems in the MENA are causal.
The government hacks get away with making these types of arguments because few in the population read past the headlines and the main stream media sometimes puts the most important economic headlines on page 14. So today we read (front page) that Obama is talking about increasing oil production in order to address high fuel prices. The only problem with this is that there is currently an oil glut! The Saudis, who in hindsight have been fairly truthful over the years in public statements, say (on page 14) that they need to decrease production because demand has fallen off.
And so here is the truth of the matter. Both sides are right to some degree. The Saudis know oil like nobody else. They have been saying for a long time that oil above $80 cuts demand. They think that the sweet spot for their profits is that $80/bbl number. Above that amount, demand destruction outweighs the higher prices with respect to total Saudi profits. I believe that the Saudis have been truthful on this matter. High oil prices have reduced demand and so there is a glut. They hardly know where to store the stuff.
For Obama's part, the glut has not reduced prices. This is contrary to the laws of supply and demand. The problem? THOSE GREEDY SPECULATORS. Yes, that is what government always says when fiat currency and fractional reserve banking (i.e. credit) based bubbles occur. And to some degree he's right. The current demand for oil has nothing to do with consumption and everything to do with people wanting an inflation proof place to store their wealth. These people are looking at the price of gold rising and they know that this is bad news for fiat currency. Why? Because you don't eat or drink gold and it can't power your factories and cars. It is almost useless industrially because of its high price. There is no way to blame the rising price of gold on greedy oil producers or greedy farmers. What would it sound like if government insinuated that rising gold price was the result of greedy miners? It would be a complete joke, a propaganda effort that would fall flat. This unique nature of gold to be recognized as the ultimate safe store of wealth which is unaffected by industrial consumption based supply and demand issues makes its rising price the economic equivalent of a tsunami siren. Platinum, for example, does not enjoy this status because its price is largely a function of the number of catalytic converters needed by the auto industry. Is it any wonder that gold is now threatening to pass platinum in dollar price?
So back to Obama and the oil price. If he moves forward in increasing the existing oil glut then he will likely scare the investment money out of that commodity. Falling oil prices could be a leadership event for falling commodity prices which will keep the sheeple from rioting (for now). But none of that addresses the fact that there is a lot of paper wealth running around out there looking for a haven to be stored in. Government debt is a huge gamble in the minds of many. The stock market has been going up in dollar terms but it has gotten killed in terms of commodities since the quiet crash of 2001. In other words, the gains have all been inflation gains, not real gains. What good is a stock that has doubled in price when gasoline has also doubled? How much did you really make in this deal if the buying power stayed even despite the share price increases? Let's not even talk about the tax liabilities you might have from all your stock market "gains". The Dow vs Gold chart is instructive here.
As you can see, despite steady gains in the DJIA since March 2009, the Dow has been flat to down in terms of gold. It used to take 15 oz of gold in order to buy one share of the Dow. Now it only takes 8.43 oz. In addition, the Dow is now fully priced (in terms like PE, dividends, etc.) at a time of high unemployment and rising prices. Money in the Dow is getting very nervous after such a strong bounce given the fact that the Federal Reserve is putting the Ponzi Pump known as QE2 on hold in June to see if the economy will continue to improve without government driven (i.e. debt driven) economic stimulation. I'm betting it won't. I suspect that the holiday buying season will be bleak.
As the end game of the global economic debt Ponzi plays out we will no doubt see many government actions taken in order to try to escape the inevitable. All this will do is push the bubble around resulting in unintended consequences. One of these days it is very likely that government has cut off all avenues of escape for the hot money except into gold. If that day arrives we could see tons of hot money chasing a very small gold market. This would kick the economic tsunami sirens into high gear. That which has been considered a risky investment for the last 40 years will eventually once again be regarded for what it has always been - the only real money on the planet.
