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Big Borrowing for Big Oil's Benefit
PRESS RELEASE Citizens for Corporate Accountability
“It’s not just the high oil prices that are shocking—rather, it’s the shocking number of things the Bush administration has done to create high oil prices.”
-Federal Reserve mandate directs policy at high price levels
(SEATTLE) 06/06/04 - With headline economic numbers finally showing significant improvement, along with several indicators which show severe economic overheating, there is no longer an excuse to keep interest rates at multi-decade lows, except inasmuch as the Federal Reserve wishes to accommodate political goals, rather than prudent economic principles, against its mandate.
It has been noted recently that Federal Reserve Chairman Alan Greenspan made an unusual number of trips to meet with Bush staff. What Greenspan and Bush are speaking of is the subject of much speculation. Beyond speculation though, the reality of Bush’s post- re-election plans have already been leaked, highlighting cuts to programs such as education and Veteran’s benefits--and painting a picture of the future different than many anticipate.
But speculation aside, what hasn’t been spoken of widely and publicly is the simple fact that higher interest rates are called for according to the Federal Reserve’s mandate, not the least of all, in order to offset a marked rise in oil prices. That’s because higher interest rates mean a stronger dollar, which reduces the dollar-denominated price of oil. So it’s either Americans continue to borrow more to put dollars in the pockets of the oil companies, or alternatively, the Fed raises interest rates, and we borrow less--and pay less at the pump. Indeed, high oil prices beg the question: What, if any, planning has gone into preventing the “unanticipated” rise in the price of oil?
In preparation on the demand side, the Bush administration gave a major tax break to gas-guzzling SUV buyers—hardly a formula for lower oil prices. On the perception side, an attack in the Middle East has done nothing to lower prices, and everything to raise them. And all the while, appointees of Bush such as Secretary Snow, and the Fed’s Bernanke, nearly have the public convinced that gas prices at multi-decade highs are among signs of “lax use of resources” –thus this team encourages low interest rates, which in turn, lead to high oil prices. So it’s not just the high oil prices that are shocking—rather, it’s the shocking number of things the Bush administration has done to create high oil prices.
The Federal Reserve claims it can raise rates at a measured pace, but that is a relative term—relative measured against exactly what? One easy answer is a factor which applies to many US businesses, that is “as measured against the price of oil,” since oil prices and interest rates are inversely related. And then there are countless other commodities which have put significant pricing pressure in the inflation pipeline, even if the rate of ascent has recently slowed. Moreover, of late there are increasing reports of US companies having to outsource or close doors due to high prices—hence, the Federal Reserve is in fact legally obligated to raise rates, so as to meet its mandates of “stable prices” and “full US employment.” (1)
Yet privately, there is another factor facing the Fed. One has to assume the Federal Reserve is finally admitting the existence of a housing and debt bubble—based on not simply what has occurred in the US, but what is now occurring in the UK, where a slow and “measured pace” of interest rate raises hasn’t worked, and the UK is at long last in a panic over a debt bubble. In short, “measured” in practice may mean “quicker” rather than “slower,” despite reassurances to the contrary. Simply said, the US Fed can’t claim “unknown” as to the effects of prolonged low rates—the UK example spoils such arguments of hypothetical ignorance.
But speaking of US debt, it’s worth it to sit down and do simple math related to the price tag of the Bush economic/re-election program. Whereas it has recently been noted that the US has a high-tech trade deficit--for the first time--and as well, new US jobs are paying significantly less than old jobs, we are also borrowing significantly more to bridge the wages gap, even while corporate profits are strong. So, if we are to re-elect the Bush team, we have to ask: What of next year, besides the leaked program cuts?
According to the best available data, there will be about 200 billion dollars less that will be available to the US economy in 2005 than 2004, with the winding down of tax breaks, and the ultimate exhaustion of cash out refinancing (the final limiting factor not being interest rates per se, but entry-level affordability, which has been finally reached in many areas)(2). This means for 2005 to be roughly the same as 2004, the 200 billion will have to be made up for in wages—barring money falling from the sky in early 2005. This turns out to be approximately 6,000,000 jobs--or roughly one million new jobs a month between now, and when the next president is sworn in. However, that’s not counting any negative shocks, or effects of rising interest rates on variable-rate loans (which would surely occur at such a job growth rate).
That’s right—no double or triple-digit retail sales growth in 2005, even with all those 6M new jobs. And then there is the federal budget deficit. With many jobs going overseas, and the new ones here not paying as well, the deficit can’t disappear anytime soon, since the tax burden is carried mostly by taxes on wages; a deficit will force interest rates up independent of other factors(3). On the other hand, if there really are 6,000,000 jobs soon, rates will also go up. So stocks, and particularly bonds, don’t seem like too much of a good bet in the months ahead. The talk of “measured” is simply a way to calm the markets.
In summary, besides leaks of 2005 program cuts under Bush, in preparation for voting, people should ask 1) Why am I borrowing money to pay for oil now? and 2) How much better off will I be next year because I borrowed so much over the past few years?
Remember, we’re all not borrowing to benefit President Bush’s re-election…right?
*** Footnotes ***
(1) The media often cites the core CPI. The core CPI is in no way a measure of price stability as it affects employment; rather, marked rises in input factor costs ex-labor can be offset by the loss of US employment to offshoring. So measures such as the JOC index and PPI become important to maintain Fed mandate, not the CPI.
(2) The difference between both tax breaks and cash-out refis between 2004 and 2005 is approximately (100 billion) each.
(3) Greenspan warned persistent deficits push up rates. Many tax breaks granted to US corporations were based on claims corporations largely created jobs in the US, and ultimately, would boost US income tax revenues; such lobbyist “promises” are proving increasingly empty, with increased outsourcing.
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