The Economic Impact of Rising Gas Prices
In our region, known for its diverse agriculture, we recently paid a staggering $3.89 for a gallon of the less expensive gasoline. With prices on the rise, it’s only a matter of time before we see gas exceeding $4 per gallon. These hikes are not only burdensome at the pump but are also poised to create significant challenges for the broader economy.
“Nouriel Roubini, the economist famously known for foreseeing the global financial crisis, highlighted that an increase in oil prices to $140 per barrel could push some advanced economies back into recession,” as reported by Bloomberg on Tuesday.
“If oil prices were to rise again to the summer 2008 levels of $140 per barrel, several advanced economies could experience a double dip recession,” he added.
Recognizing the potential crisis stemming from rising gas prices, Atlanta Fed President Dennis Lockhart took the initiative on Monday to prepare public sentiment for another round of quantitative easing (QE3).
“If oil prices continue to rise, it might compel the Federal Reserve to undertake further asset purchases,” Lockhart noted, according to CNNMoney.com.
“If [the increasing price of oil] adversely affects the broader economy and suggests a recession, I would advocate for more accommodative measures,” Lockhart explained.
Sputtering on Fumes
The term ‘more accommodation’ implies increased debt monetization, meaning the Federal Reserve may inject more money into the system. This approach has become the Fed’s go-to strategy for addressing economic challenges, essentially perpetuating the existing surplus of debt-based currency.
After years of relying on this model, the economy has become entirely dependent on the Federal Reserve’s monetary fuel. Allowing it to run dry would lead to a sharp slowdown, but too much stimulation results in rising prices across the board.
Bill Gross, known as the Bond King, has expressed concerns about an economic downturn when the Fed concludes its QE2 debt monetization program at the end of June.
“I doubt it’s as self-sustaining as the Federal Reserve believes,” Gross stated on Tuesday. “I suspect we are not standing firmly on our own two feet, and we will need continued government support.”
This government support translates to ongoing debt monetization—a process where the Federal Reserve creates money to lend to the U.S. Treasury. While this may seem absurd, it has come to be accepted as sound monetary policy.
A Monument to Ugliness
However, government stimulus initiatives are not without repercussions. Primarily, they significantly inflate the national deficit. For instance, recent Congressional Budget Office figures indicate that the budget deficit for February soared to an astonishing $223 billion, meaning the Obama administration accumulated more debt in that month than was borrowed throughout all of 2007.
Fortunately, February had only 28 days. Had it extended to 30 or 31 days, the deficit could have ranged between $231 billion to $239 billion. To illustrate the gravity of the situation, the Washington Times presented a compelling comparison.
“Under President Obama, the government has been borrowing $4.6 billion each day—exceeding the construction cost of the world’s tallest building, Dubai’s Burj Khalifa. If this trend continues, the future productivity being drained from the American economy could fund a new 160-story skyscraper every single day.”
If you have never seen the Burj Khalifa, you may not comprehend the grandeur of its design. It appears as if a legion of architects was enlisted to create the most outrageous structure possible; a monument to aesthetic failure that stretches into the sky, as if begging for divine intervention.
This scenario represents just a single day in the life of the U.S. economy. With many more similar days ahead, the presence of such absurdities seems to have become part of our daily existence.
In conclusion, as we navigate these challenges posed by rising gas prices and government spending, it’s critical to remain aware of the broader implications for our economy. The cycle of dependence on debt will continue to have detrimental effects unless addressed with sound, sustainable strategies.
Sincerely,
MN Gordon
for Economic Prism