A few weeks ago an oil trader friend of mine said "70 is the new 60". He didn't mean that he was driving his hummer at 70. Instead, he meant that 60 had been the break point that speculators had been betting on with a 50/50 chance to go over or under it. Now, 70 was the target. Oil stood on that day at 59.
Some very smart people didn't believe it, but I did. You see, uncle Alan has been raising interest rates way too slowly to stop it. Demand is still robust, even as large chunks of the country are wavering on the edge of a downturn - the housing market isn't feeling so good here in the Northeast, and the West should soon follow.
Oil slammed into 66 today, on the back of a strong run. Oil at 70 in the next year? It's beginning to look conservative.
So what is going on? Well, it's not news - housing is in a bubble, people are borrowing money to build houses, and to buy houses. They are driving farther to buy cheaper houses. So what happens to manufacturing? Well since you can't import houses from China, the prices for housing stay high. But since you can import most physical goods from China, the manufacturing jobs are moving there.
The home bubble is, as Keynesian economics predicts, "crowding out" manufacturing. That is to say - it is inflationary.
Now the Chinese want to live better to, so they are buying scooters and cars and minivans, and burning more oil. The more we import from them, the more they burn. The have dollars from us to buy oil with, so the price of oil goes up. This hits America's trade deficit two ways - we buy more stuff from China, and the price of oil goes up because they are bidding it up.
Now for every problem there is a solution which is simple, clear, obvious - and wrong. The wrong idea is to slam protectionism down on US manufacturing. Why won't this work? Because then the inflation we aren't seeing - because it is piling up in houses, will become inflation we can see. You like your retirement savings? Good, then don't go all protectionist because that is where the money for protecting US jobs in Ohio will come from - your savings.
The solution is to make it so that the protected economy isn't as profitable. Now there was a time when we could have done it by policy. But we don't live in an era where people like prudent government. They think the government should be the patsy in the economy that they raid money from. It never works that way, government's always collect - or they don't stay governments. So now the adjustment is going to happen the hard way, with the people who bought last getting hammered. They go belly up - worse yet, the new bankruptcy bill means that they won't have an incentive to work as hard, because the extra money they earn - go to the debtor's tax. That is, the new bankruptcy law is a tax on going broke.
So we are going to chug along here for a while - the market is going to steam upwards a bit more, houses will see one last splurge in the heartland - where housing bubbles are seen not as rising prices, but as sprawl - and then the "market will correct". Only the market corrects in a rather ugly fashion, and it focuses the pain on a few unfortunates, and not on the economy as a whole.
And it means that gas prices are going to keep marching up as well. This is because gas prices are not a cause of economic trouble, they are a symptom of economic trouble. When the US is letting too many dollars pour out to the rest of the world, oil prices go up, since oil is priced in those dollars - it's David Hume's observation all over again that more money just means higher prices.
This is the so called "global savings glut". Now how anyone can declare a global savings glut when 2 billion people live on less than 2 dollars a day is beyond me. How anyone can declare a global savings glut when jobs are scarce in Europe and the US is absurd. There isn't a global savings glut - there is a lack of investment supply.
This means there aren't enough company ideas that will make enough money. that means one of two things have to happen. One is a depression to wring the excess money supply out - either by contraction or inflation. The other is to change the basis of the political economy, so that there is enough future money basis to pay back investors. Usually, however, the second only happens when the first has come to pass.