Forex commentator Jack Crooks thinks it’s a possibility that the run up in oil prices reflects oils new place as the de facto monetary standard in global trade. I’ve noted before that a large percentage of oil price increases seems to be due to dollar weakness and that the best short term energy policy is stable money. Crooks takes it one step further essentially arguing that dollars are flowing into oil instead of other things, so the dollar’s current weakness against other currencies is deceptive and a much bigger portion of the crude runup is due to Fed monetary policy. Wow, that was a long sentence. My interpretation of what he writes is this.
- The Fed has pumped up the money supply with essentially free money at 1% rates.
- That money had to go somewhere
- A lot of it has gone to consumer goods, often imported.
- For reasons of their own the exporting countries don’t want too weak a dollar. (Perhaps because as he notes that the Fed is “the world’s de facto central bank.”)
- But the money has to go somewhere.
- The (consumer goods) exporting countries are using more oil to produce those goods.
- Oil has a certain supply that is actually relatively stable while the dollar supply chasing that stable supply is increasing.
- Oil prices are rising further than inflation figures or apparent dollar weakness account for because it’s ultimately oil that’s absorbing the dollars.
So, oil is evolving a role as a check on inflationary monetary policies. As the dollar isn’t a stable standard of value, oil is. The major difference with gold is that the biggest nonmonetary uses of gold in the past left the gold intact. It was always possible to pull of the pinkie ring and toss it in the pot at the poker game. A bit harder to do that with the tank of gas you burned yesterday, the polymer trash bag you sent to the dump filled with used polymer packaging or the synthetic rubber that burned off your tires in the normal course of driving down the road.
The questions, to which we have not an answer, are: To what degree is this move in crude a monetary phenomenon? Sure, the Fed move was a catalyst for real growth. But how much of this move in “stuff”, and not just crude oil, was money sloshing around in the system that found a convenient home and led to a self-feeding price rally with rationales attached to justify said rally along the way?
Thanks to Kevin for pointing me to the column.