Wednesday, September 21, 2011

You Can Not Push On A String


The Federal Reserve Bank can use monetary policy to raise or lower interest rates, but they can't put more money in your pocket. If Saudi Arabia wanted to help our economy and the world's economy, they could sell more oil and bring down the cost of gasoline, diesel and jet fuel. This would leave more money in people's pockets to buy goods and services, and in so doing, raise demand. Greater demand leads to hiring and lower unemployment. The price of energy is cutting deeply into the consumer's ability to purchase the extra items they need or would like to have. The only thing that would make matters worse would be if water went up in price to the point where people would have to choose between water and gas. Economics may not be straight forward enough for everyone to understand, but it should be straight forward enough for the majority of the American people to understand that the price of energy in the 21st century has more to do with full employment than monetary policy can ever hope to. There is an old expression among people that work with interest rates and the capital markets (the bond market), "you can't push on a string." Interest rates can be dropped to next to nothing, but without demand, no one is going to borrow money. High energy prices is sucking demand for consumer durables and even consumer non-durables from our domestic economy. While infrastructure spending will put people to work on needed repairs and new structures, unless the cost of energy, spell that O-I-L, goes down in price, the demand will not sustain itself for very long. I am talking straight economics, not politics.

Stay tuned.

2 comments:

J. Kwiatkowski-Schuler said...

Some people say that speculation is making oil more expensive, and it's the biggest factor affecting the price right now. How about some discouraging taxes on that stuff?

moneythoughts said...

This is true. Speculators can drive up the price of oil, and traders are all over the world. The one thing in our control is for the United States to drill for more oil and natural gas.