Gas at the pump hits $4.00 a gallon.
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The big story here is not just the price of gas going up; rather it is the looming specter of inflation. The price of food, petroleum and other basic necessities are on the rise. I firmly believe that this is just the beginning of large events that will eventually shake the very core of our economic system. Simply put, the path which this country has been on for the past 40 years, possibly longer has been unsustainable. America has had a great tradition of free markets and property rights which has allowed us to lead the way towards prosperity. But at some point, we lost our way; instead of embracing the principles which made America great: liberty, self-reliance, hard work and frugality, we have embraced, essentially, empire building, financed through inflation and debt. This is certainly nothing new; from the Romans to the British, nations have used such a financial strategy to hold power.
Not only do we face $4 gas, we also have to deal with skyrocketing education and medical care costs, the collapse of the housing bubble, stock markets plunging, unemployment rising, massive underemployment, excessive government debt, and unmanageable personal debt as well. Stagflation, the infamous combination of economic stagnation and inflation, looms. The big question now becomes when will the stagflation become a full fledged inflationary recession? These problems are global in nature--the problem actually originates with our system of "fiat money" that has been in place since the early 1970's.
The world monetary system has a very fundamental flaw: because the world accepted US dollars as if it was gold, all what central bankers had to do was print more money (inflate the currency), spend the money overseas (thus pushing American jobs overseas too). The prosperity which came about was literally unearned. Foreigners who took our dollars and gave us goods and services have only been too anxious to loan those dollars back to us. Now the dollar is no longer worth as much as it used to be. Such a setup allowed us to export our inflation and delay the consequences, which is happening now. We have accumulated a huge foreign debt, which must either be paid or liquidated. Another problem is that our entitlements are coming due just as the world has become more reluctant to hold dollars as their currency of use. The consequence of this lack of demand for the dollar internationally has been increased price inflation here at home. That is what we are witnessing today. In fact, price inflation overseas is worse because bankers in Europe and Asia have also been more than willing to monetarize our debt. The strategy of inflating the monetary supply which became commonplace during the Greenspan era is catching up to us. Notice that Alan Greenspan is no longer viewed as a hero in the media.
As for gas prices, the solution to the problem isn't simply demand. That's part of the problem, but the real problem is monetary in nature--that's why prices for other consumer goods, in addition to gas are way up. This price bubble is different and bigger. The Fed can no longer paper over our economic problems by simply printing more currency and expecting that more people or foreign governments will follow those dollars. The mistakes made with excessive credit at artificially low interest rates are huge, and the markets are demanding a correction. The problems are associated with excessive debt, bad investments, over investments and other problems caused by monetary over-inflation. Wars, welfare payments, and entitlement promises totaling in the trillions might all be coming to an end. We hear in the news about the escalating costs of the wars in Iraq and Afghanistan, rising pension costs, and rising health care costs associated with Medicare Part-B and other programs and I wonder how are we going to pay for this? We don't have the money or the wealth creating capacity to catch up and care for all these needs. The economic problems which are coming to a heads are so large that it is difficult to get your hands around it. The status quo won't get us out of this problem. Economic central planning on the part of the public sector, which many in Washington are beginning to embrace as a way to get us out of this problem, won't work. Bailing out companies that have underperformed due to bad investments won't solve the problem; it will only paper over them. I am of the opinion that we need to clean house. Let the market remove those bad performers out of the system and allow for the rise of newer, more efficient organizations. So far, the government only seeks to do more of the same. If this does happen, expect a longer and deeper recession in the next few years.
