How We Solved the Gas Price Problem

American memories are apparently becoming shorter and shorter. Various misguided references to the alleged causes and cures of The Great Depression aside, people don't remember that we once upon a time, less than 100 years ago, didn't have a Federal Income Tax, that drugs were legal (and then alcohol prohibited), and that inflation and interest rates were double-digits less than 30 full years ago.

Among the most recent things to be completely forgotten are the high gas prices, peaking in July 2008 with nationwide averages over $4 per gallon and people in California paying $5 on occasion. Politicians and pundits blamed this on "speculators" and called for the government to "do something." Toyota (TM) Priuses were selling at MSRP or higher.

Less than six months thereafter, gas prices had fallen by over 50%, and Toyota Priuses now come with $750 rebates to make them move. Never before did gasoline prices fall so far, so fast. Not even close.

What was the government program that fixed this economic problem? The answer is none at all. The government didn't lift a finger to solve this problem. It let the market do its magic, curing the issue with its own natural self-healing mechanism first described in Adam Smith's The Wealth of Nations [1776]. Sure, there was a lot of huffing and puffing about what people suggested the government should do, but in the end the government did nothing. The problem just went away. No government intervention solved the problem.

Think about it: The one recent problem which the government left to the free market to solve, got solved in record-short time. Contrast this to the ever-ballooning demands for the government to "do something" about the financial and economic crisis. The demands from almost all ends of the political spectra suggest that we drop all economic common sense and instead spend money we don't have.

Think about it again: We got into this mess by borrowing too much, spending too much, and making too many loans. What's being proposed? Let's spend even more, borrow much more, and make even more loans. It's like an alcoholic trying to cure a whiskey bottle's hangover by drinking a whole case worth of whiskey the next morning. If there ever were a more self-evident disaster outcome guaranteed, I can't think of one.

The free market cured the high gas problem in less than six months without the government lifting a finger or spending a dollar. Likewise, the free market would cure the imprudent debt bubble by allowing it to be pierced, seeing prices falling, wages falling and allowing bankruptcies and foreclosures to clean up the imprudent investments into orderly liquidation. Adjusting wages to demand, would guarantee full employment as with any other market price.

In a free market, the current recession would probably be cured within a year or two, and it would allow the government to cut expenses instead of increasing them. Only by dramatically cutting the size of our government, so that we can eliminate the deficit and start paying back the debt, can we restore sanity to our financial and monetary equation, which includes saving the value of the dollar.

As it stands, we are on a path that will put us in Germany's World War I surrender rail car and its 1918-20 aftermath. We will be left with a debt burden so great that the only way out will be massive inflation, as we essentially default on government bonds. Germany was left with a huge war debt after World War I, but because the debt was not denominated in British Pounds or French Francs, Germany simply inflated itself out of its obligations, causing dramatic mis-allocation of resources, societal chaos, the rise of Hitler and the bloodiest war (World War II) in its wake.

In our case today, the debt-explosion path that we will apparently be pursuing, will most likely also mean a massive inflation when we eventually print the money to pay off the bond buyers (read: The Chinese). China has one of the soundest economies in the world today, with low or nonexistent public and private debt, and high growth, but it has invested its surpluses largely in U.S. government bonds. Whoops! All that the Chinese worked for during the last decade, will go up in smoke. And in the wake of the Chinese losing their savings invested in U.S. government debt – another war? We are clearly playing with fire, taking on all this debt to finance unprecedented levels of government spending.

Disclosure: None

Comments

[kelm:]

An excellent analysis - thank you. China is planning to spend $2 trillion this year alone on stimulus. That stimulus will go to building infrastructure making their economy even stronger. As their tax receipts are dropping due to economic contraction it is a likely bet that they will utilize some of their foreign currency reserves to pay for this. At very least it is hard to see them taking on more reserves. As our bond bubble bursts and bond prices collapse it may prompt them to start selling treasuries sooner rather than later. The opportunity for a significant increase in tensions is apparent.

Jan 22 09:32 AM

[know nothing:]

As long as the U.S. needs money from forgien investors, expect the dollar to stay strong. Giving the illusion of a safe haven. Sooner or later those forgien investors will with draw thier investment,thats when inflation will occur. It is a shame that our country is running the biggest ponzi scam,ever! Whats even worse is that others are buying into the scam. This is very dissapointing!

Jan 22 09:36 AM

[Chris B:]

"...the free market would cure the imprudent debt bubble by allowing it to be pierced, seeing prices falling, wages falling and allowing bankruptcies and foreclosures to clean up the imprudent investments into orderly liquidation. Adjusting wages to demand, would guarantee full employment as with any other market price."

Herbert Hoover and Andrew Mellon advocated a wait-and-see approach to the depression too. Yet, the invisible hand failed to appear and for years markets did not correct on their own. Your comment is almost exactly paralleled by Andrew Mellon:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." -Andrew Mellon

So the question is, do we learn from history or from ideology?

Jan 22 09:39 AM

[sunnsea:]

You are correct in your assessment if all we do is print more money. But if it goes into investments like infrastructure: roads, rails, internet broadband, electric grid upgrade and education, then the impact should be less of a problem and we will see a return on the invested dollars. We are not exactly like Germany after WWI but neither are we the US after WWII.
The other part of the equation and the part that has made China wealthy is the intentional destruction of our domestic manufacturing base by the co-conspiritors Goldman Sachs and the Chinese. A strong President Obama should do everything in his power to disincentivize the off-shoring of jobs and manufacturing and create the conditions for a major revival. The key to solid wealth creation is not pushing and selling debt paper a la Wall St. but to manufacture high-value added, globally competitive products. Also, we should convert to the metric system so mistakes are not made on the shop floor to producing these products.

Jan 22 10:04 AM

[JoeMama:]

Finally we are on the right track here. Even if we evaporated China's savings through hyperinflation, the rest of the world will have it worse. We are the reason the Chinese are buying up the natural resources of Asia and Africa. They are our little evil Communist proxy state right now.

The world needs the U.S. to get through this recession so that they can export their way into a permanent middle class. Until they get more productive governing systems they will have to save at a higher multiplier than we do. We get cheap income producing assets and junk in return. We will have a competetive advantage for another 100 years, by then everyone will look like a mature democracy with effective systems for managing corruption and graft.

Jan 22 10:10 AM

[Ksankar:]

I am a small time investor buying good companies at very cheap prices..I am able to afford that risk/reward scenario..I still have lots in cash in my brokerage account..Cant the government do the same ..invest in projects which are cheap to come by..infrastructure related,healthcare and education reforms..rather than pump more money into failing banks..At this point I feel the FED has done extraordinarily well and should back off and let the market do the rest.


Thanks for a great article.

Jan 22 10:20 AM

[axelrod608:]

Great article. Unfortunately, this kind of thinking is totally out of favor among the nation's "leaders". Change ? We'll see. Looks like more of the same to me.

My best guess is that the current "war on recession" will have similar results as the "war on poverty", "war on drugs", "war on terror", etc. I REALLY hope I'm wrong. But reinflating the 2006 credit bubble can produce no positive results. Just more debt. And individuals, families, businesses, and government at all levels are already overburdened with debt.

Spend our way to prosperity ? Get real.

Jan 22 10:32 AM

[mytwocents:]

Ha Ha..they call it "damaged demand". I drove less and continue to drive less. Who knew that Americans can take control and leave high prices on the suppliers shelves. We've been empowered now and there's no going back

Jan 22 10:34 AM

[axelrod608:]

Chris B - Citi's market cap is currently $14 B. The US gov't has already dumped $45 B into it. This is wise ? You would pay $300k for a midsize Chevy ? Unlikely.

Worse, the $14B Citi is run by people whose salaries are appropriate for a $400B company. How in hell can these dinosaurs have a snowball's chance in hell of becoming profitable with personnel costs at 100x multiples of what the company is worth ? Ain't gonna happen.

Finally, the idea that government can throw money at financial crises and fix the problem has been conclusively proven to NOT WORK. The World Bank economists studied every financial crisis for a 30 year period. One of their findings was that IN EVERY case, without exception, the length and depth of the following recession was directly proportional to the amount of money the government threw at the problem in its attempt to fix it.

Japan is an excellent example. They threw massive amounts of money into their banks to save them. 20 years later, you can still buy stocks and real estate for less than half of what they cost before the government started trying to fix things.

You want to guarantee a depession that makes the "great depression" look like a minor event ? Keep throwing money at the problem willy nilly. Keep dumping cubic yards of $100 bills into insolvent megabanks. Keep guaranteeing losses that the dying dinosaurs will leave as they disappear.

Spend our way to prosperity ? Never worked before and it ain't gonna work now.

Oh, and by the way, WW II industrial production brought us out of the great depression. Other government spending programs didn't help one bit.

Jan 22 12:02 PM

[thatguy57z:]

well it sounds like your doing well at this time..now you should pull all your money now because your going to start loosing it to day,its all a smoke screen, its all a setup. the market is going to drop down around 6500, and everyone is going to pay. the government has no money, why do you think the taxes payers a paying for it. print more money the chines wont lend us anymore money and no other country will ether, where done for now, and the big three have to go down and the housing big banks that are thieves fannie ma and freddie mac and all the real estate. if your not a contribution to the high archy then your ass out


On Jan 22 10:20 AM Ksankar wrote:

> I am a small time investor buying good companies at very cheap prices..I
> am able to afford that risk/reward scenario..I still have lots in
> cash in my brokerage account..Cant the government do the same ..invest
> in projects which are cheap to come by..infrastructure related,healthcare
> and education reforms..rather than pump more money into failing banks..At
> this point I feel the FED has done extraordinarily well and should
> back off and let the market do the rest.
>
>
> Thanks for a great article.

Jan 22 12:44 PM

[thatguy57z:]

your frist comment explane your comment..there is no Global Warming, no Global Warming.


On Jan 22 12:33 PM Mark Goldes wrote:

> The Auto Industry can Kick-Start Economic Recovery!
>
> “Why sometimes, I’ve believed in six impossible things before breakfast.”
> Lewis Carroll
>
> Rapid rebirth of the automotive industry is now a matter of urgency.
> To the surprise of almost everyone, as unlikely as it may seem, revolutionary
> energy technology can change that goal from fantasy to reality.<br/>
>
> Several renewable new energy systems are in development throughout
> the world – as they reach the market, demand for fossil fuels will
> drop. However, few of these innovations have the potential to catalyze
> changes in the entire energy picture. Even fewer can substantially
> wind down carbon dioxide production fast enough to avoid the most
> drastic, life threatening, impacts caused by Global Warming.
>
> The earth is immersed in an extremely dense sea of energy. In 1926,
> inventor Hans Coler, in Germany, tapped what he termed “Space Energy”.
> His first generator delivered a few watts of electricity. During
> 1937, Coler demonstrated a second, 6,000 watt, generator that was
> later shown to the German navy. During WWII, a highly secret R&amp;D
> project supported Coler, in attempts to achieve production in order
> to recharge submarine batteries without the need for a sub to surface.
> Late in the War, the Allies bombed the lab. After hostilities ended,
> Coler cooperated with British Intelligence, which published a Report
> in 1946, concluding his achievement was real. In 1979, the British
> Intelligence Report was declassified. Today, it can readily be found
> on the internet.
>
> We are developing revolutionary new technology. Some of our generators
> may prove to be tapping the same, Space Energy resource. It is now
> often referred to as the Quantum Vacuum, or Zero Point Energy (seekingalpha.com/symbo...).
> U.S. Patent, No. 7,379,286 (not directly connected with our work)
> is entitled: Quantum Vacuum Energy Extraction. It provides a comprehensive
> discussion of the Zero Point Field. The Patent is readily available
> on the web and provides scientists and skeptics with an excellent
> analysis.
>
> Unconventional energy conversion systems are under development in
> several countries. Those inventions that become practical products
> may prove to be tapping this never previously commercialized, renewable,
> abundant source of energy. Revolutionary new energy conversion devices
> can be manufactured in many of the world’s existing factories. They
> are likely to prove inherently cost-competitive. Not only can they
> be used to power homes and businesses of every variety, but also
> to make practical cars, trucks and buses that need no engines, batteries,
> or any variety of conventional fuel or recharge.
>
> Advanced designs will soon be capable of producing torque and/or
> electricity on a self-sustaining basis. Devices without moving parts
> are comparable to an inexhaustible electric battery. One Proof-of-Concept
> prototype was evaluated by Lee Felsenstein, EE. He concluded it to
> be analogous to the early work on the transistor, which eventually
> led to a Nobel Prize and the creation of Silicon Valley.
>
> Generators we are developing are expected to generate this much power
> and demonstrate replacement of the plug needed by a plug-in hybrid
> car, within a year. This will be a harbinger of automobiles that
> need no conventional fuel. With normal progress, prototype new energy
> conversion systems are anticipated to replace an automobile engine
> within three years. That goal might be achieved more rapidly if development
> involves four teams of engineers and technicians working on a 24/7
> basis. These prototypes will open a path to mass production of entirely
> new varieties of automotive power plants. Vehicles powered by these
> technologies will never require conventional fuel of any kind. <br/>
>
> Cars can become a source of income
>
> Vehicle to grid (V2G) power was demonstrated by Google and PG&amp;E
> during 2007. It was recently estimated that selling power to the
> grid from future production hybrid electric cars might earn the vehicles’
> owner $4,000 each year. This assumes that power will be drawn by
> utilities from the car’s batteries, by means of a two-way, plug.
>
> In the future, cars powered by new energy conversion systems are
> expected to earn much more, as these generators are anticipated to
> replace both batteries and car engines. Therefore, they are expected
> to produce far greater amounts of electricity. No plug will be required.
>
>
> Generators of the variety we are developing to power electric automobiles
> might be thought of as analogous to a fuel cell that needs no hydrogen.
> We can easily switch this cell on or off. When the car is driving
> the conversion device is switched on, providing energy to the electric
> motor that propels the car. When the vehicle is parked, the motor
> that drives the vehicle is turned 'off', but the modular device remains
> "on", still producing energy, like a fuel cell that needs no fuel.
> In larger cars, trucks and buses, up to 150 kW, produced by the unit
> while the motor is off, can be transferred from the vehicle through
> a wireless technology requiring no physical connection to the parked
> vehicle, providing power to the utility grid. Instead of paying to
> park, the electric power utility may decide to pay vehicle owners,
> because their cars and trucks become a source of electricity, a clean
> alternative to any existing variety of power plant. Over a reasonable
> period of time, payments to the owner may be sufficient to reimburse
> the purchase price of many vehicles.
>
> Once cars, trucks and buses become available that need no fuel and
> can earn their keep, it is logical to expect automotive manufacturers
> will sell every such vehicle they make. Plants that have been shut
> down will reopen. Auto workers who have been laid off could have
> the opportunity to be rehired. Large numbers of new manufacturing
> jobs will be created.
>
> A revolutionary product this far-reaching has the potential to provide
> huge numbers of new jobs and opportunities for new enterprise. The
> economic impact of cars as power plants is likely to prove a surprising
> way to stimulate the global economy.
>
> It can also provide distributed generation of electricity wherever
> the grid is lacking or unreliable. Moreover, cars can wirelessly
> power homes and businesses. Imagine the many advantages, such as
> the aftermath of storms and other disasters.
>
> These technologies will rapidly reduce the need to import fuel and
> thereby accomplish a huge reduction in the balance of payments, a
> drain at present on our economy.
>
> Auto manufacturers are already preparing to market plug-in hybrids
> and electric cars. However, present technology sharply limits projected
> production volumes. Eliminating fuel burning engines and the need
> for batteries and recharge requirements will open huge new markets.
>
>
> When jet engines were proposed for airliners, experts projected it
> would take 20 years for the changeover to take place. In fact, it
> took only 5 years!
>
> When World War II began, auto makers rapidly shifted production to
> tanks and aircraft. These changes required massive reorganization.
> Shifting to new energy conversion systems that require no fuel or
> recharge is infinitely less difficult. It only requires the determination
> to adapt to rapid change that can insure not merely the survival,
> but the blossoming of the industry, instead of its destruction.<br/>...
>
> The auto industry has the potential to catalyze, with a kick start,
> a global economic recovery.
>
>

Jan 22 12:57 PM

[henarl:]

Mark Goldes: "Look, up in the sky - it's a plane, it's a bird" - no it's Krypton.

Jan 22 01:32 PM

[CLH:]

Yes you are right Anton. Capitalism always cures its mistakes while govt. is incapable of doing anything right.

Jan 22 08:32 PM

[Third Party...:]

The author states "What was the government program that fixed this economic problem? The answer is none at all. The government didn't lift a finger to solve this problem."

Not true. The CTFC "reclassified certain positions in the energy futures and options markets from the Commercial category to the Noncommercial category." More to the point, the "certain positions" referred to was ONE trader with a non-hedged speculative position so large that the position was driving oil prices higher. The next few days after the reclassification oil fell $25/bbl and then continued to fall to the $105 range.

Also, I suppose one could argue that the government policies that led to the real estate bubble and eventual credit crash can also be blamed. Consumers unable to find credit, therefore spending money, had to curtail spending leading to less demand and further falling oil prices.

Clearly government programs led to the fall in oil prices, even if by accident or too late.

Jan 22 09:30 PM

[Snowboard 2k01:]

The government did have a hand in the oil price dropping. First they lifted the ban on drilling and secondly they reversed the flow of oil in the stadistic (SP) reserve,

On Jan 22 09:32 AM kelm wrote:

> An excellent analysis - thank you. China is planning to spend $2
> trillion this year alone on stimulus. That stimulus will go to building
> infrastructure making their economy even stronger. As their tax receipts
> are dropping due to economic contraction it is a likely bet that
> they will utilize some of their foreign currency reserves to pay
> for this. At very least it is hard to see them taking on more reserves.
> As our bond bubble bursts and bond prices collapse it may prompt
> them to start selling treasuries sooner rather than later. The opportunity
> for a significant increase in tensions is apparent.

Jan 22 09:59 PM

[Robert Wein...:]

Anton Wahlman you are right on the money !

The officials in Washington are way over their heads and have no clue on how an economy works or how real wealth is created. They have no understanding that they are very capable of sending our country into chaos. There really is a limit to how much we can borrow but they don't know it (or they simply want to get re-elected )

There is still a large percentage of the population that believe the government can provide universal health care and more because they have no idea how bad we are and that the only reason we appear to be doing great is that we are mortgaging our future to do so.

If only we could have a policy of letting the free market do its magic we would all be so much better off.

I look forward to reading more of your articles

Jan 23 01:12 AM

[Kunst:]

This solution is like finally losing a bunch of weight, because you have cancer.

Jan 23 01:21 AM

[a. palmer jr.:]

The one thing that affects oil (and everything else) prices is when we do or don't buy it. With unemployment as high as it is now some of us won't need to drive to work, thus lowering the price of gas.

Jan 23 06:32 AM

[CaptainJJack:]

What a silly, fatuous analysis.

Jan 23 07:12 AM