The oil standard versus the dollar

Dollar, Oil, Economy

Analyzing the Dollar, Oil, and the Economy

The relationship of the U.S. dollar to oil and the economy is as tenuous as the dollar itself. With the Federal Reserve's power to print fiat currency comes inflation, and with inflation comes the devaluation of the dollar. This is, of course, dangerous to the world's economy -- but it does not altogether explain the incredibly rapid rise of gasoline in recent years. Matt Taibbi (2010) shows, rather, that the rise in the price of oil stems from another point -- the Commodities Futures Trading Commission. Meanwhile, politicians like Ron Paul have observed that the economy is in a poor state for a number of reasons: first, Wall Street has the government in its back pocket and neither are willing to let the economy correct itself: instead they allow the Fed to pump into the economy billions and billions of more dollars, deepening the debt, which is then in turn monetized; second, billions of dollars are being used to fund wars in the Middle East, which serve the interests of several parties, including Big Oil. In a way, all of this is connected -- the dollar, oil, and the economy. But to truly understand the nature of the problem, one must realize that what is called the dollar is really nothing more than a Federal Reserve Note; and that the Federal Reserve Note, like oil, is simply being used as a means of control. The type of control that we today are witnessing is nothing more than the merger of state and corporate powers -- also known as Fascism. This paper will show how the one idea that ties the dollar to oil and the economy is fascistic power.

Oil Independence

Some libertarians and right-wing conservatives view the problems lurking behind the devaluation of the dollar, the destabilization of the economy, and the rising price of oil as one of "oil dependence" -- dependency, in other words, on the Middle East. As Ryan Dawson (2011) has noted, one of the major reasons for U.S. occupation in the Middle East is the laying of oil pipelines: "Afghanistan is…positioned as the final slot for the TAP pipeline, the equivalent of an Eastward BTC line to feed oil hungry Asia," the pipeline sponsored by BP and the West. However, the problem of oil independence is a complex one -- and is not the solution that some think it is. Julie Borowski (2011) of Freedom Work attempts to unravel the complexity, but fails to fully explain the issues: true, "Americans are feeling the pain at the pump and the grocery store…[as] gasoline prices have soared by 13.7%…[and] food prices rose 3.9% last month which is the largest gain since November 1974," as Borowski notes; but while her observations are correct, she asserts that overregulation is to blame.

Yet, anyone familiar with the Gulf Oil spill, or the devastation that occurs daily in the Niger Delta, will assert that the oil industry is not a victim of overregulation. Borowski laments the fact that the free market is not really free -- but that is not the fault of regulation. Regulation is necessary, and, in fact, as Matt Taibbi (2010) shows, deregulation is what has caused prices to soar -- not the gas tax or overregulation. And it has nothing really to do with the oil industry itself. Again, the problem can be traced right back to Wall Street and its trading of commodities.

Taibbi notes that John McCain used oil independence as part of his campaign pledge in 2008 before he lost to Obama. Oil independence might not be a bad thing. But even that does not get to the heart of the reason why gas prices and food prices have gone up dramatically. The two are linked for a reason. And it is this particular issue that Tea Party proponents often miss. As right as the Tea Party is about many issues, the commodities trade often slips under its radar -- simply because people like Borowski fail to see how it truly affects the market. Taibbi is one of the few people to actually have a line on the problem: "Gas prices were going up for reasons completely unconnected to the causes these candidates were talking about. What really happened was that Wall Street had [initiated]…commodity index investing" (p. 129).

Commodity index investing was the fruit of a 1991 agreement between a Goldman Sachs subsidiary and the Commodity Futures Trading Commission, which allowed speculators to "be recognized as 'bona fide hedging' -- and…this was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets" (p. 131). Index speculation became a new investment vehicle. Essentially, investors were able to act as speculators (through Goldman Sachs) by investing in the S&P Goldman Sachs Commodity Index, "buying monthly futures contracts for each of the (24) commodities (cocoa, coffee, crude, gasoline, copper, etc.)" (p. 136). Taibbi gives the following example to simplify how commodity index investing (banned, once upon a time, in 1936) works:

Imagine if someone continually showed up at car dealerships and asked to buy $500,000 worth of cars. This mystery person doesn't care how many cars, mind you, he just wants a half million bucks' worth. Eventually, someone is going to sell that guy one car for $500,000. Put enough of those people out there visiting car dealerships, your car market is going to get very weird very quickly. Soon enough, the people who are coming into the dealership looking to buy cars they actually plan on driving are going to find that they've been priced out of the market (p. 143).

The reason is simply this: speculators, buying from physical hedgers, have driven up the price of commodities. Speculators win every time the price goes up. And currently it is going up and up.

One cannot fault Borowski for attempting to pin the rise in prices on the gas tax or America's dependence on foreign reserves. After all, such is the message of politicians.

The Monopoly

Still, there is more going on than simply that. Big government is working hand in hand with corporations in order to establish monopolies. Adam Smith writes that "The monopolists, by keeping the market constantly understocked by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate" (Smith, 2005, p. 56). Some economists think big government is being unfair to Wall Street by breaking monopolies like Roosevelt once did. Monopolies, however, are not good for the economy and Smith knows as much: "Such enhancements of the market price [by monopolists] may last as long as the regulations of policy which give occasion to them" (Smith, 2005, p. 57). The economic policies of today essentially serve the monopolists, and many consumers are outraged by the way big government kowtows to big banking by rewriting legislation that has been in place for years to safeguard the economy from ruin. Smith expresses as much when he states, "Our merchants… complain much of the bad effects of high wages in raising the price…. They say nothing concerning the bad effects of high profits; they are silent with regard to the pernicious effects of their own gains; they complain only of those of other people" (Smith, 2005, p. 86). No less is true today.

Again, it is Matt Taibbi who points the finger at the 1991 letters written by the Commodity Futures Trading Commission (CFTC) which allowed Goldman Sachs subsidiary J. Aron to call itself "a physical hedger," thus sidestepping the rules meant to keep speculators from driving up market prices. Nonetheless,

On the October 18, 1991, the CFTC -- in the person of Laurie Ferber, an appointee of the first President Bush -- agreed with J. Aron's letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as 'bona fide hedging' -- and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets (Taibbi, 2010, p. 133).

It is precisely this kind of backdoor agreement that has allowed the price of oil to skyrocket. Speculators are acting as hedgers and are thus rigging the prices of commodities like oil and driving them up for greater and greater profits for themselves. It has less to do with oil dependence than with political legalese and the monopolists who know how to pull the strings.

Imperialism

It also has to do with imperialism. The dollar, oil, and the economy are all connected by the idea of Fascism -- the merger of state and corporate power -- and this merger is clearly seen in the imperialistic policies of the American Empire. Howard Zinn (2010) shows how imperialism has been the practice of every Empire, and how a handful of Empires battled for control of the New World that would come to be its own Empire -- the American Empire. John Perkins (2007), likewise, examines how the modern American Empire has affected our economy and our society in his book the Secret History of the American Empire.

Perkins reveals nothing new when he contends that the United States makes up "less than 5% of the world's population…[yet] consumes more than 25% of the world's resources" (p. 5). What he does do with this information is use it as a platform from which to analyze America's position in the global arena. How is America able to consume so much? According to Perkins, "this is accomplished to a large degree through the exploitation of other countries, primarily in the developing world" (p. 5).

As Howard Zinn points out, European powers, beginning in 1897, were pushing their way into China, a potential nation ripe for exploitation. The only problem was that America was not in on the action. What Zinn shows is how the American media, even then, was quick to undermine American isolationism in favor of American militaristic imperialism: "The New York Journal of Commerce, which had advocated peaceful development of free trade, now urged old-fashioned military colonialism" (Zinn, p. 302). The same thing happened in Cuba at around the same time.

The Anti-Imperialist League formed in 1898 and tried "to educate the American public about the…evils of imperialism" (Zinn, p. 314), and the war in the Philippines was its main concern. In 1899, Congress ratified a treaty to annex the Philippines, to the chagrin of the Anti-Imperialist League and "despite the growing evidence of brutality…in the Philippines" (Zinn, p. 317). Such imperialism still exists today. One need look no further than the U.S. occupation in the Middle East. Supposedly there to stamp out terrorism, the reality is that U.S. forces are there to help corporations like BP install their pipelines: As Philip Knightley (2001) reports, the role of Islam has been written to a great extent by the United States: "Keen to see Afghanistan under strong central rule to allow a U.S.-led group to build a multi-billion-dollar oil and gas pipeline, Washington urged key allies Pakistan and Saudi Arabia to back the militia's bid for power in 1996, analysts said. But it was soon forced to abandon…the Islamic purists, who U.S. officials now say are unfit to rule, as the militia began imposing its brutal version of Islamic law." The fact is, the U.S. abandoned the Taliban when it no longer served their interests to support them.

The Collapse of the Dollar

When the reality of Big Oil's use of American military is related to the usurpation of America's money supply by the Federal Reserve, one sees the monolithic role of Fascism very clearly. First, let us consider the reality of the dollar -- or what is really called the Federal Reserve Note. The creation of money "out of thin air" (Paul, 2009, p. 150), or fiat currency, and the monetization of debt, have all changed the way we think of money. Today, paper money is no longer tied to the precious metals it once represented. Inflationary practices have resulted in a steady decline in the value of paper money around the world.