Oil, Intervention, and Ron Paul

Over the past six months there have been untold numbers of articles written regarding the rise in the price of oil, inflation concerns, U.S. military intervention, credit market issues, bank failures, and now presidential candidates. What follows are some thoughts regarding the price of oil, interventionism, and what possible relationship there may be.

The reality is that per barrel oil prices have risen by 400% in roughly 7 years (an average of 57% per year), during which time we have been intensely intervening in the affairs of the Middle East. The obvious correlation issue is this: what is the relationship, if any, between U.S. military intervention and the rise in the price of oil?

If one remembers, part of the argument for stopping Sadaam’s assault on Kuwait was the idea that, ostensibly, only we (the U.S.) were capable of intervening in a way that would prove effective and that our intervention would be a stabilizing factor in world energy prices. The argument went that if Hussein was in control of the Kuwait oil fields he would/could control world oil prices (ostensibly, the risk being far higher prices), and command a far richer enterprise affording him the ability to acquire, perhaps, more costly and ghastly weapons thereby destablizing the region. Similar arguments, albeit dwarfed by the weapons of mass destruction and ‘war on terror’ pretext, were put out five years hence in the context of terrorism with the more recent overthrow of the very same Iraqi dictator. We did indeed intervene as we turned back Sadaam from Kuwait, then intervened in Bosnia, then attacking segments of Afghanistan, and most recently the Iraq war. All the while we have maintained a presence on the Arabian Penninsula, all the while the net result has been that the price of oil has skyrocketed. Please note that this is the exact opposite effect of the stabilization argument. One simply cannot ignore this fact, and I would argue the two are bound and tied together by a chain of paper currency printed virtually at will with no asset backing.

So, here is the formula: FUNNY MONEY INFLATION —-> FUNDING OF INTERVENTIONISM —-> INFLATION

Some argue that there is no relationship, that the rise in the price of oil is merely a function of supply and demand citing the rapidly expanding Chinese and Indian economies, and our own insatiable appetite for oil as the prime price mover. But a growing economy, in and of itself, has absolutely nothing to do with inflation. Economic growth without devices for increasing the money supply actually results in deflation, as it did from the end of the Civil War until 1896. Yet there are others who ignore this demand issue and focus entirely on worldwide credit policies of central banks. If one looks at oil prices prior to Dessert Storm, the price of oil was under $20. After repelling Sadaam, and after the tensions eased, the price quickly returned to the sub $20 range. During the early 90’s it actually hit a low in December of 1993 of $12.56. From that point, we have seen (with a few notable variations) the price rise almost ten-fold in just 14 years. The common thread to this has been an unprecendented increase in the combined measure of central bank money and credit manipulations – some of which even the central banks cannot fully measure (such as M3). Frankly, I believe the nexus is being missed, or ignored, principally because it flies in the face of support for the troops and the president AND is a principle source of cash for those who do business with the government.

The answer to this issue is that we have been paying for interventionism by printing currency, extending credit, and in many seen and unseen ways easing fiduciary media limits – all supposedly “balanced” by issuing debt instruments picked up by China, Japan, et al. We have been financing domestic spending, real estate puchasing, and general consumer consumption with massive debt via a highly loosened credit expansion which has resulted in the very issues to which Ron Paul has alluded on more than one occasion. Elucidations, I might add, which tend to fly right over the pinheads both on the stage, in the gallary, and, notably, in the role of “debate promotion.” My argument then, is that it is precisely this inflation which has resulted in the velocity and magnitude of the rise in oil price, and a general rise in the price of virtually all goods and services. The banking system enabled by our Federal Reserve has allowed an incredible amount of “funny money” to enter the system. Moreover, I would argue that the rise in oil prices would have occurred whether we intervened in the middle east or not. The complete thought is this: The rise in oil prices would have occurred whether we intervened or not, given the same amount of money creation (inflation) by central banks – particularly The Federal Reserve. This, I believe, is the nexus which is being missed in most of the discussions to date.

So it would be true whether you buy guns and build nations with it, or buy health care for children with it – the initial inflation (an unbacked increase in money of all forms) causes a rise in prices either way – but not all items in the economy rise in price to the same degree or at the same time. Also, where you use this inflation makes a difference as well. That is where demand comes in… and the resulting revealing of particular price rises. It should be rather obvious that some products have a more or less elastic level of demand. But in this analysis however, one cannot ignore the nature of the Fed’s need over the last seven years to massively inject liquidity into the economy, which clearly they have by printing money, easing credit, and liberalizing fiduciary media requirements. The reason was (and is) due to the massive cost of our inteventionism, along with domestic policy spending programs such as the farm bill, the “ownership society” mantra, medicare drug benefits, etc. As an aside I have no beef with an ownership society, provided it is based on capitalism- I believe laissez faire to be the one and only solution to all of this. But an ownership society created by government intervention and unbacked currency inflation is hardly free market, laissez faire, and has shown to have been foolhearty. The “ownership society” is turning out to be an unfunded mandate ridden, adjustable rate mortgage trapped, double earning, caffeine dependent rat race.

Clearly, our interventionism in the ME has accomplished nothing with regard to the stability of world-wide global energy prices – in fact it has made it worse. Oil rose precisely concurrent with our increased interventionism. Now, correlation does not prove causation but we do know that inflation causes all goods prices to rise, but not all at the same time. Moreover, basic economics defines inflation as is the act by a central bank of increasing the supply of currency. A general rise in prices is a logical, longer term, consequence of that inflation.

Ron Paul’s position is that the inflation would not have been necessary had we not had to deficit fund our military operations overseas. I think his precision here is right, and that this is rather self-evident now; U.S. military interventionism could only be sustained by the Fed injecting massive liquidity into the system – it is, therefore, monetary inflation in a variety of guises which has been a decidedly magnifying cause of the degree to which oil prices have risen precisely because we are paying for a commodity, oil, which is itself in high demand. We have done so with rapidly inflating currency, and the cause and effect is highly probably.

It is not a case of one or the other, demand or credit, rather it is both inflation of the money supply (all forms) AND the demand for oil which are at the heart of the oil price rise. Our interventionism is merely a side show which justified additional inflation of the money supply to pay for it. Had we used the massive inflation for nationalized health care and “free homes” for everyone the price of oil would have risen just the same. The reason for the inflation was, in this particular historical case, our interventionism – all three are inextricably linked. Interventionist foreign policy required an inflationary monetary policy, an inflationary monetary policy coupled with the inherent demand for oil causes a price rise much higher than merely the demand in a non-inflationary environment (or less inflationary).

Now, Ron Paul argues against an interventionist foreign policy not merely based on the inflation issue but also on a constitutional, Founding Fathers vision argument (non-entanglements). Ron Paul is exactly correct on this matter on both fronts – the fact that the neo-conivers prefer guns and nation-building over health care and homes is irrelevant. The bottom line is that neither are provided in the constitution and the avoidance of both, coupled with a sound currency, would return this country to be in step with the Constitution, the Founder’s vision, and an economic system far less susceptible to boom-bust cycles. Unfortunately, it will probably take utter collapse before people will believe it – at which point they’ll probably blame capitalism and cry for more government intervention.

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Posted in Capitalism Advocacy, Founders Vision, US Presidential Election. Comments Off on Oil, Intervention, and Ron Paul
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