Other Voices: Blame deficit spending for high oil prices
Some folks blame demand from Brazil, Russia, India, and China, the BRIC countries, for the run-up of gas prices. Others ask us to blame the oil companies or speculators.
Given that our energy policy was formulated behind closed doors and access to that policy was refused on the grounds of “executive privilege”; that Exxon had profits of over $40 billion in 2007; the administration wants to fill the Strategic Petroleum Reserve while simultaneously drilling for oil in the Alaska National Wildlife Refuge; and the oil market is not a free market (there is a cartel at the top and an oligopoly in between), the tendency to think conspiracy is natural.
As Paul Harvey says, however, “now for the rest of the story.” To this end, I offer a “tale of two countries.”
Country A follows a don’t-tax-and-spend policy – running huge deficits, cutting taxes, giving its citizens tax refunds, sending out checks to stimulate demand, etc. Country B follows a tax-and-spend policy and dutifully balances its budget. What are the effects of these policies, i.e., don’t-tax-and-spend vs. tax-and-spend?
The general set of functions that have been traditionally attributed to money are (from “Money, Banking, and Financial Markets” by Robert D. Auerbach):
• Medium of exchange
• Temporary abode of purchasing power
• Store of value
• Unit of account
• Standard of deferred payment
The one particular interest to us is “store of value.”
The more that Country A engages in deficit spending, the more it depletes its currency’s store of value.
For a very short period, this may not be evident, but continued over a period of years, the lack of value will be evident by higher prices for commodities such as oil, metals, grain, and other commodities when expressed in Country A’s currency. Because Country B has taxed for what it spends, commodity prices expressed in Country B’s currency will be stable and country B’s government expenditures have zero, zip, nada effect on the store of value of its currency.
The BRIC countries are experiencing an economic awakening and a period of rapid and likely prolonged growth. While it is true that their growth is undoubtedly fueling a worldwide growth in the demand for all commodities, that demand is only a part of the reason why commodity prices, including oil, are skyrocketing in this country.
We all know – Republicans and Democrats alike – that government cannot give us something that it hasn’t taken away from us first.
When government spends what it hasn’t taken, the value of its currency is depleted.
That means if one has a savings account, CD, money market account, even if that account is growing in nominal value, e.g., 2-3 percent per annum, the purchasing power of that account (real value) may be declining.
A major part of the blame for today’s high oil and commodity prices must be assigned to deficit spending.
Paul W. Higginbotham lives in Penn Valley.
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