Ashby 2008

I was reminded yet again of some of the lasting effects of the Bush presidency as I read the paper today. An article in the NY Times on OPEC had the following paragraph in it:

“OPEC said the reason prices rose to nearly $100 a barrel in recent weeks had little to do with supply and demand but was a result of trading by commodity investors and hedge funds, as well as geopolitical instability.”

Beyond the obvious impact this Administration has had on geopolitical instability, it is also worth noting that this President has unwittingly increased the amount of speculation on our economy. I talked about this in my paper on sub-prime mortgages, but the tax cuts the President likes to talk about didn’t actually go to business investment or to new business startups. The government tracks those figures, and they did not appreciably change after the tax cuts went into effect. So where did the money go? A very large part of it went to hedge funds, they used it to speculate on things such as mortgages, oil and gas futures.

The bulk of the tax cuts went to the wealthy, or the very wealthy, people who already had everything developed in investment strategies, with a spread of risk. When these people then received their tax cuts, they didn’t put the money into low-risk investments – they put it into high-risk investments, because it was essentially found money. The government doesn’t actually track hedge funds (the subject of a future post…), but hedge fund industry sources suggest that close to a trillion dollars have gone into hedge funds during the Bush presidency. Moreover, the hedge funds had to find a place to put the money, bets to make. Again, no firm numbers are available, but anecdotally it seems probable that hundreds of billions of that money was used to speculate on energy futures. Hedge funds bet that oil prices would go up, and because there was suddenly more money chasing oil futures, they did go up. This is how bubbles work – too much speculative money chases a given economic activity or output, causing the prices to spike upward.

As a side note, I have nothing against speculation – this is an important part of our economy. However, Republicans used to believe that the economy was for all practical purposes a natural organism, with its own internal balance. Deficit spending broke this balance, and led to negative consequences. In this case, the deficit spending greatly increased the amount of speculative capital, which has had a range of negative consequences on our economy. Does anybody else remember the days when the Republican Party actually understood the inflows and outflows of economic activity…?

So if energy prices are in a bubble, they should come back down, right? Unfortunately, not likely. A few years ago, OPEC used to be concerned that if prices went too high, it would cause a global economic downturn, which would significantly reduce demand, and further would cause countries to ration their use and look for alternatives, which would also reduce demand. For this reason, OPEC tried to keep the price within a certain range. I remember when that price range was about $30 a barrel. Now, however, OPEC and the oil producers have had an epiphany – people will pay $100 a barrel, and demand won’t drop.

The Bush tax cuts and geopolitical instability are by no means the only factors driving oil price increases – the industrialization of the third world is also a large factor. However, there was a time when Republicans took the responsibilities of government seriously. They realized that actions of government often had unintended consequences, and they were cautious to protect against government actions which harmed our country. This Administration, surely the worst Republican Administration in history, seems to have the opposite goal – they are intent on having the government do as many stupid things as possible, just to prove that government is incompetent. The next time you fill up, thank the President for the prices you are paying.

This entry was posted on Thursday, December 6th, 2007 at 3:28 pm and is filed under Blogroll, Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.