Barack Obama’s awful, no good, very bad day

Barack Obama has had a bad day. His bad day actually started last Friday when the stock market dropped 500 points on news of Europe’s failure to deal with its own debt crisis. After the close of markets that day, Standard and Poors, one of the rating agencies for financial bonds, made a long feared announcement that it was downgrading the credit rating of the United States. To make matters worse, the U.S. federal debt was revealed to have reached 100 percent of GDP a few days earlier, a milestone not seen since 1947.

Over the weekend, investors and ordinary Americans (who are one and the same if they have a pension, an IRA, or a 401k) contemplated how the downgrade would affect Wall Street and Main Street. To add to the somber mood, on Saturday, August 6, an Afghan insurgent shot down a U.S. Army CH-47 Chinook transport helicopter killing thirty Americans, including members of a U.S. Navy SEAL team. Seven Afghan soldiers and a civilian interpreter were also killed.

There was much speculation as to what would happen when the financial markets around the world opened today, the first trading day after the announcement of the downgrade. What happened was what some observers called a financial “bloodbath.” The stock market crashed for the second time in two trading days. The Dow Jones Industrial Average fell 635 points to a level that erased almost ten months of gains. Financial markets around the world were hit.

At this point, many economists are warning that the United States is likely entering a second recession. In a Dick Morris column, James Fitzgibbon, director of the Highland Fund called today “the second phase of the meltdown.” Fitzgibbon believes that “stocks, real estate will collapse and keep falling into 2013. The lows of 2009 will be easily taken out on the downside.” Chillingly, Fitzgibbon believes that the worst is yet to come: “The real horror will be later in the year when the U.S. Treasury Bond goes into a freefall. Then a depression is possible. Soaring interest rates. Collapsing asset values. Contracting economic activity. Surging unemployment. And business closures.”

This is a particularly bad day for Barack Obama for several reasons. ABC News notes that the selloff sharpened after the president spoke in the afternoon and called for more taxes. This shows that investors have lost faith in President Obama’s vision for the nation. They realize that the fiscal problems of the United States are too great to be fixed by raising taxes on the wealthy. The only solution to the problem of overspending and deficit reduction is to cut spending, a prescription that President Obama and the Democrats have steadfastly resisted.

The second reason that today was a bad day for President Obama is that he must realize that the new crisis is his fault. This is not a crisis that he inherited from George Bush. This one is purely of his own making. The debt crisis is due to the fact that President Obama’s Keynesian stimulus projects have failed miserably while increasing the federal debt by a third. President Obama has no serious plan to repay any of the money that he has borrowed in the name of the American people.

The president must also realize that, as the U.S. economy sinks into another recession, his hopes for re-election also diminish. Voters generally vote their wallets. If times are good economically, they vote for the incumbent. If times are hard, they vote against the incumbent. In a Gallup poll taken before the recent stock market crashes, President Obama’s approval rating was down to 43 percent (with 48 percent disapproving). With the bad economic news, his approval rating will only fall further.

This is not altogether unfair. The current carnage in the world’s financial markets is the logical end result of his policies. His administration has been an unending saga of new regulations on business, not the least of which is Obamacare, that stifle job growth. His solution to the first economic crisis was to borrow money and spend it on pet projects. An additional attempt to resolve the crisis was to print more money through the Federal Reserve’s quantitative easing programs. As a result, the United States has the highest unemployment in recent history, a downgraded credit rating, and a devalued dollar, all due to President Obama.

In Georgia, the unemployment rate is even higher than the national average. According to the Georgia Department of Labor, Georgia’s unemployment rate is at 9.9 percent while the national rate is 9.2 percent. Three years after the initial crash of 2008, Georgia’s foreclosure rate remains the sixth highest in the nation according to the Atlanta Business Chronicle. This has led to falling tax revenues for the state and local governments, which has in turn led to massive layoffs of government workers and teachers. Untold numbers of Georgia businesses have failed. Georgians have watched their retirement plans dwindle year after year. After the events of the past few days, it seems that all of this will get worse. Barack Obama lost Georgia by five percent of the vote in 2008. He will likely lose by much more in 2012.

The last bad thing that happened to Barack Obama today is that Timothy Geithner informed the president that he would not resign as secretary of the treasury. As one of President Obama’s most trusted economic advisors, Geithner bears much of the responsibility for the current economic fiasco. Federal Reserve Chairman Ben Bernanke and Austan Goolsbee, chairman of the president’s Council of Economic Advisors, are also reportedly not resigning.

It is a bad day for President Obama. Unless he reverses his economic course, a change that he is most likely incapable of making, he will go down in history as a latter-day Herbert Hoover. He will be the president who spent the United States into an economic calamity, the likes of which has not been seen in eighty years. That is bad for President Obama, but worse for the rest of us.

If you disagree with the analysis presented in this article, please read “Serious questions for liberals, Democrats, and other Obama supporters.” If you can answer the questions presented, the author would welcome your response, either through email at thorntondavid@yahoo.com or as a comment.

Photo credit:  Elizabeth Cromwell/Wikimedia

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Why gas prices are going up... and how to stop them

Gas prices have risen sharply over recent weeks and are forecast to continue rising.  According to Atlantagasprices.com, local gas prices have risen by almost thirty cents in the past month and by a dollar in the past year.  Atlanta’s gas prices are about nine cents cheaper than the national average, but have risen at the same rate.  According to a forecast by the U.S. Energy Information Administration, gasoline prices could exceed four dollars per gallon this summer.

To find out when the country will get relief from these high gas prices, it is first necessary to understand why they are rising in the first place.  One reason that gasoline prices are higher is that it is almost summer.  Refiners use a different recipe in summer months to create a “summer blend” gasoline.  Cheaper additives used in winter tend to evaporate and cause pollution in the warmer summer months.  Federal and local laws require different additives in summer to preserve air quality, but more expensive additives tend to drive up the price.  Additionally, as refiners change blends shortages can result that drive up prices further.  Federal law requires the sale of the summer blend from June 1 to September 15, but some local governments have their own timeline.  To have the product in stations prior to June 1, production must start in March or April. 

One good thing about the switch is that is that most drivers will notice a slight increase in fuel economy when using summer blend gasoline.  This is because there is more gasoline in the mixture and fewer total additives than in winter gasoline.

The U.S.E.I.A. Short Term Energy and Summer Fuels Outlook (April 12, 2011) mentions two other factors in the rising price of gasoline and oil.  First, one component of rising oil prices is due to growth in demand as the world and U.S. economies finally recover from the recession.  Second, oil supplies are being reduced by the disruption of Libyan oil exports and the continuing unrest in the Middle East.

Looking back through history, it is easy to see a pattern in which oil prices rise sharply and the economy subsequently plunges into a recession.  These oil shocks have occurred several times in the past fifty years.  The Arab oil embargo of 1973 led to the first oil shock and a major recession from 1973 to 1975. A second occurred in 1979 with the Iranian Islamic Revolution and was followed by the recession of 1980 to 1982.  A smaller spike occurred in 1990 with the Iraqi invasion of Kuwait and another in 2001 after the 9/11 attacks.  The most recent oil shock occurred in the summer of 2008.

Oil shocks typically cause a decline in the demand for oil as prices rise, but they also cause a decline in the demand for other goods and services as well.  The reason for this is two-fold.  If consumers are spending more at the pump, they have less money to spend on other things.  Second, the prices of other things are rising as well because oil and gasoline are used to manufacture and transport a large number of products.  As demand falls off, companies earn less in sales and therefore produce less.  The economy shrinks into a recession.  This was illustrated in vivid detail in 2008 as the price of oil collapsed after the economy crashed.

Conversely, the rising price of oil is an incentive for producers to produce more oil.  Oil reserves that were not economical to tap at lower prices are suddenly more attractive.  Other producers, such as OPEC countries, have historically ignored production quotas to take advantage of rising prices as well.  The increase in the supply of available oil on the market drives the price down.  Eventually, supply and demand reach an equilibrium at a lower price.

The crisis in Libya has also helped to drive up oil prices around the world.  Even though Libyan oil primarily supplied Europe, when Libyan production was lost European companies had to look elsewhere for oil to meet their needs, driving prices up.  In the ongoing struggle, Libya is estimated to have lost two-thirds of its oil production.  Prior to the war, Libya ranked 17^th in world oil production with most of its exports going to Italy and Germany.  The disruption is the eighth largest oil disruption in modern history.

There is still more unrest in the Middle East as well.  The “Arab Awakening” has spread from Tunisia and Egypt throughout the Arab world.  The uprisings have not yet reached Saudi Arabia, the world’s largest oil producer, but Saudi forces have intervened militarily to support the ruling family in neighboring Bahrain.  Unrest in more oil-producing countries would have a further upward pressure on the price of oil.  As always, Iran’s nuclear ambitions also threaten the region.

There are other factors in the price of oil that are not discussed in the Energy Information Administration’s brief.  Chief among these is the Obama Administration’s moratorium on off-shore drilling.  Originally, President Obama had announced a plan in March 2010 to allow drilling in the eastern Gulf of Mexico and parts of the Atlantic.  After the BP oil spill, Obama reversed his decision and temporarily banned offshore drilling in waters deeper than 500 feet.  He lifted the ban (which was struck down by the courts in its original form) in October, just prior to the midterm elections, and kept the ban on the eastern gulf and Atlantic. 

Even after the ban was lifted, the Administration dragged its feet on issuing drilling permits to the point where oil companies sued the Department of the Interior.  Again, the courts found in favor of the oil companies and agreed that the new rules issued after the ban was lifted imposed an informal moratorium.  The government continued its policy of delaying permits and was found in contempt by a U.S. district judge in February 2011. 

Ironically, while American oil companies are banned from drilling in the Gulf of Mexico, other countries are not.  Cuba has sold drilling rights to more than a dozen countries including Russia, Sudan, Myanmar, and Vietnam.  China is currently negotiating leases with Cuba that would allow drilling within 45 miles of Florida.

Another government policy that has a negative effect on oil prices is quantitative easing.  The Federal Reserve, led by Ben Bernanke, has been increasing the money supply by buying government bonds.  As more money enters the market each dollar is worth less because price falls as supply increases.  Each dollar will buy less because it has been devalued.  This is called inflation. 

Bernanke does not believe that his inflationary policies affect the price of oil, but logic dictates that if each dollar used to purchase a barrel of oil is worth less then the oil producers will want more of them for their product.  If a barrel of oil is sold for more dollars than before, the price of the gasoline it produces will also increase.  Essentially, Bernanke agrees that inflation is likely, but doesn’t think it affects oil prices.

One factor in oil prices that is likely not a major problem is speculation.  In another flashback to 2008, President Obama is again demonizing commodities traders as speculators who are driving up the price of oil.  A quick comparison of the current OPEC basket price for oil and recent futures prices for oil on the Chicago Mercantile Exchange. 

On April 25, the OPEC basket price was $119.38 per barrel.  In contrast, the futures prices listed for the close of trading on April 26 are in the $112 to $113 range for the next year.  It seems that traders are betting that the price of oil will actually decrease slightly from its current level rather than forcing the price up.  Similarly, Oil-Price.net shows the current price of oil at $112.13 which is less than the basket price being charged by the oil-producing members of OPEC.

There are several things that President Obama could do to help alleviate rising oil prices.  The most obvious is increasing the supply of oil available to help keep prices down.  In July 2008 President Bush lifted the presidential ban on offshore oil exploration and called on Congress to rescind a congressional ban.  The effect was an immediate decrease in the price of oil even though new sites could not be drilled for years.  A similar move by Obama could reverse the trend of rising oil prices and prepare new oil fields that will help relieve the American dependence on foreign oil.  Unfortunately, Obama’s policy has been the opposite with bans on offshore drilling and a resistance to issuing new drilling permits.

Second, President Obama could take steps to secure Middle Eastern oil fields.  This might mean politically unpopular moves such as expanding the U.S. role in Libya to topple Gadhafi.  If the U.S. and NATO intervene with ground troops to break the stalemate between Gadhafi and the rebel forces, Libyan oil production could recover to full capacity.  President Obama is unlikely to commit more U.S. forces in what is already an unpopular war.  This is especially true considering Obama’s anti-war base and Democratic criticism of the Iraq War as a “war for oil” as well as the president’s indecisiveness on military matters.

Another option that could give consumers some relief would be to declare a gas tax holiday.  In June 2008, Georgia Governor Sonny Perdue stopped a scheduled increase in the Georgia gas tax as prices approached record highs and suspended the gas tax entirely in the wake of Hurricane Katrina in 2006.  The Georgia gas tax is automatically scheduled to increase on May 1.  The increase is tied to rising gas prices.  The new rate will be an increase of 2.8 cents to a total of 12.9 cents per gallon.  The federal gas tax is even higher at 18.4 cents per gallon. 

By not collecting gas taxes, President Obama would cut the price of gasoline at the pump by almost twenty cents per gallon.  The problem is that this is a temporary fix that would do nothing to address the problems of supply and demand that drove prices up in the first place.  Many believe that a better course would be to enact broader tax reform for more permanent relief.  In any case, President Obama is unlikely to push for a tax cut of any sort.

If all else fails, Americans can still expect the price of oil to fall.  As history has shown, the price of oil generally falls when the economy enters a recession.  Oil at $100 per barrel might not be enough to cause a recession by itself, but in the current weakened economy it is far from the only negative factor.  Worries over deficit spending, the negative effects of Obamacare, the possibility of rising taxes, and new regulations that are strangling business are all combining to slow the recovery.  It seems increasingly likely that Obama’s policies and world events are combining to cause a double-dip recession that will ultimately at least give consumers some relief at the gas pump… if they still have jobs.

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Gas prices, Obamanomics, and the return of inflation

Drivers around Atlanta have undoubtedly noticed rising gas prices over the past few weeks.  Georgiagasprices.com reports that the average price of regular unleaded gasoline in Georgia is $3.428, just below the national average of $3.487.  Georgia’s average price has risen 42 cents per gallon in the past month and 78 cents in the past year.  This is an even sharper increase than the national average which is up 36 cents in the past month and 74 cents in the past year.

Part of the reason for the increase in gasoline prices is undoubtedly the unrest in the Middle East.  Whenever there is political instability in oil-producing regions of the world, which is fairly often, the price of oil tends to rise.  This, in turn, causes the price of gasoline and other items made from oil to rise.  The problem is compounded by the Obama Administration’s attempts to stop new domestic oil exploration and the EPA’s new carbon regulations. 

The rising price of oil may both mask and contribute to something more insidious as well:  a return of inflation.  Rampant inflation and resulting stagnant economic growth characterized the entire decade of the 1970s.  The inflation of the 1970s was caused by many of the same factors that are present in our economy today.  President Nixon ran up federal deficits and imposed wage and price controls.  Along with Federal Reserve Chairman Arthur Brooks, Nixon also increased the money supply sharply in an effort to end a recession and reduce unemployment.  Further, oil prices spiked twice in the 1970s as well; first, in 1973 with the Arab Oil Embargo and again in 1978 with the Iranian Revolution.

These factors are mirrored today in President Obama’s economic policies.  The federal deficits under Obama have led to an increase in the federal debt of $3.5 trillion.  Obama has also launched controls in some areas of the economy.  The president capped the pay of Wall St. CEOs of companies receiving federal bailouts.  He has also openly considered the idea of price controls as a remedy for health insurance costs that are rising even more sharply in the wake of the passage of Obamacare.  Federal Reserve Chairman Ben Bernanke is currently increasing the money supply by printing money under the guise of “quantitative easing.”

It is axiomatic in economics that as supply increases, price decreases.  Therefore, we can predict that as the supply of dollars increases through quantitative easing, increasing the money supply, that the price (or value) of those dollars will decrease.  Essentially this means that as the government prints more dollars, each individual dollar is worth less. 

Already, the specter of inflation is rearing its head in world markets.  One of the most notable areas of price increases is in world food markets, where food prices are at the highest point since the UN started tracking them in 1990.  Ironically, the rising cost of food in poor Arab countries may have been partly to blame for the outbreak of revolts against Middle Eastern dictators.  The unrest then further drives up oil prices, which leads to more inflation. 

President Obama with Fed Chairman Ben Bernanke

Bad weather and crop failures around the world have contributed to rising food costs, but economists believe that government mandates to use more food for ethanol production instead of consumption also play a major role in rising food costs.  Economics teaches that when something becomes more scarce, as when food is diverted to manufacture ethanol, it becomes more expensive. 

At the same time, ethanol remains uncompetitive in spite of government subsidies.  A plant in Soperton, Ga. that produced ethanol from wood recently shut down in spite of receiving over $150 million in government loan guarantees and grants, while a corn ethanol plant in Camilla, Ga. is in bankruptcy.  Ethanol subsidies and mandates are detrimental in that they add to the federal deficit while also driving up world food prices.

The Consumer Price Index (CPI), which measures inflation, has been relatively steady.  The CPI, however, does not typically include food and energy.  When food and energy prices are included, the CPI shows a sharp uptick in recent months. 

A further indication of the onset of inflation is the rising price of gold and silver.  Precious metals, gold in particular, are often considered a hedge against uncertainty and inflation.  After falling with the economy in 2008, the price of gold has rebounded sharply.  Since President Obama took office in 2009, the price of gold has risen from less than $900 per ounce to $1,467, an increase of more than 60%.  Silver has reacted even more dramatically, rising from just over $9 per ounce to $35, an increase of almost 300%.

Many economists do believe that monetary policy is the sole cause of inflation and that rising oil prices are a symptom of inflation, rather than being one of its causes.  In this case, rising oil prices are still bad news for the U.S. and world economies.  There is a strong link between spikes in oil prices and recessions.  The typical pattern is that oil prices increase dramatically, at least partially causing the recession.  As the economy slows, demand for oil decreases, which leads to a decline in the price.  This often allows the economy to rebound. 

This is the pattern followed in 2008 when record high gas prices were experienced just prior to the financial collapse.  After the onset of the recession, oil and gas prices dropped dramatically.  The Obama Administration’s regulatory and financial policies postponed the recovery and kept oil prices low until recently.  As the economy slowly recovers, oil prices would normally start to creep upward again.  The unrest in the Middle East provided more upward pressure as well.

Algerians riot over high food prices in 2009 (Flickr: 110109 Algeria slashes food prices amid riots)

In the current economic climate, the Federal Reserve is dramatically increasing the money supply.  At the same time, political unrest in the Middle East and Obama Administration policies at home are driving up the cost of oil and energy.  Problems with crops and diverting agricultural resources to ethanol production are increasing the cost of food as well.  If these trends continue, Georgians can expect gas prices to continue to rise, along with the prices of milk, bread, meat and other foods.  Eventually, if left unchecked, inflation will spread to other areas of the economy as well.

The cure for runaway inflation is almost as bad as the disease.  The rampant inflation of the 1970s was defeated only by the strategy of Ronald Reagan and Federal Reserve Chairman Paul Volcker to tighten the money supply (by increasing reserves of central banks and reducing the supply of money in the economy).  This strategy led directly to the recession of 1980, but ultimately inflation was defeated and the economy entered a strong recovery.  Other policies that President Obama is unlikely to embrace, such as tax cuts and reducing regulation, helped to ease the transition to tighter monetary policies.

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