TAKING STOCK

Cheaper oil would grease the economy's skids

by Malcolm Berko

Dear Mr. Berko:
Our investment club would like to know what effect the rebate will have on our economy over the next 12 months. It just doesn't seem logical to me that the Federal Reserve would release $150 billion and expect the economy to recover. While I'm certain it will stimulate the economy, some of us think the effect won't be enough and to work successfully the Fed would have to drop $1,200 per family about every six months to make it work.

Dear W.P.:
Sadly, no matter how you look at it, the latest economic stimulus package hosted by Congress is pure, pandering politics ... a national giveaway program to put pieces of eight in the pockets of voters in time for the November elections. The typical Washington response to an economic problem (social, too) is to bury it under an avalanche of "free" money. And it works. The pain goes away for a little while only to return shortly after the election. And you may be right too: this rebate (which is borrowed money and increases our national debt by $150 billion) is sort of like giving an aspirin to Typhoid Mary so she can return to the kitchen and prepare more meals.

If you take your family to Wal-Mart and buy toys, clothes, camping equipment, office supplies, athletic shoes and sporting goods, that money is basically sent to China. If you decide to use that money as a down payment on a Honda or a Toyota or purchase various electronic devices, then you are depositing your rebate check in Japan. If you purchase a laptop computer, clothing, jewelry, semiprecious stones and leather goods, your rebate check is cashed at a bank in India. If you buy various fruits, vegetables, flowers, silver, coffee, cotton goods and alcoholic drinks, then your check is marked; "pay to the order of Guatemala, Honduras or Mexico." If you purchase TV sets, cell phones, stereo systems, video players, recorders, etc., you are essentially giving that money to Korea and Vietnam. And when you purchase fuel to drive your car or oil to warm your home, that rebate swells the already bulging bank accounts of the Arab Sheiks in the Mideast.

Among the few items made exclusively in the U.S. are cigarettes, Kentucky bourbon, trans fats and Smith & Wesson handguns. And ever since we banned smoking, underage drinking, eliminated fatty acids from our diet and placed restrictions on gun ownership, the dollar began to sink, oil prices zoomed, our national debt increased geometrically, we began losing jobs to overseas competitors; corporations eliminated phone staffs in favor of using "press 1 or press 2 or press 3" technology and rap became the music "du jour."
Oh, the rebate will be an economic stimulus. Congress and the press (both of which are economically challenged) will wax eloquently, praising the Fed for this brilliant strategy.

However, the Fed did not approve the $150 billion giveaway; rather it was foisted upon taxpayers by the White House. In fact Chairman Ben Bernanke vigorously objected to this stimulus but was overruled and bludgeoned by the White House. Bernanke believed the stimulus would be a short-lived political fix. He also knew that when the glow dimmed that the White House would blame the Fed.

Yes, the rebate will be a short-term fix, providing a "high" lasting just long enough till the national elections in November. And then like Jack and Jill, the economy may come tumbling down thereafter.

One obvious solution to our economic problem is actually quite simple. Return the price of oil to $30 a barrel. The high price of oil is having a very nasty, worldwide impact on the cost of almost everything we consume. In the past several years, fertilizers have tripled in price, the cost of sulfuric acid increased by 340 percent and naphtha, used in soaps and paints, has more than doubled in price. So many of these numerous compounds are taken for granted, but they are the necessary ingredients of everything we use and they have doubled or tripled in price, just like gasoline.

The higher cost of a finished product takes a larger and larger chunk of our paychecks.

Petrochemicals have abundant uses in our lives. They are used in foods, resins, fuels, pipes, clothing, carpets, bottles, inks, dies, pesticides, polyesters, nylons, acrylics, vitamins, adhesives, waxes - I can continue for page after page after page. Oil has tripled in price in the past three years, driving up the prices on almost everything we purchase at the shopping mall and grocery store between 10 percent and 30 percent.

Today's consumer price index measures increases of 4 percent or 5 percent but the CPI is a useless anachronism from the 1950s and 1960s. It's laughable and about as applicable to 21st century economics as a riding crop is to a Boeing 777.

Bringing the price of oil back to $35 a barrel, reducing the price of gas from $3.60 to $1.50, and reducing the cost of cereals, eggs, milk, meat between 10 percent and 30 percent, etc., would have a much better effect than giving each family $1,200 to spend.

And bring the cost of oil back to $35 a barrel can be done if Big Oil would allow it to happen. (Note my April 9 column: "Big Oil Has Little Reason to Lower Prices."

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
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