Tuesday, May 13, 2008

Gas is Cheap

I bet you all think that the price of gas has increased. This is simply not true. Gas is a commodity ( something from the earth ) like coal, copper and silver -- at least the crude oil that gas is made from is a commodity. Very few commodities have actually increased in true cost in the last five years. I am well aware of the fact that you have to give more cash at the pumps to fill the gas tank, but don't blame gas for it or the companies that sell it. In fact, companies like Exon and so on only contribute an average of 7% to the cost of gas. In fact if you are removing the Corporate gas companies cost + profit for making the gas you only remove less than 25 cents for each gallon. So $3.50/gal gas only drops to $3.25, and certainly does not account for the difference between gas in 2003 costing $1.50/gal to what it is today. Lets try an explanation.....

Lets say I am having a yard sale and I need $10 in change to get it going. No one is coming by so I get the bright idea to start another yard sale on the neighbors lawn. I need another $10 change for that one but I don't have it. So, I borrow the $10 from that neighbor and the neighbor, at the end of the day, wants the original $10 plus 10% of all proceeds to pay for using their lawn. No one is stopping at either yard sale even though during the day I kept dropping the prices.

Lets say the Nations' Gross Domestic Product (GDP), what we make and sell to the world, has stalled. The nation has enough cash flow (change) to make what is needed, but sales are really low. The economy is stalled, and the year is 2003. The FED decides to trigger the economy by supercharging some of the industries in the US. To do this, they need more cash and order the US Treasury to increase the rate of printing money (cash for the new yard sale). The US Treasury begins selling 10, 20 & 30 year notes to cover the cash they are printing and sell these notes to other countries on the earth. (borrowing the money). This action by itself does not seem to do any good, so the FED drops the interest rates on borrowed money to banks to just 1% (dropping the prices).

First comes the housing boom with people borrowing money from banks to get a home beyond their means. The bank takes twenty loans each valued at $100,000 for a total worth of $2 million and sells this bundle to another finance company for the $2 million. The actual money is not there, just the paper saying it will eventually be paid. The bank is in the clear now. Many of the "bundles" included secure contracts and ARM's, adjustable rate mortgages, but it is not the banks problem now. The mistake the bank makes is taking the $2 million and loaning it back out for more mortgages, but not at a one-to-one basis. They loan at a multiple of 67 times (on average for every bank you know). In other words, for each real dollar the bank has, $67 are loaned out.

To make up the difference, the bank borrows from the FED the extra $66 dollars needed to cover their position. The new money makes new loans for mortgages and these get bundled and sold for face value, and the FED has to order the Treasury to print more money.

That begins a wild ride that makes banks rich on paper, and fuels a whole new industry called loosely "financials." The bundles look so good on paper that besides a foreign country buying US Treasury notes, they - the financial industry - buys the bundles too.

All of this happens from April 2004 until April 2005. Congress says to the President, "Aren't we printing an awful lot of money?" And the President says, "No, Congress, life is great." The President then ordered the US Treasury to quit reporting the M1 & M3 monthly reports. These reports can be used to calculate how much more money is being printed than what is needed to support the annual GDP, Gross Domestic Product.

Everything described continued until present day. By Presidential order we have already stated that the M1&M3 are no longer reported, and to make the GDP look better a few other minor things were done. When calculating the annual rate of inflation the White House ordered that Food, Health Care and Fuel no longer be counted. When estimating unemployment, only count the actual number of people drawing on the Unemployment Insurance fund. No longer count the individual state estimates of the unemployed not drawing the insurance.

Here are a few facts for you to chew on. Since 2004 the annual rate of inflation has been around 20%. "OH NO!" you say. Yes, this is true. Inflation is the amount of money printed that is greater than the needs of the GDP. True inflation has nothing to do with the cost of butter at the local store. That is a different inflation called "consumer inflation." As long as the extra money was floating around and being used in the Housing and Financial areas, it did not impact the rate of consumer inflation. Consumer inflation deals with stagnate excess printed money. Consumer inflation began last August (August 2007) when ARM's began adjusting upward (a monthly mortgage payment went from $700/month to $1400/month on average.) People could not pay, defaulted on the mortgage, and --think about it-- all along the line of where the "bundled" contract went to, suddenly there was no income from that part of the bundle. Banks and Financial businesses suddenly began reporting their profits were posted wrongly, then later, as defaults increased the "paper" became less valuable.

Nationwide, more than 410,000 families lost their homes last year, and the rate of loss is increasing.
This means that more money is being left "stagnate" and consumer inflation is increasing. It means there is just too much cash available. The FED's answer to this problem is to print more money.

Ok, I said the price of gas is about the same as it was in 2003. Consider that I said the money supply (true inflation) has increased 20% per year since then or for 5 years. So each year the money itself has devalued at 20% of the total money that is in existence. A dollar today is worth far less than it was in 2003. It takes many more of those dollars to purchase the same product as in 2003 because the dollars are worth a lot less.

2003 gas at $1.50 at a 20% loss in the value of money you are using to buy the gas means that in 2004 you had to pay $1.80.

2003: $1.50 X 1.2 (20% increase) = $1.80
2004: $1.80 X 1.2 = $2.16
2005: $2.16 X 1.2 = $2.59
2006: $2.59 X 1.2 = $3.11
2007: $3.11 X 1.2 = $3.73

So $3.73 would be the cost of gas because of the extra cash that is being pumped into the system. But gas is going higher. During 2008, generally, any price of gas beyond the FEDs $3.73 is caused by increased demand by India, Japan and China-- Mostly China. It is your dollars that are worth 20% less each year that is costing you at the pump, not the cost of the gas. If you adjust the currency inflation since 2003, the cost of gas is the same, or would be very nearly the same except the global inflation in gas which is also nearly 20%. Gas should rise in price during 2008 to reach about $4.78 a gallon for regular. Then it will level out for the year from August through about April 2009 as the economy bottoms out in a severe recession. The recession brought about by the price of gas will divide the citizens between the "haves" and the "have nots." The Middle class will be wiped out.

By the way, When the FED says "loans" or the Congress says "bailout" or the President says "rescue," please change their terms for the correct term: " taxpayer" You, your grandchildren and many more generations COULD pay for these vote-buying terms, unless the USA announces bankruptcy. You may also want to consider these tidbits: We are borrowing money from China and paying it to the Oil Countries (like Saudi Arabia) at the rate of $2 Billion each and every day. So every day we are $2Billion more in debt to China. China and Japan each own over $2 TRILLION of our currency (dollars). India falls short at only a little over $800 Billion of our dollars in their vaults. The reason that the current Administration wants to bomb Iran is NOT due to any nuclear processing facilities. It is because they are the only oil producing nation that has dumped the dollar as a basis for selling/trading oil, and have instead switched to the Euro. This is destabilizing our overseas purchasing power for oil.

Where does all this lead? The president elect of 2008 will win or fail depending on how much that person understands basic ecconomics and technology. So far, none in or headed for Washington DC have shown any indication of economic knowledge other than Ron Paul. It appears that no matter who we have for president, a deep recession/depression will occur and will last until December of 2012. Fire the FED, bring back gold into currency, and maybe the economic damage can be repaired in time for our great-grandchildren to manage society.

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