The Real Reason for The Recession

Here’s my quick theory and it’s something to chew on.

First of all the housing market didn’t cause the recession.  Yes there was a portion of the housing market that was a house of cards.  What blew that house of cards over?  It’s simple when you think about it.  The real cause of our bad economy, and no one but no one as talked about it as such, is $4 a gallon gasoline.  (Follow me for a minute.) Yes people have talked about high gas prices etc but no one has used high gas prices in the overall scheme of the economy. 

First of all if you were living with one of those house of cards mortgages in 2006 (before the democrats took over) you were managing.  If you bought 20 - 30 gallons of gas a week before the sudden spike in gas you were spending $25 to $35 a week.  In 2008 you were spending $80 - $120 a week.  Well if you were barely making it you cannot afford for you monthly fuel bill go from $100 a month to $480 a month without something giving way.  Clearly people didn’t drive less, the survey’s mostly confirmed people didn’t drive less.  What they did do was pay all their bills except their mortgage.  For whatever reason people tend to pay rent and/or the mortgage last.  They will pay their weekly bills but will be short on cash when it’s time to pay the mortgage.  Clearly gas prices pushed the people that were over stretched down the “proverbial” hill.

The next thing we hear is that all this stimulus is going to cause hyperinflation.  Obviously in basic economics that is true.  So far it hasn’t happened and no one can explain it.  It really isn’t that hard to figure out actually.  There is all kinds of other things going on devaluing our money etc but that is other topics for another time.  Our domestic economy needs (X) dollars to operate or it won’t operate.  Depending on the amount of money in the economy determines the rate of growth.  Again lots of factors but we are keeping it simple.  The reason we had the housing crash and the reason we have not seen hyperinflation is simple: Gas Prices.  Fuel prices drive or slow down an economy the same way business save quick cash by cutting hours for their employees or expand as they add employees and payroll.  In 2008 oil prices were around $150 a barrel, we sent approximately 2 Trillion dollars of our cash overseas in that year alone. (That is by the simple numbers as best as I could research them.)  This doesn’t count the extra money that went overseas during the run up to $150 a barrel.  That cash has never returned to our domestic economy.  It’s largely in banks overseas.  The people we buy oil from don’t buy enough to send that cash back.  Borrowing from China actually brings money back that we send overseas.  While debt isn’t good a trade deficit is just as harmful.  Eventually you could, in theory, run out of cash.

This is essentially what happened and caused the great depression.   A lot of people think it’s the stock market crash.  The stock market crash was actually a symptom just as the housing market crash was the symptom this time.  The real issue leading to the great depression was that our money supply shrank by 25% almost overnight (at least an economic overnight.)  The same thing is driving this recession.  A shrinkage of the money supply.  Even with 1.5 million in stimulus money and additional borrowing since 2005 our money supply has shrunk by about 4 to 5 trillion dollars (by my crude estimates admittedly.  I don’t have access to much information to have a precise estimate.)  Now we are at $3 a gallon again and we are continuing the acceleration of the shrinking of our money supply.  (You also have to add in that about 20% of the stimulus money also went overseas and wasn't used to stimulate our economy.) 

Now the question becomes who or what is driving oil prices.  It's actually a bit obvious. First of all former Enron employees ended up in the commodities houses after Enron was dissolved.  Just like electricity there is no competition for gasoline.  There is some minor competition between companies that sell gasoline but that has been insignificant competition since the oil companies lobbied congress to pass a law prohibiting “gas wars.”  What Enron was doing with electricity was brokering between electric companies.  As an example they would buy at $10 per KWH and sell at $100 KWH and the company that needed more electricity generally had to pay it.  Well after the fall of Enron their former brokers ended up in new broker jobs in the commodities houses.  They soon begin to artificially drove up the price of oil.  There was actually no reason for the price to go up.  Supply and demand had not changed significantly enough to cause such a rise in price and that includes China and India as emerging consumers.  If you’ll remember you went home on Friday and gas was $1.25, on Monday it was $1.75 and it climbed from there.  That was not China, India or greedy oil companies.  It was a section of the commodities market getting greedy.  I despise the term “greedy capitalist” because in general that’s not really true, however in the case of oil and former Enron employees, it is true.  Your only alternative would be a stupid socialist manipulating markets for a power grab.  (A socialist is far worse than a “greedy capitalist” by the way.) Socialist aren't bright enough to have driven up fuel prices.  They are too busy thinking about the next protest or tax hike.  There solution would have been to raise taxes on gasoline. 

There are lots of problems in the economy but the first thing that needs to be fixed is the price of gasoline.  We know we can drill safe, we need to drill.  We know nuclear is safe, we need to build more nuclear power plants.  The department of energy was put in place by President Carter.  We bought about 30% of our oil from overseas at the time.  Now we buy 70% from overseas.  The democrat established Department of Energy is a failed program.  The quick fix is to drive gasoline back to 99 cents a gallon for the next 4 years.  People will have more disposable income spurring savings and spending.  If not we could see this recession last as long as the great depression.  It takes years for an economy to generate a bigger money supply unless the government adds to the money supply by printing.  As your population grows you need more cash.  The government would have done better with their 1.5 Trillion stimulus package if they had just given every person in the country that filed a tax return $10,000, including the rich.

(We will talk about the fallacy of the rich don't need it lets take it from them as promised earlier this week................soon.)