- The Washington Times - Saturday, September 3, 2005

The rise in oil prices to historic levels has generated the typical erroneous media reporting and reaction, including, sad to say, many financial commentators.

It is alleged, since so many industries and services depend on oil and gasoline, price increases in these sectors will set off a rise in overall prices as a recent Reuters news dispatch suggests: “Oil prices continue to rise, setting new record highs and spurring fears of inflation.”

Worse, is the all too often blind acceptance by financial writers of monetary authorities’ pronouncements on economic matters. An article in The Washington Post about higher gasoline prices demonstrates such unscrupulous analysis: “Federal Reserve officials agree that energy costs are the primary source of inflation.” (Nell Henderson, “Consumer prices increase, outstrip wages,” Aug. 17, Page D3.)

One of the most important contributions to the spike in the cost of oil, and prices in general, has been the continued loss of the dollar’s “value,” or more accurately its purchasing power.

Like any other good, money is governed by supply and demand. If the supply of money increases, its “price” or purchasing power falls, i.e. the dollar will not “buy” as many goods and services — such as gasoline.

Although the financial press refuses to focus on such things, the guilty party for the continuous slide in the dollar’s purchasing power is not hard to find. One organization is allowed to print money: the Federal Reserve. Thus, the amount of money in an economy is controlled by Alan Greenspan and his cohorts at the nation’s central bank.

Rep. Ron Paul, Texas Republican, has estimated the dollar has lost 30 percent in value since 2000. Since the Fed was set up in 1913, not only did it pave the way for Franklin Roosevelt’s engineered elimination of the gold standard, but its inflationary policies have cost an astounding 90 percent of the greenback’s purchasing power.

Another significant misunderstanding among reporters is how producers “set” prices. The costs that go into producing a good are believed by most to generate prices.

In reality, however, prices are the market outcome between supply and demand: the equilibrium price where consumers agree to buy and producers to sell.

Entrepreneurs cannot arbitrarily increase price without ramifications. If they do and consumers don’t buy or cut back their purchases, revenue will be lost. The mere rise in costs does not necessarily mean prices will go up. Each firm has specific consumer demand schedules.

The “oil price shock” is not the genesis of price rises, but rather the Federal Reserve “shock” of monetary expansion. Overall price increases result from inflation (money creation) and are not its cause, despite what is reported or taught.

Inflation has no economic benefit except for those responsible: the Federal Reserve, banking system and federal government.

The only fair, moral and economically sound solution not only for higher oil prices, but higher prices in general is a return to a monetary system of honest “hard” money: a gold standard.

Also rarely discussed by financial organs is how prices “signal” market participants. Higher prices attract marginal producers into flourishing industries. A rise in producers in a particular field typically increases output, eventually lowering prices.

For consumers, higher prices transmit information of potentially diminished future supplies of a good, which will cause buyers to economize and/or seek alternatives. The recent news of heightened U.S.- Iran political tensions and the distinct possibility of a shutoff of the latter’s fuel supplies has also figured in the oil price surge.

Until the media begin comprehending elementary economic principles and become more critical of financial officials no matter their status, the public, which they claim to serve, will be misinformed. Moreover, until either the media or elected representatives increase scrutiny of the real culprit not only of soaring oil prices but rising prices in general, the Federal Reserve will recklessly continue its ruinous inflationary path.

JAMES P. PHILBIN

Adjunct professor,

Montgomery College


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