Oil Prices-Surrogate Interest Rate
Posted by Eric Solis on December 29, 2010 under Banking, Financial Crisis, General, Global/International, U.S. Treasury Markets, Uncategorized | 
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Oil Prices-Surrogate Interest Rate; Low rates are the problem not the solution.
Oil is priced more like a bond than a commodity. As interest rates go down, prices of oil rise and as interest rates go up, oil prices fall. Why is this important? Because the Federal Reserve is choosing to leave interest rates at or near zero to keep oil prices artificially high. The result of this is that money that is being funneled to OPEC could be going to the American people by way of lower gas prices at the pump, heating oil and lower consumer prices. The distribution of freed up capital as a result of lower oil prices is far reaching when prices drop. The economic benefit hits the economy immediately and is spread far and wide across all socio economic classes. Low interest rates on the other hand, unevenly distribute relief to those persons owning assets which require financing in particular BANKS. The problem is that in an economic climate where savings not debt is the required behavior; lower interest rates are a bastardized strategy towards stimulating economic growth.
Even more disconcerting is that low interest rates are essentially a vehicle for funneling money to OPEC by way of artificially high interest rates. What do I mean by this? Think about it this way. If interest rates were to increase to 5% which is the historical average for 100 years, then oil would drop back to 1990 levels. Think about a world today with $1 gas prices at the pump and natural gas bills for heating your home cut by 65%.
This would distribute 100’s of billions of dollars immediately and tangibly right into the pockets of the American people. Instead what the government is doing is keeping rates at zero; so that oil prices remain high and thereby American consumers are channeling these hundreds of billions of dollars to Saudi Arabia instead. The other benefactor to this strategy is the BANKS. Since they borrow at 0%, they are basically getting free money at the direct expense to the consumer. The consumer is getting hoodwinked into thinking that low interest rates are stimulative to the economy. But you need not be an economist to determine that the supposed tsunami of capital that the government has injected through fiscal and monetary policy, is NOT finding its way into the hands of consumers. In fact it is being sucked out of the pockets of consumers by way of an artificially high oil price. This tax on consumers is then monetized by way of printing more dollars and then loaned to banks at zero percent.
IMHO
