Thursday, May 01, 2008
Random Economic Post: The American Peso
I've heard a lot of insane things lately:
-We're running out of wheat
-We're running out of rice
-Gas prices will be $10.00/gallon in 2 years
-It's a worldwide famine
While there are things to be concerned of, these are not among them. First of all, we're not running out of anything. We may in the future, but like the idiot in my office who predicted $4/gallon gas back in 2003, just because it eventually happen doesn't make your prediction that it will happen by 2004 true. You are no Nostradamus, that's for sure. At any rate, gasoline will not be at $10/gallon unless the dollar drops 100% from where it is right now. We have had less wheat and rice than normal due to some weather issues as well as the scourge of ethanol, leading farmers to plant more corn, leading to less wheat, leading to higher prices - not an absence of wheat all together. Now that wheat is up, we're looking at a bumper crop in the fall/winter. Hallelujah, the wonders of a market economy.
What has been more disturbing is the insane devaluation of the dollar. Did you know that if the dollar was still at parity with the Euro, oil would be $50/barrel cheaper right now? That translates into a decrease of at least $1/gallon on gas at the pump. Sure, supply is still tight and there needs to be more exploration, but the biggest problem with oil prices isn't supply, it's the anemic dollar. You can see the effects of a strengthening dollar even today - it's down at around $1.55:€1, which is better than the $1.60 that it was at. This has primarily happened due to the increased concern about inflation which has made the Fed look hard at putting the brakes on the easy money. This in turn has lowered oil prices by $6/barrel from its high. Of course, that isn't to say that things are going to continue on this pace, but if the Fed cowboys up and increases rates, it will anger Wall Street, but it will really help Main Street. That's why your food is more expensive (well, that and ethanol) and that is why your car costs more to drive (well, that and ethanol).