Gas prices and the like

 

Does it always seem that some asset classes catch the attention of the public and even amateur economists. Professional economists talk about this asset class, as a perfect gauge of overall economic activity. We are talking of course about oil,that is, the different kinds of oil derivatives: Brent Crude, West Texas and other, but these two are the most widely traded. One if a hallmark of Europe and the other of the USA.

Gas has been on a rocky ride these past ten years and more. The beginning of the millennium say gas prices at around three dollars a barrel on the international markets. The inflationary decade that preceded us gave us a $ 150 price tag. The Great Recession of 2007 created an environment of a collapse in the price of gas, which isn’t strange due to the overall slump in global demand, the price had to fall, but barely two years and going, the price has crept from its lows of $30 a barrel to $100 a barrel.

The normal theme concerning the gas prices at home and abroad is the problem of speculators. The speculators were blamed for the run up of the price of gas in the past decade and they are blamed for the current situation as well. Its strange how they are never blamed for the fall in price? Usually, the politicians brag that the fall is attributed to their wise stewardship of the economy and forcing the price of gas down. They do this through releasing strategic reserves, built up over the past decades or the more infamous way by means of price controls and the like. Like all government actions, putting a floor or a ceiling on the price of gas is not going to solve the problem in the long run; its just going to distort it.

The price of gas is currently being influenced by the policies of the Federal Reserve. The global demand for oil has not reached the peaks of 2007, and yet the price is almost but the same. The demand for gasoline in the United States is the lowest in the past couple of years, and the production, believe it or not, is at the highest. Its so high, that American producers are exporting gas to Europe. Why is price for a gallon of gas in America and a liter of gas in Croatia so high?

Well, there is a massive influx of dollars in the oil market, pushing the price of gas higher and higher. That’s why there was discussion of releasing the oil reserves in The USA and from the British Prime Minister David Cameron in the UK. They are desperate to lower the price of gas and the so called cost push inflation that is draining the US GDP every day. According to ZeroHedge, every $10 increase in crude prices, cuts US GDP by 1%. The same logic applies to any country, as input costs rise, it gets increasingly difficult to pass these prices to consumers. The consumers can bear these costs as long as if the so called price elasticity of demand and the consumer short run budget lines go hand in hand.

After a while, it becomes unbearable and production processes can no longer absorb these increasing costs and production falls, taking consumer demand and the rest of the economy with it.

Being taught ignorant economics

 

As an economist, I have been through my educational process at the nation’s capital University at which I was taught a lot of strange things concerning the youngest scientific field in human history – economics. During my studies, I have come to some pretty startling conclusions that maybe the “stuff” that I was taught, probably has no resemblance with the real world what so ever.

For example, on my graduate year, I was taught in a class called “Fiscal policy” that economic activities come and go in waves of prosperities and troughs of recessions. This was called normal, because the capitalistic system has certain built in defects that cause strange recurrences of happiness and sorrow. Entire books have been riddled with this subject and still, it is said, we have no idea on how to stop this plague and once and for all enter a golden of everlasting prosperity, a so called “New Economics” and what the American economist Irving Fisher dubbed in 1929, just before the Wall Street crash:

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."

or, the great Keynesian demigod that brought upon multiple generations of wrongly taught economists in the mainstream and permanently destroyed what is a truly elegant science by saying in 1927:

"We will not have any more crashes in our time."

Why on Earth are these individuals heralded as the great thinkers of our time?

This blog post is merely a reflection on things gone by and the uncertain future that lies ahead if we keep on burying our heads in the sand and pretending that these guys and there modern protégés have a clue what they are talking about.

I leave you with two final quotes, one from a Princeton Professor of economics also a Nobel laureate and a former dean of Harvard (I let the reader guess the antagonists) commenting on todays depression.

“To fight this recession [Nasdaq bubble of 2001] the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, […], Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

“The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.”

Productivity comes from workdays, not holidays? Really?

 

This economic malaise has really brought forth the spectacular failure of the welfare state as we know it.

Portugal has just announced that it will suspend a number of holidays for at least five years. The rough translation from index.hr goes as follows:

“The decision about which religious holidays, has been reached in agreement with the Vatican. Authorities have already, in the austerity measures reduced public sector wages, increased taxes, and now they have decided on more drastic measures.

The four holidays that were abolished include All Saints Day (November 1st), Corpus Christi (60 days after Easter), Republic Day (5th October) and Independence Day (December 1st).”

The text goes on telling that this step has been taken to bring about more “government savings”. Thus is a half truth. What the story presumably meant is that due to falling government revenues due to the great many number of holidays and lack of production and savings, the government can no longer force employers to subsidizes workers for not showing up at the workplace.

The fact that the Vatican has gone along shows the gravity of the situation. Not celebrating a country's Independence Day does show that the concept of social identity is not an important factor is a nations pride, but the number of productive labor hours put into the manufacturing of goods and rendering services.

Portugal has around 15 or so more holidays in the calendar year. Croatia, my home country has 14. Remember, these figures are the so-called mandatory holidays. Only certain business activities may be completed on these days. If employers don’t give these days to employees, they can be targeted for inhumanity and possibly slapped with a fine.

The best possible thing to do is let the market state the number of labor hours completed in a given year. If you go on Mish’s web blog, you will find certain references to the so called right-to-work legislation which would implement free market principles in determining wages and labor negotiations between employer and employee. A given list from Mish’s website is a good reason why coercion is always a bad thing in the labor market:

1. Collective bargaining agreements take away the right of individuals to pursue a career of their dreams void of union affiliation
2. Collective bargaining agreements force individuals into organizations against the free will of those members
3. Collective bargaining agreements force union dues out of members who do not even want to belong
4. Collective bargaining agreements dictate what members can and cannot do with their free time.
5. Collective bargaining agreements even dictate what non-members can and cannot do with their free time!

Since I am not aware of certain privileges that Croatian union members have, this list is certainly a good guideline.     

Referring back to holiday termination dates, it is often frequent that union members impose which days they will not work, justifying the same as a social and moral norm and punishing and even threatening others who do not wish to take those days off.

No wonder that governments are toppling in Europe; you remove an incentive for a coercive system (unions) to back up another coercive system (government), you will have political turmoil. But, the fault doesn’t lie in terminating these holidays, it is because these holidays are forced upon those who want to work but can’t that causes the problem.

Croatia is no different.