Exporting Inflation to OPEC
By Thomas E. Brewton
Upward pressure on oil prices intensifies.
Profligate spending at the Federal level, funded by the Federal
Reserve's creation of money out of thin air, in excess of the
underlying increase in real, useful goods and services, is
destabilizing worldwide currency exchange rates.
The dollar, since World War II, has by default been the world
monetary standard. A responsible central bank in that circumstance
has a duty to maintain a sound currency to prevent disruptions and
dislocations in world commerce. The Federal Reserve has signally
failed to fulfill that role.
The fault is not entirely the Fed's. It can be traced to the
Employment Act of 1946, which enshrined John Maynard Keynes's
socialistic economic doctrines as the official policy of the United
States. The Fed was directed, among other missions, to manage the
economy via currency manipulation in order to maintain full
employment. Keynesian orthodoxy, which is the ideology of the
Democratic Party, dictates that every economic glitch can be cured by
increased Federal spending.
The Fed's ever-ready response to the spurs of Federal spending has
made it a poor steward of a sound currency for the rest of the world.
The steepening downward trajectory of the dollar exchange rate has
compelled Middle Eastern oil-producing nations to rethink linkages of
their currencies with the dollar. Those nations now are at a
decision-making point.
If they diversify their central banks' reserves of foreign exchange
out of dollars, that will dump more dollars into the world market,
driving the dollar exchange rate down still more. If they don't do
so, they will have to raise oil prices or demand payment in
currencies other than the dollar.
The latter amounts to a price increase in dollars, because U.S.
importers will have to sell larger amounts of dollars to obtain the
necessary amount of other currencies to pay for oil imports.
In a page-one article in its November 20 edition, the Wall Street
Journal( http://online.wsj.com/article/SB119552599363898773.html?
mod=hps_us_whats_news ) reports:
"For many years, oil-rich Persian Gulf states have pegged their
currencies to the dollar. Now that link is stoking a bad bout of
inflation in their red-hot economies and putting policy makers in a
dilemma: Break the dollar peg and risk undermining the U.S. currency,
or keep it and face growing local discontent.
"The dollar peg has "served the economy...very well in the past,"
said Sultan Nasser al-Suweidi, the governor of the United Arab
Emirates' central bank, last week. "However, we have reached a
crossroads."
"Because countries such as the UAE, Saudi Arabia and Qatar sit on
large reserves of U.S. dollars, their decisions will have
repercussions beyond their borders. If they move away from their
strict dollar pegs -- perhaps following Kuwait, which earlier this
year switched to a basket of currencies -- it could undermine demand
for dollars and encourage others to diversify their holdings. Many
nations have already created sovereign wealth funds to invest their
holdings in a broader array of assets...
"Normally, when the price of a country's major export rises, that
pumps up the local currency, which helps restrain inflation.
"Instead, much the opposite has happened. As the price of oil has
skyrocketed in recent years, Gulf currencies tied to the dollar have
fallen relative to other currencies such as the euro and British
pound, making many of their imports more expensive.
"The UAE and Qatar have suffered some of the worst inflation, as the
oil gusher has triggered a building boom."
Sound familiar?
Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.
The New Media Alliance is a non-profit (501c3) national coalition of
writers, journalists and grass-roots media outlets.
His weblog is THE VIEW FROM 1776
http://www.thomasbrewton.com/
Email comments to viewfrom1776@thomasbrewton.com
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