Aug 20, 2009 10:28 am


Warren Buffett notes that most (i.e., not all) of the greenback effects"are invisible and could, indeed, remain latent for a long time." No question about it. Still, some of those invisible effects are currently blocking recovery and increasing unemployment. Moreover, the Chinese authorities, if not the American ones, are beginning to realize it.

One of those side effects is high commodity prices, most importantly, high oil prices. As analysts admit, and anyone following the numbers cannot fail to notice, the price of oil follows the market rather than the rules of supply and demand. It is true that OPEC has successfully reduced supplies but that is insufficient to explain the high price. That can be better explained by the Greenback effect. Indeed, the same can be said about the entire stock market.

Why? Because investors have to do something with the dollars sloshing out there and they assume, as Buffett hints, that a trashing of the dollar must be coming sooner of latter. So, why not bet some easily available certain to be dropping in value dollars on that eventuality?!

So what? So higher oil prices mean lower growth and lower employment:

Josheph Lazzaro writes:

Here's the economic reality: Every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every one cent increase in gasoline decreases U.S. consumer disposable income by $600 million per year.

Well, according to the AAA,"a gallon of regular unleaded is 16.3 cents more expensive than last month. . . ." You figure out what this rise cost Target. Phillip Davis writes:

People often forget that stocks are a commodity too and are also exchanged for currencies - when the dollar falls, at least initially, stocks tend to rise. Unfortunately so do our commodity costs but, as we saw in last week’s data, wages do not keep up and that, sadly, leads to a deflation of consumer buying power.

Every $10 increase in the price of a barrel of oil rips $25Bn a month out of the hands of global consumers, enough money to employ 6M people a year at $50,000 each. Those jobs are torn away from other sectors as discretionary income goes to commodities and, by the time you add in refining mark-ups and the cascading effects on other raw material cost, the effect of a $10 per barrel rise in oil is doubled to what amounts to about 1M global jobs per dollar.

Rumors that the Chinese, if not the American, authorities understand these unintended consequences of the easy money policy and are getting ready to counter it, may have caused the recent drop in the Chinese market. Danske Research Team report:

Commodities are very sensitive to Chinese news these days. This morning Chinese stocks briefly entered a so-called bear market as stocks have dropped at the Shanghai bourse by 20% since August 4th. Chinese stocks are under pressure as the market is concerned that the authorities will curb the current excessive lending growth. There are a lot of rumours that money meant for real investments has ended up in the stock market.

The reaction has been a strong sell-off in the business sensitive base metals. Copper is down more than USD 200 to 5.875. Commodity markets naturally fear that the Chinese government will have to tighten monetary policy to avoid a bubble building up in housing and the stock market. Tighter Chinese monetary policy will hurt

Personally, I do not believe that any similar American response will follow. Certainly not before Bernanke is reappointed or replaced. I would be grateful, if at the very least, the Obama administration would act to insure increased domestic (rather than Brazilian) energy supply. Getting poorer is bad enough. Getting poorer to empower oil tyrants is really galling.

And it continues -

It's a world that's awash in oil, but you'd never know it from oil's price, currently around $70 per barrel. That's well above oil's historic 150-year real average of about $25-30 per barrel, and certainly above where the price would typically be as a recovery starts following a long, nasty U.S./global recession.

Actually, high oil prices will prevent or slow recovery, such as it is."Surprisingly," unemployment claims are up again.

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