Posted on Wednesday, 8th April 2009 by admin
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Minds of most Americans have been corrupted with many economic myths by mainstream economists and so called experts, which are reinforced by the media and often repeated on the streets. These myths are false in most cases, and based on half truths in others. We constantly hear things like: inflation is caused by rising oil prices; consumption is the most important element for economic growth; government expenditures help stimulate the economy; and many others.
In this article, First in a series of two, I will explore some popular myths regarding Inflation and Energy matters. In the second article, I will write for you about common myths about Consumption.
Inflation – translated in layman’s terms as a general rise in prices – and the increase in energy prices have always been at the core of some of these myths. The following are just a few of the most common ones.
Myth No. 1: Dependence on Foreign Oil is the Reason for Rising Oil Prices
This misconception suggests that the reason behind rising oil prices lies in America’s dependence on foreign oil.
In fact, the high price of oil is not connected to its place of origin. Oil prices are determined in international markets. Even if the US were to produce, and meet 100 percent of its consumption requirements, the price would remain the same if the supply and demand across the world were to remain the same. Oil is a commodity. So the price of a barrel produced in the US is the same as it is in any other country, but the costs of labor, land and regulatory compliance are usually higher in the US, compared to third world countries. Bringing down these costs will result in increasing supply, which in turn, will push the prices lower – regardless of the fact that it was done in the United States or elsewhere.
Importing a product does not imply that you “depend” on it. It would be like saying that when we “import” food from the local grocery store, we “depend” on that grocery store. What’s usually true is actually the complete opposite. It is the exporters who depend on us, since we are the customers and buying their products. Also, importing a product usually means that we are buying at lower prices; and producing in the US would mean consuming at a higher price. This point is easier to understand when we look at the cheap imports we can buy from China, compared to the high priced similar items we produce in our own country. An amazing contradiction arises when, on one hand it is claimed that America should be “protected” from cheap imports, but when it comes to oil, they demand to be “protected” from “expensive imported” oil.
In reality, most, if not all, of the higher oil prices can be justified by the debasement of dollar or the expansion of the money supply. It is not the foreign producer that is at fault, its out own national central bank that is the guilty party.
Myth No. 2: Inflation is Caused By Rising Oil Prices
If the supply of money was to remain constant, then a hike in the price of one good would cause a decline in the price of the other goods. In more specific terms, if more money is to be spent on oil, then less money will be available to spend on other goods. This will, as a result, cause a drop in the demand of other goods, which will then cause a drop in the prices of these other goods.
In truth, inflation is always a monetary matter, which is caused by the increase in the money supply due to interest rate easing policies of central banks.
Myth No. 3: The Cause of Current Inflation is the Rise of Demands by Millions of New Consumers in China and India
At face value, that might seem true. With the advent of millions of new Asian consumers in the market, there is a higher demand for most goods, which would apparently cause higher prices. But what is being ignored here is that these new consumers also happen to be new producers. In general, most people produce far more than they consume, because most workers have to produce more than what they earn to keep their jobs. So, where the demand has increased due to these consumers, supply has increased even more; thanks to their increased production. This is apparent from the frequent price drops in Chinese manufactured goods. On the other hand, the only method these new producers can increase their consumption beyond what they produce is through credit. Hence we have come a full circle to the point I have made twice already: Credit expansion due to central banks’ intervention in the financial markets is the true culprit behind inflation.
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Tags: causes of inflation, central bank, cheap chinese goods, China, chinese goods, Currency, demand, Dependence on Foreign Oil, economic growth, economic myths, energy, energy prices, expensive oil, financial markets, food, foreign oil, higher oil prices, imports, India, inflation, inflation myths, international trade, Macro-Economics, money supply, oil, oil prices, rising oil prices, supply, supply and demand, Tips & Advice, united states
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