July 24, 2019

Greatest Puppet Show on Earth

For years, critic after critic has bemoaned the U.S. Trade Deficit.  Virtually everything imaginable on earth has been cited as the cause of the Trade Deficit.  In turn, virtually every economic woe besetting the U.S. is said to be a result of the Trade deficit.  Let’s look at the dots and join a few of them with the purpose of determining some of the culprits that are the dominant causes of the Trade Deficit – The Puppeteers, as referred to in this article.

THE FIRST PUPPETEER- THE CHINA SYNDROME. The first major cause of the U.S. Trade Deficit is the artificially low U.S. Dollar price of the Chinese Yuan.  A few years before the riots that rocked China, culminating in the famous Tiananmen Square debacle, China realized that it had to provide opportunities for its young.  Jobs would be one way, but they had to be at an acceptable level of labor compensation.  Who would buy the products of their efforts?  To assure foreign markets, since consumer spending in China was not sufficient to absorb the onslaught of greater domestic production, the solution for China was to intervene in the foreign exchange market and peg the Dollar price of the Yuan at about 75% below its equilibrium.  It did so over a ten-year period, a financial version of “death by a thousand cuts.”  At the time when this policy was instituted, the exchange rate was about $0.50 for 1 Chinese Yuan.  The peg was established at $0.125 for 1 Yuan. Recall that in international trade there are two prices, in this case the Yuan price of the Chinese good to be imported into the U.S. and the dollar price of the Chinese Yuan, usually referred to as the exchange rate.  This meant that a TV set costing 1000 Yuan fell from a dollar price of $500 to $125 or a discount of 75%.  This also meant that the Chinese price of imports from the U.S. rose considerably.  Before the pegging occurred, the Yuan price of the Dollar was 2 Yuan (per $1 USD) and after the peg was established, the Yuan price of the U.S. Dollar rose to 8 (per $1 USD) or about a 300% increase.  This had a considerable negative impact on U.S. exports to China. Within this period of time the U.S. Trade Balance with China went from a $6 million deficit in 1985 to $6 billion deficit by 1989. Do you know that the U.S. Trade Deficit with China comprises more than 50% percent of our total Trade Deficit- having risen from 22% in 2000 to 54% in 2010?

THE SECOND PUPPETEER- THE EXPANDED OIL CARTEL. ‘It’s the market…we have no control over prices’. The newly cartelized U.S. oil firms have trumpeted this lament over the past several years.  

The second major cause of the U.S. Trade Deficit is the large volume of petroleum imports at prices established by the oil cartel, OPEC and its fellow travelers, the U.S. branch cartelized in the period from the 1993 to 2003. Follow the trail.

(1997) Ashland Oil combines most assets with Marathon Oil; 

(1998) British Petroleum (BP) acquires Amoco; 

(1998) Pennzoil merges with Quaker State Oil; 

(1999) Exxon and Mobil join to form Exxon Mobil; (

2000) British Petroleum (BP) acquires ARCO (Atlantic Richfield); (

2001) Chevron acquires Texaco to form Chevron Texaco; (

2002) Conoco merges with Phillips; (

2002) Royal Dutch Shell acquires Pennzoil-Quaker State

When the Seven Sisters oil companies determined oil production levels and hence the per barrel price of oil exported from primarily the Middle East, i.e., prior to 1973, the per barrel price of crude was about $3.50.  When the Middle East power brokers led by Saudi Arabia took control, they forced the Seven Sisters to reduce production and set the price at $14 per barrel, a 300% increase.  This caused both inflation and a recession like slowing of the U.S. economy.  Many of our younger readers did not live through this ordeal.  As inflation occurred peaking at an annual rate of nearly 20% around late 1979 and early 1980, the FED slammed on its brake and engineered a recession to eliminate much of the inflation by mid-1982.  The per barrel price of oil from OPEC nations continued to rise to around $19 per barrel in 1978 when OPEC once again cut production and caused the price of crude oil to rise by 100% to $38 per barrel.  


The next really major event occurred over a nearly ten year period from around 1993 to 2003 when the U.S. oil industry recartelized.  Recall that the Rockefeller oil cartel, Standard Oil Trust, was legally disbanded by a court decision around the beginning of the 20th Century, although a number of historians doubt that the court decision had any significant and lasting effect.  Nearly a century later, the anti-trust authorities, the Anti-Trust Division of the U.S. Department of Justice and the Federal Trade Commission, our “sworn protectors” against the evils of anti-competitive activities, refused to stop the recartelization of the American branch of the oil industry.  As cited earlier, 13 of the largest oil companies merged into 5 including the merger of Exxon and Mobil, two of the world’s largest oil companies.

 

In 2004 OPEC (Organization of the Petroleum Exporting Countries) and OPIC (our acronym for domestic big oil – Organization of the Petroleum Importing Countries) struck again and raised their per barrel price from $35 and along with massive speculation in oil futures fostered by the same investment bankers that gave us (MBS) mortgage backed securities (CDOs, CDSs, etc.) and the financial chaos surfacing in 2008, the per barrel price rose to $145 in the June/July 2008.  

 

With the ensuing recession, oil prices fell back to around the $40 range only to rise back up well above the $100 per barrel range. The American oil companies, fresh from their recartelization activities, ‘went along with the market’ and also raised their prices.  Translating, they had informally joined OPEC.  As we have argued, this was part of the beginning of the ongoing recession in the U.S. and the agony of high unemployment rates with its effects including foreclosures, inflation by decontenting, etc.

THE THIRD PUPPETEER, THE ENVIRONMENTALISTS.  A major cause of the huge imports of oil into the U.S. has been the successful campaign of the environmentalists to reduce the use of fossil fuels produced in the U.S.  Assumed answers, rather than asked questions, are the hall mark of this movement.  How is it that we somehow equate importing expensive oil over vast distances from less than stable or desirable sources as preferable to exploiting our own reserves?  This seems to defy reason.  The U.S. has huge coal reserves and growing oil and gas reserves as improvements in technology have overcome the former inability of releasing oil and natural gas from shale. Do you know that our net energy imports constituted more than 70% of our total trade deficit in 2010?

Macroeconomic theory tells us that since imports depress domestic aggregate demand and exports increase the aggregate demand of our economy, trade deficits reduce aggregate demand of the U.S. economy and therefore depress the level of economic activity aggravating an already hefty U-6 unemployment rate of nearly 16%

Did you know that the U.S. has enormous coal reserves economically exploitable with current technology? Based on U.S. coal consumption for 2008, the U.S. recoverable coal reserves represent enough coal to last 234 years.  However, EIA projects in [their] most recent Annual Energy Outlook (April 2009) that U.S. coal consumption will increase at about 0.6% per year for the period 2007-2030.  If that growth rate continues into the future, U.S. recoverable coal reserves would be exhausted in about 146 years if no new reserves are added.

Did you know that the U.S. has over one-hundred years of reserves of natural gas? According to the EIA Annual Energy Outlook 2011, the United States possesses 2,552 trillion cubic feet (Tcf) of potential natural gas resources.  Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 827 Tcf of this resource estimate, more than double the estimate published last year.  At the 2009 rate of U.S. consumption (about 22.8 Tcf per year), 2,552 Tcf of natural gas is enough to supply approximately 110 years of use.

And while we’re on the topic of energy, let’s talk terrorism. The funding for most of the terrorist activities that have beset the U.S. and other parts of the world has ultimately come from terrorists organizations funded by oil revenues from nations like Saudi Arabia and Iran.  On the one hand we send our military into areas on the grounds of humanitarianism and at the same time we also send dollars from oil purchases from OPEC nations to enable terrorist organizations to buy weapons to maim and kill those same military personnel.  Denying the use of domestic energy sources and making this nation rely on imported petroleum is sheer hypocrisy at best and lunacy at worst.

Let’s stop being puppets, manipulated by other nations and dubious groups under the collective term environmentalists.
 

As Patrick Henry challenged his fellow delegates in the Second Virginia Convention of March 23, 1775 in St. John’s Church:

“The war is actually begun!  The next gale that sweeps from the north will bring to our ears the clash of resounding arms!  Our brethren are already in the field!  Why stand we here idle?  What is it that gentlemen wish?  What would they have?  Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery?  Forbid it, Almighty God!  I know not what course others may take; but as for me, give me liberty or give me death!”

Professor Donald Byrne holds a Ph.D. in economics from the University of Notre Dame and is a long-time Professor of Economics at the University of Detroit Mercy. For the past several years, he has been active in developing his New Paradigm in Economics. He and his colleagues are contributors to Catholic Journal. The full version of this article may be found at their website: http://www.econnewsletter.com 

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Donald Byrne

DONALD BYRNE was a retired Professor of Economics at the University of Detroit Mercy and held a Ph.D. in Economics from the University of Notre Dame. He taught at other institutions, including: University of California-Berkeley, Notre Dame, Wayne State University, and Walsh College. In 2003, he helped launch an economics and finance oriented online newsletter: EconNewsLetter.com. He also served on several financial-institution boards and as a Visiting Scholar at the Federal Reserve Bank of Chicago. A devout Catholic and family man, Dr. Byrne passed into eternity on May 7, 2018. May God rest his soul.

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Written by Donald Byrne