Gas prices these days

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They are not what they seem. An excellent observation from The Czar of Muscovy at The Ancient & Noble Order of the Gormogons. It defies excerption and is not long so I am swiping the entire thing:
Quantitative Dis-Easing
The Czar walked into the second floor men�s room at the Castle this morning and found �Puter sitting on the cold tile floor, in his underwear, staring at the floor drain while clutching a roll of Brawny paper towels in one hand, and a mostly empty brown jug of spiced rum and home-made Dr. Pepper in the other. For those of you who know �Puter, this is known as �Waiting for the big one.� Anyhow, the Czar asked �What vexes thee?�

�Did you see the price of gas in California, which you will no doubt write about complete with a photograph conveniently in the right corner? �Puter is forced to conclude you were right about quantitative easing.�

Yep. Which you can read about here, as well as here, over here, and even over here.

Gas prices are shooting up. And you were warned about this, too: back in late 2010, before any of the explosive, violent protests in the Mideast occured.

How on earth did the industry know that riots in Tunisia, Egypt, and Libya would drive prices up? Well, they didn�t know anything of the sort. What they knew, and what was largely denied by our government, was that quantitative easing would kick in sometime in 2011, and last until at least 2012. Anyone with any sense about money should have known this would occur, on schedule, to the amount it has.

All the turmoil in Northern Africa does not really affect our gas prices, because the United States buys no oil from Tunisia or Egypt or Libya. The price of gas has been going up because the boneheads in our government decided to print up billions of dollars in extra currency and dump it into circulation. The theory sounds like something from an Our Gang save-Mickey�s-farm plot: if we print up a ton of money and throw it...somewhere...Americans will suddenly have a lot more money, which they will start spending on things like vacations and dining in restaurants, and this will kick the economy in high gear and companies will start hiring again, and then we will never worry about that money ever again.

Of course, in real life, this is like trying to fix a leak in a boat by drilling a bigger hole in the hull to drain the water.

Indeed the execution was classic Obama: they put the money into the federal bond market, which encouraged bond holders to cash in and convert money to stocks. This flared up the Dow Jones Industrial Average (which is an inexperienced way to measure the real economy) in late 2010 and everyone in the White House declared the recession was over. Then, unemployment remained high because the spike in stock prices was caused only by an influx of cash, not real capital. No one started hiring. So things stayed a little bleak.

Our president, predictably, undid his own strategy by telling Americans to skip vacations and going out for dinner. The increase in spending failed to occur, meaning that the value of the dollar dropped. See, the President�s economics eggheads skipped the class day to attend a pro-union folk song rally, missing the part where the professor explained how inflation weakens the dollar. If you increase the amount of dollars without increasing the value of products and services, prices go up to compensate.

This is easy to understand if, unlike them, you have a clue how investing works. If the value of a company is worth $45 million, and they have a million shares of stock for sale, the share price is $45 a share. Simple, right? If the price of the share goes up to meet demand, the value of the company goes up; if people start selling shares, the price goes down�the value of the company starts going down.

Likewise, if the price of the stock is $45 a share, and the company suddenly announces they are selling an additional 100,000 shares of stock, what happens? The value of the stock drops, because $45,000,000 divided by 1,100,000 shares of stock equals $40.91. You just lost almost four bucks per share. This is what inflation does to the dollar.

By flooding the bond market with billions of extra dollars, the value of the dollar drops. This is inflation, even if you call it �quantitative easing.�

It takes a few months for the ripple effect to occur. And since this started a few months ago, economists who did their homework began warning that we would see an increase in prices And because the stock market got the extra cash first, the first things that start getting hit with inflation will be your futures markets: oil and food, most notably.

Why your gasoline prices are going up.You can guess where you are seeing the prices surge fastest.

Here is why this drags the entire economy, and why whatever little bit of good the Obama administration sought to claim out of quantitative easing will now go up in smoke: as the price of gas increases, the cost to ship products has just gone up. Why?

Whether you ship good by plane, rail, ship, or truck, these guys need fuel�not green jobs�to power the equipment. Oil prices go up, so fuel prices go up. Fuel prices go up, and the cost to ship this stuff goes up. As a result, those costs are not magically absorbed by rich, corporate fatcat bankers: they are passed right onto you in the form of higher prices.

Some products can withstand this better: we can delay some shipments or reroute stock supplies accordingly for a while. But not with perishable food items: this drives up food prices even higher, faster.

And when companies cannot afford to ship products, they ramp down production. This means people get laid off. Unemployment increases. Some folks simply quit: many truck drivers are independent contractors, and are responsible to buy their own gasoline. This cost is factored into their contract costs: if they have to pay for higher gas prices, they encounter one of two situations: they have a fixed price, and so have to eat the cost out of their profit, or else they have to raise their price per mile, which makes them less competitive against shipping companies. As a result, many drivers simply quit the job and look for work elsewhere. Because they quit, this usually fails to show up on employment statistics.

Let us review: the Fed elects to go for quantitative easing. This increases inflation, prices, and unemployment. Done.

The President, of course, is focusing like a laser on the economy. So that should fix everything.
Case in point -- for the store and the bakery, we order cases of tomatoes. They used to be around $22. Now with the freeze in Mexico and the spike in fuel costs, they are now close to $60. Customers at the bakery get a much thinner slice of 'mater on their sandwich and customers at the store are now paying twice our "old" price.

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This page contains a single entry by DaveH published on February 27, 2011 7:45 PM.

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