Saturday, November 6, 2010

Inflation, Oil Prices, and the Trade Deficit

World oil prices are going up just on the idea that the Fed’s latest money-boosting tricks will lead to inflation. If inflation actually occurs, oil prices will go up more. You may have noticed gasoline prices going up about 7 percent in the last two weeks. This is not the result of oil companies trying to influence the election, but speculators betting that the U.S. dollar will fall, anticipating the Fed move before it was officially announced. As long as the United States is the largest oil importer, its money will have an inverse relationship to oil.

But the declining dollar and increasing prices for energy make it more important to reduce our national dependence on imported energy. Energy is the biggest of category of imports in the United States, sometimes exceeding all other imports combined, and the United States is running a persistent trade deficit, importing too much compared to the amount of money we have available to spend. The trade deficit is the main reason the U.S. economy is chronically out of balance. The U.S. economy won’t be right until the trade deficit is smaller. The declining U.S. dollar, though, will tend to make the trade deficit larger.

To counter this, we need to find more ways to use less energy. Replacing the old CRT televisions with flat screens was the right idea. The new trend of replacing light bulbs with LED light bulbs will have a similar effect. There must be other ways in which we can do what we’re doing without importing so much energy.