Since I am a bit under the weather, I will preemptively absolve myself for any and all absurdities I pen here this evening. With said absolution at hand, I wish to say that the dramatic rending of garments and political posturing in Washington, DC over the current economic crisis and attendant bailouts is insignificant, at least insofar as any economic recovery is concerned.
There, I said it. Permit me to say it differently: This bailout stuff is a joke.
The main reason we are seeing such a downturn in the American economy is that we are finally seeing the effects of high gasoline and oil prices in America. The housing and credit crisis is a different matter; I believe that issue is only tangentially related. But the Big Three crisis in Detroit is directly related: despite Detroit's many internal woes and weaknesses, the domestic automobile industry has been sorely damaged by the high cost of fuel.
Moreover, all sorts of industries have been adversely affected by fuel costs, whether in heating/cooling and production, or in delivery and distribution. The price of fuel has been viciously high, and we are finally seeing the many corrections both in capital and in labor necessary to get by.
Alas, fuel costs have dropped precipitously in just a few short weeks. Merrill Lynch has predicted that a barrel of oil could fall to below $25 in the next 12 months. Amazing, and important.
Why? Because the cost of fuel is the number one recovery dynamic in our economy. That's just my opinion; but we will begin to see a recovery down the road that is rooted in the recent declines in oil prices. By comparison, all the bailout rhetoric and plans and handouts will have a smaller and more delayed effect on the economy; fuel costs trump a bailout plan any day of the week. But Washington WILL take the praise for the economic recovery that is inevitable from today's low fuel costs. (I am not saying that the recovery will be long-lasting, only that it WILL happen, all things remaining relatively equal.)
If what professor Mark Perry claims is true (see here), that every penny decrease in the price of gasoline per gallon saves American consumers at least $1.42 billion a year, then the recent $2.29 drop in gas prices will save American consumers at least $325 billion in the next 12 months. The good news is that if gasoline drops even further, the savings could exceed $500 billion a year. And that is ONLY gasoline. We have not considered what the savings on heating oil suggests numerically.
All this to say that the equivalent of a third- or half-trillion dollar tax break will do wonders for the economy. Hopefully, it will be the sort of tax break that will remain relatively permanent. But who knows? One thing we do know: All sorts of politicians are currently clamoring for the most advantageous position from which they may boast that they have delivered us from economic evil.
Downside: Lower fuel costs keep America dependent on foreign sources of fuel. Now is the time to really wean ourselves from that dependency. We mustn't be lulled into complacency by affordable fuel. And let us not forget the environmental downsides of oil use.
Prediction: If gasoline drops $.25/gallon in the next four weeks, Americans will begin to purchase more cars from Detroit ... especially if Detroit starts building Hondas.
(Fact: At Thanksgiving Dinner with my relatives, I noted 13 cars in the yard. Six were Hondas, two were Toyotas, one was a Hyundai. The remaining four were Detroit products: two Chevys, one Ford, and one Buick. How hard would it be for Detroit to make a car as good as a Honda? Alas, even if they could make one, it may be too late to rescue the Detroit brands' reputation.)
©2008. All Rights Reserved.
There, I said it. Permit me to say it differently: This bailout stuff is a joke.
The main reason we are seeing such a downturn in the American economy is that we are finally seeing the effects of high gasoline and oil prices in America. The housing and credit crisis is a different matter; I believe that issue is only tangentially related. But the Big Three crisis in Detroit is directly related: despite Detroit's many internal woes and weaknesses, the domestic automobile industry has been sorely damaged by the high cost of fuel.
Moreover, all sorts of industries have been adversely affected by fuel costs, whether in heating/cooling and production, or in delivery and distribution. The price of fuel has been viciously high, and we are finally seeing the many corrections both in capital and in labor necessary to get by.
Alas, fuel costs have dropped precipitously in just a few short weeks. Merrill Lynch has predicted that a barrel of oil could fall to below $25 in the next 12 months. Amazing, and important.
Why? Because the cost of fuel is the number one recovery dynamic in our economy. That's just my opinion; but we will begin to see a recovery down the road that is rooted in the recent declines in oil prices. By comparison, all the bailout rhetoric and plans and handouts will have a smaller and more delayed effect on the economy; fuel costs trump a bailout plan any day of the week. But Washington WILL take the praise for the economic recovery that is inevitable from today's low fuel costs. (I am not saying that the recovery will be long-lasting, only that it WILL happen, all things remaining relatively equal.)
If what professor Mark Perry claims is true (see here), that every penny decrease in the price of gasoline per gallon saves American consumers at least $1.42 billion a year, then the recent $2.29 drop in gas prices will save American consumers at least $325 billion in the next 12 months. The good news is that if gasoline drops even further, the savings could exceed $500 billion a year. And that is ONLY gasoline. We have not considered what the savings on heating oil suggests numerically.
All this to say that the equivalent of a third- or half-trillion dollar tax break will do wonders for the economy. Hopefully, it will be the sort of tax break that will remain relatively permanent. But who knows? One thing we do know: All sorts of politicians are currently clamoring for the most advantageous position from which they may boast that they have delivered us from economic evil.
Downside: Lower fuel costs keep America dependent on foreign sources of fuel. Now is the time to really wean ourselves from that dependency. We mustn't be lulled into complacency by affordable fuel. And let us not forget the environmental downsides of oil use.
Prediction: If gasoline drops $.25/gallon in the next four weeks, Americans will begin to purchase more cars from Detroit ... especially if Detroit starts building Hondas.
(Fact: At Thanksgiving Dinner with my relatives, I noted 13 cars in the yard. Six were Hondas, two were Toyotas, one was a Hyundai. The remaining four were Detroit products: two Chevys, one Ford, and one Buick. How hard would it be for Detroit to make a car as good as a Honda? Alas, even if they could make one, it may be too late to rescue the Detroit brands' reputation.)
©2008. All Rights Reserved.
5 comments:
What is disturbing to me about this bail-out business is that the government is taking our -- and by "our," I mean the 150 million or so of us who pay the bills -- money and giving it to someone else, for which we receive, drum roll, please, absolutely nothing. The close to trillion dollars which is proposed to be bestowed upon automakers, banks, mortgage lenders, etc. is close to the annual receipts of the U.S. government. In effect, it's doubling our annual tax burden for a year, then taking the excess and burning it up. Better to give me my tax payments back and let me spend the money on a new car or an HD TV. That would help the economy.
As for your point about gas prices, you are correct. I find it amusing that in 2006, the Dems ran on a platform blaming the President, when gas as a little over two bucks a gallon. They won. Gas went to four bucks. Whose fault is that? Now it's under two bucks while Bush is still president. Does he get the credit.
Stupid, stupid, stupid.
Of course the politicians have nothing to do with these cycles except making them worse via the law of unintended consequences. Best course of action: BUTT OUT.
Cheers.
(Sorry you're not well, BTW. Get better soon.)
I bought a 2008 Jeep Liberty Sport edition 4x4 (second hand. Great, great deal).
I'm doing my bit.
I agree with R.Sherman. Butt out for once. But I fear interventionism is all we know these days in North America.
Yes, the price of gas is now an immediated injection of dollars into our economy, precisely the jolt it needs. As for the bailout of the auto industry, I'm inclined towards giving it two thumbs down. Toyota and Honda appear to be able to make a profit building cars in this country, employing American workers. I don't think the American taxpayer needs to subsidize a failing business, failing because of poor planning, poor management, and ignoring customers. If Congress steps up and provides them with funds, it should have very stringent strings attached, unlike what they did with the financial institutions. Each executive management team should immediately step down with no additional compensation. The boards should immediately put emergency management teams in place and then begin to formulate operable business plans. The unions need to be honest partners in the realignment, if they are to continue to exist.
The meddlesome aspect of the government in our economy is troubling from a practical standpoint. It has questionable effects and unintended consequences. Its prime benefit seems to be only an injection of confidence on the part of the American consumer.
Forgive the fuzzy thinking and bush league grammar. I too am wrestling with an illness.
I hope you feel better, Bill. Glad you're posting again.
Happy New Year to you and yours, Bill!
I can only agree about the bailout: as many have said, it is a case of privatizing the profits and socializing the losses of big business, thus giving Americans the worst of both Capitalism and Socialism.
About the "high" prices of gasoline: I can only laugh. Americans have no idea: gas is cheaper for you than just about anywhere else in the world (with the exception of Saudi Arabia). And believe it or not, oil is not going to last forever. Every time you vote down a public transportation or alternative energy bill, your grandchildren will pay dearly. We have to get off oil, and the sooner the better.
cheers from chilly Vienna, zilch
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