West Texas Intermediary (WTI) crude oil jumped up again today. It is important that I remind you, that per the Federal Reserve Board of San Francisco "For each $10/barrel increase in oil prices, the United States pays an effective "tax" of about $50 billion (5 billion barrels times $10), or 0.4% of GDP." But with our leverage, roughly calculated, each dollar move up in oil wipes out about $100 billion in U.S. GDP. The current Banking-Treasury-Administration partnership won't allow for a significant drop in GDP at this stage. Can we avoid a vicious cycle where more Federal Reserve "Quantitative Easing" is necessary to offset each reduction in GDP, reducing the value of the U.S. dollar and thus indirectly raising oil prices further, and on and on?
Of course oil prices should turn back down after things calm down in the Middle East, but timing is the issue. The analysis provided by most media sources makes this point, but I think that matters are far more complex than that. While I don't pretend to have a handle on all of the correlations and interactions in our global economy, I do have data that tracks the U.S. dollar, oil, and gold prices in response to the Fed's Quantitative Easing and Permanent Open Market Operations (POMO). Some of the relationships are not obvious and could be disputed, but time is showing us otherwise so far.
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