Great Depression Online Archive Issue:

Nothing for Something

Great Depression Online
Long Beach, CA
March 07, 2008

Inside This Issue You Will Discover…

*** Oil Prices Hit Record High
*** It had to Happen
*** Nothing for Something
*** And More

Oil Prices Hit Record High

After nearly 28 years oil prices hit a new record on Monday.  Joe Mouawad reporting for the New York Times on March 4th shares the news…

“The day’s highest trading price, $103.95 a barrel on the New York Mercantile Exchange, broke the record set in April 1980 during the second oil shock.  That price, $39.50 a barrel, equals $103.76 today, when adjusted for inflation.

“The surge in energy prices is taking place as investors seek refuge in commodities to offset a slowing economy and a declining dollar.  Analysts pointed out that financial institutions like pension funds and hedge funds are also buying oil and other commodities like gold as hedges against a rise in inflation.”

Last time prices were this high Jimmy Carter was President.  But we didn’t have to wait another 28 years for the next record.  For just three days later, oil prices hit $105.97 a barrel setting another new record. 

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We have a feeling that there could be many more new records for oil prices this year.  Because while the April 1980 high was due to sudden supply disruptions tied to geopolitical events, today’s high is due to an unfolding dollar crisis.

It Had to Happen

All records stand to be broken.  That they will one day fall is inevitable.  But what’s curious about this new record is that nominal prices had to increase over 262 percent to achieve it in inflation adjusted terms.  Just reaching $39.50 per barrel didn’t do it…$103.95 was needed.

What this means is that the dollar’s lost 62 percent of its value since 1980.  And the dollars decline, and the difference between nominal and inflation adjusted prices, obscures many things including income values.

For example, according to the U.S. Census Bureau the median household income in the United States in 2006 was $48,201.  In 1980 it was $17,710.  At first glance it looks like the household income has increased 272 percent.  But when you adjust for inflation $17,710 in 1980 is equal to $41,258 in 2006 dollars.

So during this period, household income increased at about 0.65 percent per year.  Not much of an improvement in real incomes, especially during an era often characterized as a period of economic boom.

Nothing for Something

Over the last 10 years the idea that you could get something for nothing was pervasive.  First all you had to do was ‘buy and hold’ an index fund and the market would make you wealthy.  Then all you had to do was buy a house, because ‘housing prices always go up’. 

But now, just the opposite is happening…

The economy is stagnating and inflation is rising.  This is commonly known as stagflation.  And in this scenario, unemployment and prices both rise while income lags behind.  So if you’re fortunate enough to keep your job, even if you work really really hard, your standard of living goes down.

You get less out than you put in.  You work at a diminishing return.  Your pay stays the same yet prices go up.  You get nothing for something.

But, too, that’s if you’re one of the fortunate ones.  For some, their income will lag behind prices so that they’ll labor and become poorer.  In effect, they’ll get less than nothing.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  In addition to oil prices, gas prices have gone through the roof.  Discover how to quickly and easily make your car run better, drive smoother, last longer, and cost you less at the dealer’s, the auto mechanics, and at the pumps!  Learn more here: Cheap Car Tips and Tricks.

 

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