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George Bush Begs Saudi's for Cheap Crude Oil - The Begging is Only the Beginning!

Economics / US Economy Jan 18, 2008 - 03:10 PM GMT

By: Andy_Sutton

Economics Begging for Oil
Earlier this week, news reports surfaced about how President Bush, during his recent trip to the Middle East urged the oil producing countries of that region to step up production to meet current market conditions. His plea, however, was less than well received. The Saudis, in effect, told Mr. Bush to get lost, saying “Oil production is controlled by the market”. I'll allow that this utterance is cloaked in ambiguity. It is worrisome, however, especially against the backdrop of persistently high oil prices. The Saudis have either an unwillingness or inability to ramp up production.

Others have already followed suit. Despite the recent weakness in crude oil prices due to the slowing US economy, crude stocks are still at historically low levels. Demand has still not pulled back, despite the common sense assertion that it ought to. For whatever reason, the demand curve on a worldwide basis appears to be more inelastic in this range than previously thought. We can postulate all we want about where we go from here in terms of demand, but there are compelling arguments that point to stability in petroleum demand unless we see a worldwide depression. In that event, the price of oil would be the least of our concerns.

“Pardon me sir, but can you spare a Billion or two?”

Another kind of begging is also going on is with regard to the US and the Saudis. Our banks are screaming for help as they are in the early stages of an epic battle for solvency. There are so many apron strings all over financial Americana tied to the subprime housing debacle that the entire financial system is spiraling down the funnel of irrelevance. An overstatement you say? An exaggeration? I think not. We are now screaming to foreigners who have massive pools of our dollars to help. For now they are. Here's a thought. We're in the first round of bailouts. Foreign sovereign funds are willing to get involved to a certain degree thinking they're getting in at the bottom.

What happens when this gets worse and their investment disappears? Bank of America already had to throw $4 billion in good money after a $2 billion malinvestment from this past summer in order to protect it. So what happens when this crisis deepens and the banks cry out for more money? Will sovereign wealth funds be willing to throw more good money after bad? If they do, then they will end up owning many of our large institutions. Where are the cries of national security now? If the sovereign funds don't pony up, the Fed will be forced to monetize debt to continue the bailouts. Neither situation is desirable. Much like politics, we'll be forced to choose the lesser of the two evils.

The monetary cycle's end game – begging for reflation

After another rout this week, Wall Street is literally on its collective knee, begging the Fed for more easy money. The President will speak today, outlining two fiscal stimulus packages. Nice try. I challenge one journalist to ask where this money is going to come from. The government is broke. It owes over $9 Trillion dollars already. And it isn't going to get any better with millions of baby boomers about to demand Social Security, Medicare and other retirement benefits. The idea has been floated of giving a $300 or $600 tax rebate to households based on their filing status. I remember seeing one similar rebate in 2001. If I remember correctly, I was expected to pay taxes on a tax rebate. What a joke. This is the way that the Central Bankers will put fresh dollar bills directly in the hands of American households. This means that we are now in the end stages of this monetary cycle. The savings is gone, home equity is largely gone, credit card and consumer debt is rising, the recent Christmas season was a washout by most measures, and our authorities are very worried. Worried about where the spending is going to come from to drive this debt-riddled economy.

We are now undoubtedly in inflation mode, soon to be hyperinflation mode. Lower interest rates will be a reality; for a while. If you are one of those folks that is in a position to gain from refinancing your house, I'd keep an ear to the floor over the next few months. You might get one more good opportunity. Generally, low interest rates encourage borrowing for a myriad of reasons such as expansion, production and consumption. The problem is that with debt levels so high, there are many people that are realizing that it doesn't matter how cheap the money is they just can't borrow any more. Many of them had confidence that their house had their back. The price of their home could never go down, and enough equity would always be there to fill any gaps that emerged. That confidence has blown up over the past year in a big way.

Homeowners with ruined balance sheets are begging to the government for help. Begging for punishments for bankers who lured them into these mortgages. Ultimately, the burden will fall on individuals who were prudent enough to live within their means as we'll be the ones who will end up supporting simultaneous bailout and stimulus programs. How much more burden can savers take? There is a point of no return in every monetary cycle, and we are reaching ours at a breathtaking rate of speed.

I had an interesting exchange with a journalist from a mainstream financial website earlier this week. I won't mention the name of the site of the name of this gentleman, frankly because it isn't important. His reasoning permeates the financial press. His assertion was that people are not hurting because they can still buy all the things they want to buy. I made the point to him that people to a large degree used to finance luxuries from savings, whereas now they do it with debt. Since there is a theoretical maximum of debt assumption, I asked how long can this really go on? His response was that it is current consumption that matters; nothing else. This is a sadly typical assumption of most on Wall Street and in the media.

Consider all of this with regard to the fact that we're in a political season. Recessions and economic crises are not tolerable by politicians when it is election time. The diversions and subterfuge are obvious as they are willing to talk about anything other than the economy. Yes, it's the economy, folks. However, they are too busy putting on a show of tabloid politics, calling names, mudslinging, and in general, wasting time. Time we don't have. Shame on them. Shame on us for tolerating it. Mark my words the begging is only beginning.

We'll discuss these and other issues on this week's edition of “Beat the Street” – every Saturday evening on Blog Talk Radio. For more information and a link to the show, please visit

By Andy Sutton

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. He currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar.

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