Friday June 24, 2011

Fellow Resource Prospector,

Sovereign debt issues continue to roil the markets. Contagion from Greece has officially bled into Italy as shares of Italy's two largest banks, Unicredit and Intesa San Paolo, which were halted amid the pressures.

Growth in the United States is anemic, if not completely stalled. And now on the eve of the end of the greatest monetary stimulus program ever, the program Ben Bernanke calls "Quantitative Easing," President Obama has recklessly and perhaps desperately announced he plans to tap into the United States Strategic Petroleum Reserve (SPR).

The thing is, this reserve is supposed to be used during emergencies. So where's the emergency? If there is an emergency, maybe Obama should tell us about it. If there's not an emergency, then you have to wonder what's going on with our President.

Here's some official "reasoning" from Obama on the topic, from March 11 of this year:

"So we're going to try to do everything we can not only to stabilize the market, as I said, to the extent that we see any efforts to take advantage of these price spikes through price gouging, we're going to go after that. If we see significant disruptions or, you know, shifts in the market that are -- are so disconcerting to people that we think a Strategic Petroleum Reserve release might be appropriate, then we'll take that step. And we're going to monitor very closely."

Okay, so that doesn't make any sense. Even on the face of it: if releasing barrels from the SPR is intended to stymie oil "gougers" then it will fail almost immediately. Oil speculators are smart cookies. They won't be burned by this move in a significant way. They'll probably take advantage of the market gyrations in a way that people in Government can neither predict or understand.

But the real damage here is that this country will experience an emergency that calls for tapping into the SPR - and we'll have to cope with 30 million barrels less.

So since we clearly aren't experiencing any kind of emergency, why would Obama tap into the SPR now?

My best guess is that Obama and his cabinet hope that by tapping the SPR, they'll be able to continue the effects of QE and QE2 for a bit longer.

Maybe, this release of 30 million barrels at a time when QE is supposedly finished will suspend disbelief in the recovery long enough to convince consumers and businesses that all is, indeed, coming up roses.

The real lesson to be learned of course is that the Federal Government does not have any practical limit on the ways that it can spend money to stimulate the economy. These non-officially-announced versions of QE have much the same effect without being branded as such.

Will that create confidence?

Maybe - but it will be misplaced confidence.

And honestly, I believe stimulus really can work. That's not my inner Keynesian coming out. There's no reason the Government should sit on cash if it has it on hand. It should certainly be returned to the free market in the form of tax cuts or spending.

But that's not the case right now. The Government is not sitting on some huge surplus of resources that can and should be returned to the market. The Government right now sits on the largest pile of debt in the history of mankind.

So any "stimulus" whether it's fiscal (in the form of tax cuts or spending increases) or monetary (in the form of interest rate gyrations and money printing) - now comes out of thin air and eventually worms its way through the economy in the form of inflation, dollar devaluation and higher prices.

That's not so good. But the Federal Government long ago sacrificed the good for the convenient. We're just playing out that hand.

Have a great weekend,

Kevin McElroy
Editor