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Is the American Economy Cannibalizing itself?

By       Message Chris England     Permalink
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I was perusing the cable news networks as I'm won't to do and happened upon Ben Stein discussing investment options after yet another poor day on Wall Street. With the stock market looking less than promising for the foreseeable future, the topic immediately shifted to commodity futures. Some doubts were raised regarding the reliability of such markets and the interlocutors expressed the fear that it could be yet another bubble. But it was the first idea mentioned for the obvious reason it's the only place that people have been making quick money.

To buy futures means that you're temporarily taking a product off the market and selling it later. As many people have pointed out the process increases the price of said commodities by taking the product off the market and decreasing the supply. Some economists have speculated that much of the recent increase in oil prices has been due to precisely this very process.

The process gets scary around here. As Ben Stein illustrated the first impulse of many investors once the stock market declines is to shift that money to futures, specifically oil futures, because right now that's where the money is. But investing in oil futures increases the price of oil which drains the American economy, which hurts the stock market, which could potentially lead to more people shifting to oil futures, which would drain the American economy, which hurts the stock market -- and on and on and on. Throw in a declining dollar which takes a blow every time the stock market declines, thereby pushing up gas prices even further, and you have a cycle in which the American economy is literally eating itself from the inside. It's a constant flow of money out of the stock market, out of business, into higher gas prices.

There are of course a couple of qualifying remarks to make. It's hard to say with any degree of certainty what percentage of investors, dismayed with the stock market, shift to oil futures, or whether it will actually manifest itself in a continually compounding phenomena like what I described. There's also the widely held belief that the oil futures market is a huge bubble likely to collapse at any moment. It almost certainly is the former. The latter, we can hope, is true though there are bound to be negative economic ramifications to the bursting of that bubble as well.

The wisdom of supply side economics, of shifting the nation's wealth to its most affluent members (also known as Bush's economic plan), was brought seriously into question during the Great Depression. The famous example, portrayed in The Grapes of Wrath is of fields of fruit going to waste as thousands starved. Without an affluent consumer base there was no reason for the owners to harvest the fruit. The capital was there, the demand wasn't. The lesson was that capital isn't always productive, and that you can hand the wealthy as much money as you want, and they might not do anything with. The situation today beats that. Now capital is serving fundamentally counterproductive purposes, increasing the price of gas, sucking away consumer spending, increasing the price of production. Regardless of whether the process is cyclical, regardless of whether it'll continue to get worse and worse until it reaches a crisis, the fact of the matter is that all that money which was supposed to trickle down to us is actually being used to empty your pockets at the pump. You should remember that fact the next time a politician tells us they can't pay for our students' education but then gives huge multimillion dollar tax cuts and handouts to the uber wealthy.

 

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Chris England graduated from UC Berkeley in 2006 and is currently a Ph.D. student at Georgetown University.

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