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Wednesday, December 1, 2021

Panicky Joe Biden has failed the oil price test

Crude prices have risen but are not particularly high. Brent is hovering around $80 a barrel, far below sustained levels near $100 from 2011 to 2014, let alone the $148 peak in mid-2008. Oil is flowing smoothly and trading close to its long-term historical average in real terms. 

What America does face is near-record fuel prices at the pump, though nothing like the supply shock of the 1970s, an era when gas-guzzlers were half as efficient. Petrol has jumped 50pc since January to $3.50 a gallon – still tame in UK terms – with the blame increasingly being laid at the foot of the White House. 

Mr Biden first tried to cajole OPEC into opening the spigot. Failing that, he has cajoled a string of states, including Britain, to join his futile attempt to buck the forces of global supply and demand. His other reflex is to seek scapegoats. 

“I have asked the Federal Trade Commission to strike back at any market manipulation or price gouging in this sector. Gas supply companies are paying less and making a lot more, and they do not seem to be passing that on to consumers,” he said. 

In this respect we really are back to the 1970s when President Nixon imposed price controls in a forlorn attempt to suppress inflation caused by his own government. In that instance it was the fiscal boom of the Great Society and the Vietnam War, egged on by loose money from a co-opted Federal Reserve. 

The reason why US petrol prices have been rising faster than crude oil itself is because of soaring costs in the refining industry. The “crack spread” has widened. Mr Biden’s advisers must know this, so is it unfair to suspect that he is resorting to cynical, business-bashing, Peron populism in order to halt the slide in his poll ratings? Is he the Trump of the Left? 

As in the early 1970s, the underlying cause of US cost inflation is the printing press of the Federal Reserve. The output gap has officially closed. There is no longer slack in the economy. 

Capacity constraints are visible everywhere. The jobs “quit rate” used to track tightness in the labour market has never been so high. The Atlanta Fed’s instant tracker of GDP growth for the fourth quarter is running at a blistering 8.2pc. 

Yet the Powell Fed is still injecting stimulus. Having already gunned the broad M3 money by 30pc since the start of the pandemic, it continues to purchase over $100bn of bonds each month and continues to hold interest rates at zero. That is why inflation has soared to a 30-year high of 6.2pc, accelerating to an annualised 10pc rate last month. 

Monetarists warned a year ago that the Fed was pouring rocket fuel on dry tinder, and that prices would catch fire once the economy reopened. The circumstances are nothing like the post-Lehman episode when the banks were crippled and QE was needed to head off a deflationary vortex. 

Professor Tim Congdon from the Institute of International Monetary Research (IIMR) said then that the “crushing evidence of monetary history” is that money creation on such a scale would prove highly inflationary. It was the same message from the Center for Financial Stability in New York. They were ignored. 

The central bank fraternity and the canonical professoriate have been caught by surprise because monetary analysis has no place in their New Keynesian theories. “Money has disappeared from modern models of inflation,” said Lord Mervyn King, ex-Governor of the Bank of England. 

In a speech to the IMMR last night he mocked the “King Canute theory of inflation”, the conceit that prices will remain stable because central bankers order them to behave. The tide is not impressed. “You ignore big rises in broad money at your peril,” he said. 

The jury is still out on whether this inflation is the start of a 1970s wage-price spiral or a one-off rise in the price level, and therefore an opportunistic way to devalue the pandemic debt burden before the bond vigilantes wake up. I remain agnostic. But it is undeniably responsible for the surging cost of living in the US right now. 

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