Oil is Money

Courtesy of Forbes we have a run time chart that tracks nominal and real prices for oil.

I posted it on my frequent links, Tracking Oil. Notice that real and nominal oil prices have been in lock step since 2001. Notice also the Oil imports by volume chart. Oil imports continue to track down, have been doing so ever since the crash. Oil is still the constraining input, it is correlated with everything the economy does.

Look at the inflation data, it is still tracking downward. Then look at the Zero Hedge post showing that the S&P index simply reflects printed money floating around New York and Washington.

As long as oil remains the constraint on the economy, monetary policy will simply cause more bits to flow around the computer networks. None of the companies on the stock exchange can do any real investing, every profit calculation they make has oil on the input and oil on the output, canceling their business plans.

As far as fiscal policy, there is no unused resources, all resources are used to the limit of oil surpluses, which is none. Under these conditions, the fiscal multipliers will be less than one unless government actions move to relieve the oil constraint. The private sector will shrink by more than one barrel of oil each time the government sector uses one barrel of oil.

The economy is operating as if oil is real money, and I do not believe there is some oil illusion that can fool us. Economists who think that government expansion is using excess resources are engaging in fraud.

Christopher Steiner lays out the problem in his book: "$20/gallon"