Yesterday, we questioned the validity of using fiat money as a unit of measure for the value of a commodity. Today, we will look at idea that the “weak US dollar” is one of the scapegoats for rising oil prices.
Frequently, we hear from the media explaining that one of the ’causes’ of rising oil prices (and by extension, inflation) is due to the “weak US dollar.” But notice one thing: oil prices had been rising in all currencies, not just in terms of US dollar. This leads us to one basic principle: everything else being equal, a falling US dollar has no effect on oil prices measured in non-US currencies. Of course, in the real world, everything else is not equal- oil prices rises to different degrees in terms of other currencies too, including the Australian dollar. In that case, can the rising in oil prices in terms of non-US currencies be attributed to supply/demand fundamentals?
But wait a minute! What is the meaning of “weak US dollar?” Can we interpret the meaning of “weak US dollar” to mean that the supply of US money and credit has been expanding at a faster rate than the supply of its non-US counterparts? Well, consider this fact: the supply of non-US money and credit has been expanding at an arguably greater rate than the supply of their US counterpart. For example, Australia’s money supply increased 21.6% (see Australia?s monetary growth update?February 2008) while the US money supply was estimated to be significantly below that figure (the US no longer publish figures on their M3 money supply). Putting aside the argument of which nation’s money supply has been increasing at a faster rate, this is the basic point: the supply of fiat money and credit of all nations have been increasing. In other words, high oil price is not just a problem of the “weak US dollar.” As we said before in What if the US fall into hyperinflation?,
Now, in this age of freely fluctuating currencies, the currency?s value is a relative concept. For example, a falling US dollar implies a rising Australian dollar. Therefore, one way to ?maintain? the value of the US dollar relative to the Australian dollar is to devalue the Australian dollar. Perhaps this is the route that central bankers will concertedly take to instil ?confidence? in the US dollar in order to create the illusion that the US dollar is still a reliable store of value? Well, they can try, but growing global inflation and skyrocketing gold price relative to all currencies will be tell-tale signs of such a dirty trick.
We can include oil prices in the last sentence of the above-quoted paragraph. Thus, we believe that global monetary inflation is one of the major contributing factors in accentuating the rise in oil prices, in addition to the fundamental supply/demand factors. It is an error to blame it on the “weak US dollar.”
In the next article, we will connect monetary inflation with oil price speculation.
