The last I saw domestic gasoline consumption has been looking modestly higher, even as prices are up.
Here’s how I see how that works out:

Assumptions:

1. The US bill for imported crude goes up and consumption doesn’t fall.

2. US consumers have less to spend on other things.

two possibilities:

A) Iran and Saudia Arabia use their incremental winnings to buy US jets and nuclear reactors from US companies.
a) US jobs and paychecks in jets and nukes business increase by the same amount as the oil price hike, so
b) US domestic consumption remains constant.

Summary of results:

More US people working more hours and consuming the same in total.
As a whole that’s a negative outcome.

More exports for the same amount of imports.
Also a negative- declining real terms of trade.

It’s a case of ‘looks good’ (a few more jobs, exports up)
but feels bad (working harder for the same consumption).

Other possibility:

B) Iran and Saudi Arabia don’t spend the dollars
a) Domestic (non oil) consumption falls, so
b) Output and employment falls

This is a case of looks bad and feels even worse.

What actually happens seems to be somewhere in between?
Crude prices up, exports up, and jobs flat.

37 Responses

  1. But that will take some time to actually play out, right? In the meantime, investors pile on to an oil (and gold, and other commidities) bubble, aided and abetted by QE2, right? People will think that higher oil prices are a sign of an economic recovery, when in actual fact they are a result of speculation.

  2. Iran might buy jets. But US jets? Commercial jets, maybe? I don’t think we’d sell ’em the kind what make big boom.

  3. Didn’t high oil prices “cause” the last slowdown, which rippled into the highly leveraged housing and banking sectors? How come no one is mentioning oil as the “cause” of the financial crisis? It’s always the highly leveraged sectors that get hit hardest in a downturn, and nothing was more leveraged than housing and banking.

    And why won’t it happen again?

  4. Warren:

    There was a posting in another area on your website about competitive advantage. Obviously, we are better off exporting food and importing oil as we are the low cost producer of food and a high cost producer of oil. Thus, exporting food isn’t a cost. If we didn’t export food and import oil, we’d be worse off. Taken to an extreme and looking at this in a very simplistic way, let’s assume we are an agrarian economy and the low cost producer and all we do is export food. This puts currency in our pockets that we can them use to consume, buying products such as oil or cars from other countries. If we have all we need to eat and can feed the world as well without inflation, how are these exports a cost? They provide us with valuable currency (euros, yen) to purchase real goods. At what point are exports a cost?

    1. But, Ivan, the US is not exporting food for oil. It is exporting weapons. There are implications that go with that.

    2. The point at where you are exporting things you could consume here ..at that point you are exchanging real goods for Fiat currency, bad trade!
      The rest of the world wants to continue to do that trade and we are now trying to convince them not to, go figure.
      BTW….They dont provide us with anything in order for us to purchase their goods, they accept dollars and send us their “real” goods .

      1. First off, it may or may not be a bad trade. If the Chinese wind up with dollars that they use in the future to consume our output, it isn’t necessarily a bad trade for them. The U.S. used to be a major exporting nation as we were “maturing”. That was good for us at the time, much as it is good for China today. Second, that we export weapons isn’t the point. Set aside politics. Exporting wheat because we are the low cost producer is a good thing and it enhances our standard of living if we in turn purchase goods produced elsewhere where they are the low cost producer. So, getting back to the point, what (and when) is the cost of those exports? To say that exports are a cost (in and of itself) doesn’t make sense.

      2. My point about exporting weapons is that they are not a cost. Consumers and business are not deprived of fighter planes, and the sale of weapons feeds military Keynesianism, which is foundational for the US economy. It’s a symbiotic relationship, at least until there is blowback.

      3. Ivan,

        I don’t think Warren is saying exports are a cost. He’s saying that, all other things being equal, when we pay more for oil, domestic aggregate demand is diminished for other goods and services. To the extent that we are suffering from domestic overcapacity, and that the petrodollars don’t go to buy our goods and services, this exacerbates the overcapacity. Of course, we should be running larger federal deficits to compensate …

      4. @Tom:

        Tom, of course exporting weapons is a cost. A great deal of resources goes into designing and manufacturing weapons. Those resources could be deployed elsewhere to increase our standard of living.

        As to the usefulness of the military industrial complex itself, well, it’s not quite as simple as you seem to think. Spending 5% of our GDP on the military might seem to be a big waste, but what if by doing so we prevent a world war? 5% of GDP per year seems like a bargain in comparison to fighting WWII again.

        So if you think of military spending as a form of insurance, 5% of GDP is perhaps justifiable.

      5. ESM, without military Keynesianism the US economy would be in the trash heap now. That is a significant portion of the US manufacturing base.

      6. With weapons, it doesn’t make any difference whether the US uses them for its own arsenal or exports them; they do not benefit consumers as goods and they are not capital goods either. This is expenditure on what is supposedly public purpose, but unlike other public investments, it produces nothing for the real economy. While some defense expenditure is necessary, more than what is needed is wasteful and inefficient, and it could be better directed elsewhere.

        Only the income (jobs) and profit benefits the real economy. The output is useless domestically in that it cannot be consumed. Military production adds NFA through federal expenditure but it adds zero product to the domestic economy, hence it is potentially inflationary.

    3. good to trade food for oil in the context of your post.

      even better to get the oil and not have to export anything if we can get away with it,
      and take a day off from plowing now and then

  5. Ivan, re-read innocent fraud #5.

    The point, or rather the goal, is for U.S. to consume everything it can produce at “full employment” and utilization then import everything you want to improve standard of living (Louis Vitton, Mercedes Benz etc.)
    using of course dollars to make the purchases.

    1. Jorge:

      Will you please stop drinking the Warren cool-aid for a moment and think about the real issue! I know we want to consume everything made throughout the world. However, competitive advantage is a real economic issue that enhances our standard of living. When we produce what we can produce as the low cost provider and buy from others what they produce as the low cost provider, both parties are better off. Also, consuming Louis Vuitton and Mercedes in exchange for dollars isn’t some joke on the French and Germans. They want those dollars because they want to buy something with them. In this case, they buy oil. That leaves Iran with dollars to pay for weapons so that Hezbollah and Hamas can attack Israel and they can support global terrorism. Or…maybe they just want refined gasoline from the United States. Either way, there is a cost! Now go Elephant Hunt!

      1. Ivan, apart from food and natural resources can you come up with another example of competitive advantage? Any good produced and sold is about how much producers can get for it and not about how much it costs to produce.

      2. let me guess: michael jackson cd’s are produced in china and donwloads are technically not produced anywhere

      3. That would be true if the exporter couldn’t use the data entered in the computer to import back into his own country. Not the case in the real world!

  6. “They want those dollars because they want to buy something with them.”…sat what? can’t they buy them with their own currency?

    “I know we want to consume everything made throughout the world. However, competitive advantage is a real economic issue that enhances our standard of living. When we produce what we can produce as the low cost provider and buy from others what they produce as the low cost provider, both parties are better off.”
    …but your question is at what point does that interaction become a cost!!!and the answer is the one I gave you before.

    Hamas? Hezbollah?…you should switch to the Warren cool aid, your stuff is making you paranoid and clouding your thoughts.

    I go Elephant hunting when I’m done with the Dinosaurs…are we done?

  7. Ojos que no ven corazĂłn que no siente

    Jorge: Allow me to be more clear. If I’m a Chinese manufacturer and I sell drywall to Americans, I have chosen that the dollars I receive are a good exchange for the drywall I sell. I want the dollars. I haven’t been tricked or coerced into taking them. They have some value to me. That value may be American products or crude oil from the Middle East. I may decide to save them for the future and purchase Treasuries while I wait. I understand that if I save the dollars, I’m taking currency risk. At the end of the day, it isn’t a data entry that I want however. I want something denominated in dollars which most likely is something produced or offered in the United States. If I buy oil, my Saudi or Iranian trading partner takes dollars because he ultimately wants something made in the United States. My point is that the import isn’t costless in real terms. That is the so called “debt” that we leave to our children. It isn’t money. It is standard of living when the balance of trade reverses course. You seem to think that we simply get their goods and they get a data entry. This isn’t the case. It isn’t the same as points in a basketball game to use Warren’s analogy. In a basketball game, I may win by 40 tonight. Tomorrow I may lose by 1. I can’t use my +40 to cover my -1. In trade, I can take my +40 and use it the next night.

    By the way…I can’t believe you read a book. You’re the first salesman to ever do that! You can lose your license!

    1. however, more likely what motivates china’s politicians is kissing up to their exporters who help keep them in power. it’s about being able to spend the dollars some day. it’s pure political survival in an imperfect social system.

  8. …”My point is that the import isn’t costless in real terms. That is the so called “debt” that we leave to our children.It is standard of living when the balance of trade reverses course.”
    Do you mean when we EXPORT more than we export there is a cost? you should read up on this.

    …”You seem to think that we simply get their goods and they get a data entry. This isn’t the case.” I happen to KNOW that is the case, it’s called the Fed wire system, I read a book on it.

    …”It isn’t the same as points in a basketball game to use Warren’s analogy. In a basketball game, I may win by 40 tonight. Tomorrow I may lose by 1. I can’t use my +40 to cover my -1. In trade, I can take my +40 and use it the next night.” It’s EXACTLY like that except it’s not a basketball game, in this stadium you play “trading with partners using FIAT currency,where the points don’t expire and you can use yesterday points etc. AND THE STADIUM DOESN’T RUN OUT OF POINTS.

    by the way, I LOVE this reading thing, let me recommend a few for you since you seem to like reading:

    1-How to make friends and influence people-Dale Carnegie
    2-7 Deadly Frauds of Economic Policy-Warren Mosler

    1. Jorge:

      You’re totally dismissing contingent liability. If I get a data entry, that isn’t the end of the game. I can transfer that entry back to someone in the United States for real goods or services.

      By the way, I understand reserve accounting and agree with most of what Warren has to say. If you’re this dismissive of someone on the same side, how can you expect to educate those who don’t understand the issues at all?

      Got your call yesterday. I was going to call you back today but I’m busy reading my Dale Carnegie!

      1. Ivan, I think USD’s have been mostly accumulated by the exporting countries. Otherwise you would have had USD depreciation on a much larger scale. Since the exporting countries want to continue to export to the USA, they don’t allow their currencies to appreciate significantly enough to make exports unattractive to US consumers and consequently this give us the free ride that we are getting so to speak.

      2. I agree. The Chinese desperately need to avoid civil unrest so they’re willing to sell cheap goods to the U.S. in exchange for expensive debt in order to keep unemployment down. We are clearly the winners here…at least for now.

      3. Another point is that some or most or even all of the dollars that the Chinese have accumulated to date may never be spent, ever. There is some number of dollars that non-US residents and governments want to have squirreled away for whatever reason. That number is greater than zero and probably grows exponentially over time. Right now, roughly $4 or $5T net financial assets are probably owned by the ROW (rest of world). Apparently, it is not enough since the ROW still wants to net sell us goods and services. Is there any reason why the ROW’s desire for $ net financial assets will ever be less than $5T? Is there any reason it won’t continue to grow well beyond $5T? As long as we maintain a stable government, rule of law, and 12 aircraft carrier groups, I don’t see any good reason why the ROW’s desire for $ will diminish.

      4. ‘I can transfer that entry back to someone in the United States for real goods or services.’

        that means you can buy things from willing sellers at market prices, if you want.

        but govts don’t seem to care about that? japan hasn’t spent a dime of their 2 trillion dollars ever, for example.

      5. Are the Japanese paying nothing for the U.S. Military presence and their defense? If so, that’s a great deal for them!

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