The stock market is back up today after its worst three-day run since the dismal year of 2002. Markets have been unstable and volatile as they sort out the implications of the real-estate correction, Big Bank write-downs, 100-dollar-oil, uncertainty at the Federal Reserve, populist protectionism on the campaign trail, and a possible return to 1970s style disco-nomics in Washington. Paul Krugman this morning tried to explain these events by endorsing Ben Bernanke's (and Alan Greenspan's) view that a world savings glut poured money into the U.S. and created the trade deficit.
The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve. Mr. Bernanke asked a good question: â€œWhy is the United States, with the worldâ€™s largest economy, borrowing heavily on international capital markets â€” rather than lending, as would seem more natural?â€
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a â€œglobal saving glutâ€: lots of money, all dressed up with nowhere to go.
As so many economists do, Krugman, Greenspan, and Bernanke ignore the obvious and central factor: the value of the U.S. dollar. Steve Forbes, with Occam's Razor in hand, far more cogently details the simple origins of today's global instability in real estate, energy, credit, and stocks.
The geopolitical fallout from the weak dollar is all around us: Terrorist Iran gets massive windfalls for its oil; ditto Venezuela under its wounded but still reigning lunatic, Hugo ChÃ¡vez; Russia becomes more truculently anti-American with each uptick in the price of oil; so-called sovereign funds buy up U.S. corporate assets at fire-sale prices; China, which outsourced its monetary policy to the Fed in the mid-1990s when it tied the yuan to the greenback, now faces increasingly destabilizing inflation; and oil-lacking developing countries, many of them fledgling democracies, are being hit with potentially destabilizing economic squeezes.
The prices of oil and other commodities are surging primarily because of the weak dollar. Between mid-2003 and the beginning of 2008 oil has zoomed from $25 a barrel to almost $100. Real demand in oil didn't suddenly massively increase to justify a nearly fourfold rise in price. The best indicator of inflation is gold. In this same time period the yellow metal has zoomed from around $350 an ounce to more than $800 an ounce. More than $50 of the per-barrel price of oil today comes from inflation and the speculation that inflation induces.
The value of money is the bedrock of all world decisions and transactions. Crack that foundation, and everything built on top of it goes wobbly.