posted by King Minos in Money / Career

Triple AAA Poor Source on Gas Prices

February 18, 2013

Of course, the King himself is not a good source, either!

But this almost monthly blurb from AAA about where gas prices are headed is a very, very poor substitute for economically sound information regarding the price situation.

“Although there are a few factors that could cause oil prices to stabilize this week, it’s likely gas prices will increase,” said Jessica Brady, a AAA spokeswoman. “So far, market trends and price fluctuations at the pump have been similar to 2011 and 2012, leading analysts to believe prices will peak in April before they retreat.”

As far as can be told, you have a AAA spokesperson who has been asked about prices so many times, that now he or she believes he has become something of an Oracle who can predict the future; at least until prices go up or down again -- and that's probably caused by seasonal changes, the Korea threat, and the fact that Hillary is now unemployed!

In reality, "AAA" is a group that makes its living off of the traveling of the general public; this is why their pronouncements, while holding slightly towards the truth, often predict sunny skies just as soon as prices spike to $6 a gallon! Well, they haven't said THAT yet; but they did say prices might approach $5, before falling back, last summer.

SERIOUSLY, our media -- and I use this description charitably -- is clueless on most important business news; and, whence the radio and print explanations come out, most of the public are then similarly duped.

What about prices?

Well some of the factors affecting gas prices are the value of the USD; the volatility (rapid rise or fall) of prices may suggest that exchange rates for the USD are more volatile as well. Technically-speaking, this may be caused by an increasing inability of markets to factor-in deliberate attempts at devaluation among major market participants including the U.S. Treasury and Fed, and Japanese and EU authorities.

For instance, in order to boost their own exports and, perhaps, slow imports (and thereby strengthen their balance of payments and ability to pay back debts), major competing states around the globe seem to be printing lots of their own currency and handing it out to make that currency worth less! If only one nation were holding down the value of its currency -- China, for example -- then it would help that nation while it harmed all the rest. In the present situation, you have many nations attempting the same strategy and THIS makes it difficult for markets and financial experts to come-up with relative valuations; this difficulty causes big ups and downs in currency valuations; and this volatility means prices for things like gas and oil ALSO oscillate!

While no one country may be able to "out-devalue" all the rest -- and import significant inflation and much higher gas prices -- they can cause rapid fluctuations in prices. Already, gas prices that may have increased, say, a penny, overnight in the 1970s, are apt to rocket-up as much as a dime or even $.0.50 OVERNIGHT!

Interested observers ought to think about the implications of rapidly oscillating currency valuations. When foreign products are bought or sold, the USD must be converted into another currency. This "transaction" cost has implications not only for prices but for long-term trends in trade activity. For example, the European Monetary Project attempted to spur trade by using a single currency; the single currency got rid of the transaction cost of, say, changing French Francs into German Deutschmarks; this reduced transaction costs between the now-unified states, and spurred an increase in the total volume of trade: All boats rose higher!

THEN, as values bounce around more rapidly, transaction costs, prices, and trade volumes should all change significantly; even if the currency war cannot spark inflation against the great bulwark of expectations for inflation*, it can, by default, raise transaction costs so much that prices must rise for other reasons.

A currency war is not the same as Smoot-Hawley; but its goal is clearly the same: An effort to use government regulatory mechanisms to manipulate trade, and satisfy domestic political constituencies. Clearly, successful "devaluations" can only cause retaliation; and world trade could collapse as it did prior to the last global Great Depression.

*How can the expectation of higher inflation actually work to prevent it? Market participants who expect higher inflation actually make "hedging bets" in anticipation of higher prices; an airline, for instance, might buy, today, fuel for delivery several years out, if that fuel had a lower price; private investors, as well, could sell dollars to buy "hard" assets such as gold and silver or even arable land; they expect their investments will rise in value as the value of the currency declines aka "inflation." (In fact, when lots of folks start to buy gold, the price moves rapidly higher; and this strengthens the belief in higher inflation!) Working together, all of these actors create a very strong bulwark against the very thing they fear and have prepared for; actual inflation, however, generally requires agreement between pro and anti camps about relative price stability. Whence everyone relaxes, government can juice the money supply, and inflation can come roaring back to life! The overwhelming victory of PBO and the democrats taken together with their EZ money economic policies could constitute victory of the loose money advocates over the honest money crowd. If that is so .... well, let's just wait, and see!

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