Economic independence. Stop our reliance on foreign oil. Build it here; we don’t need those cheap Chinese imports. We don’t need them; we’re Americans. Debt crisis; it’s their problem. Heard any of these before? Not a scintilla of truth in any of the above statements.
Let’s assume – somehow – that we stop importing “foreign oil” (an impossibility given our automotive requirements, although we get most of our oil from this side of the Atlantic and not via ships from the Middle East). Let’s pretend we just made a huge secret find somewhere in the middle of the U.S., enough to keep us supplied for decades. Woo hoo. We’ll never have to pay expensive prices at the pump again, right? We will never be benefiting terrorist states with oil reserves by purchasing their petroleum, correct? Wrong, caped crusaders. You see, every drop of oil produced, graded as to quality, is literally dumped into a vast global bathtub – called the marketplace – and the price of oil is not set (OPEC notwithstanding) by the country where the oil is extracted; the market establishes pricing on a daily (hourly) basis. Oil is a commodity. If the price of oil rises because of market demands, that increase benefits every single oil producer on earth. If we have glut of oil or demand drops – as it is as global markets shudder over possible repercussions and economic contractions over European debt – all the oil producers get slammed.
And just think what would happen if we stopped importing foreign manufactures. Not only would the denizens of Beverly Hills face Gucci and Prada withdrawal pangs, but Americans across the land would find their clothing costs doubling and tripling, they wouldn’t be able to buy a television set anywhere, and their cars would soon be running on metal. That’s just the tippy tip of the collapse in the American standard of living that would follow. And what’s happening in Europe – credit failures at a national level – is a tsunami in training that might just make its way to our shores. We’ve tried to slow the wave.
On May 10th, “[t]he Federal Reserve announced that it would open currency swap lines with the European Central Bank — in essence, printing dollars and exchanging them for euros to provide some liquidity for European money markets and banks.” New York Times (May 10th). But that may not be enough. Testifying before a House Financial Services Committee on May 20th, Federal Reserve governor, Daniel K. Tarullo, said, “In the worst case, such turmoil could lead to a replay of the freezing up of financial markets that we witnessed in 2008.”
Want specifics? The May 21st New York Times summarized the further testimony: “Mr. Tarullo laid out how that contagion could spread. If sovereign debt problems were to broadly affect Europe, American banks could face large losses on their overall credit exposures, as asset values declined and loan delinquencies mounted. Money market mutual funds that hold commercial paper and certificates of deposit issued by European banks also would be hurt. The result could be a further contraction in bank lending… ‘Although we view such a development as unlikely, the swoon in global financial markets earlier this month suggests that it is not out of the question,’ Mr. Tarullo said.” In English: Concept 1: American banks are exposed in their European operations. Concept 2. Credit in the developed world is a lot like that bathtub filled with oil; there’s really only so much credit that the global markets can sustain, so if Europe siphons off a pile for its failing PIIGS nations, there’s not going to be a lot left for the rest of us. Concept 3. If the euro continues to fall, their ability to buy U.S. exports – a big part of our recovery plan – drops as well. Weeeeeeeeeeeeee!
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