Oil prices spiked on Friday following Thursday's ECB decision to leave rates unchanged and comments indicating its next move would be to tighten, poor unemployment numbers and dollar weakening. It is apparent to all but those with severe cases of denial that much of the spike in oil prices is due to speculation on the value of the dollar, Fed policy, U.S. economic performance as well as increased global demand.
The $16.00 two-day rise in the price of oil on 6/5 - 6/6 was clear indication that speculation is drive prices. Either that or six million cars were added to Chinese and Indian roads over night. As I have stated several times in the past, much, if not most, of the rise of oil prices is due to the weaker dollar. This can be proven by charting the relationship.
The good news is that the Fed can fix the problem If the Fed began tightening, the dollar would gain strength and oil prices would stabilize and possibly fall. However, the Fed cannot take this course of action. Why? Any rise of short-term borrowing rates could be harmful or fatal to many U.S. financial institutions. Even the Fed's stimulus programs would be affected.
One needs to ask if Glass-Steagall Act should be reinstated. After all, it was created in 1933 in the wake of the 1929 market crash and failure of the banking system. Maybe if speculation was better controlled the Fed would not have had to step in and prevent a failure to the financial system and a Bear Stearns implosion would be more isolated. Maybe Mr. Bernanke should lead the charge. After all, he is a student of the Depression.
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