Economic Perspective: Doug Casey

Oil prices may fluctuate day to day.

But the fundamental problem facing the oil market cannot be solved with derivatives, interest-rate cuts, newly created money, or manipulating the market.

A massive volume of oil has been removed from the global market as the Strait of Hormuz is essentially closed.

That supply will not be easily replaced.

Alternative pipelines have limited capacity. Spare production cannot be activated overnight. Tankers, ports, refineries, and storage facilities all face physical constraints.

Governments can print currency. They cannot print a barrel of oil.

First, we should define what a swap line is. It basically amounts to the US giving a foreign country X amount of currency in dollars, and the other country paying for it by giving the US the same amount in their currency. For decades, US dollar swap lines were mostly reserved for major allies and core financial centers around the world.

It’s a problem, however, with countries whose currencies have no value outside of their boundaries. A country that gets a swap line from the US is trading its paper for liquid and fungible dollars. The US may then get stuck with UAE dirhams or Argentine pesos. It’s trading real money for play money, Monopoly money.

In the case of Argentina, that swap line may never be repaid. The US might wind up being stuck with a bunch of worthless Argentine pesos.

When the US gives a foreign country a swap line, it basically creates those dollars out of nothing. They enter the banking system and debase the dollar. Doing so gives the US some leverage over a country that takes the swap.

But it's a pretty expensive way of getting leverage.

To eliminate misunderstanding as to what taxes are, it is helpful to define the word "theft." One good definition is "the wrongful taking and carrying away of the personal goods of another." The definition does not go on to say, "unless you're the government."

There is no difference, in principle, between the State taking property and a street gang doing so, except that the State's theft is "legal" and its agents are immune from prosecution. Many people do not accept that analogy, because the government is widely viewed as being of, for, and by the people, even though it's also acknowledged as acting badly from time to time.

Suppose a mugger demanded your wallet, perhaps because he needed money to buy a new car and threatened you with violence if you weren't forthcoming. Everyone would call that a criminal act. Suppose, however, the mugger said he wanted the money to buy himself food. Would it still be theft? Suppose now that he said he wanted your wallet to feed another hungry person, not himself. Would it still be theft?

Now let's suppose that this mugger convinces most of his friends that it's okay for him to relieve you of your wallet. Would it still be theft? What if he convinces a majority of citizens? Principles stand on their own. Even if a criminal act is committed for a good purpose, or with the complicity of bystanders, (even if those people call themselves the government), it is still an act of criminal aggression.

Most investors are watching oil. But ...  They should also be watching the bond market.

Since the war began, the 10-year Treasury yield has climbed from 3.97% to around 4.60%. That’s a serious warning sign.

The 10-year Treasury yield is one of the most important financial benchmarks in the world. When it rises, borrowing costs rise across the economy—and the U.S. government’s already massive interest bill climbs even higher.

At today’s debt levels, a 63 basis point rise could translate into nearly $250 billion in additional yearly interest costs.

Now add a major oil shock...