Morning Thoughts - The Oil Factor in US Trade

-- Posted Tuesday, 13 May 2003 | Digg This Article Digg It!

May 13: It is increasingly clear that the Cabinet has become, in Bagehot's phrase, a dignified part of the constitution, joining the Privy Council. There is no real collective responsibility because there is no collective, just diktats in favour of increasingly badly thought through policy initiatives that come from on high. The consequences of this are serious. - Clare Short UK International Development Secretary

Of the many cults of the ancient Mediterranean world that surrounding the Oracle of Delphi has always fascinated me. Kings, seers and other assorted wise and not so wise men over the course of centuries would make the pilgrimage to the site and ask the oracle their burning questions. Plutarch, Greek Historian and High Priest at Delphi, wrote of the trance of the Pythia, the resident seeress, who according to recent geological work used to get high on ethylene, once used as an anaesthetic. One wonders, however, if, aside from the more traditional visions, from time to time, the Oracle could be persuaded to spin her tale to suit the petitioner. Who knows what inducements Philip of

	US Economic Calendar	EST
Tues	Int'l Trade	8:30
Wed	Im-Ex Prices	8:30
	Retail Sales	8:30
Thurs	PPI	8:30
Thurs	Ind. Prod.	9:15
	Philly Fed	12:00
Fri	CPI, Housing St.	8:30
	CC (U Mich)	9:45

	@ 9:00AM	% chg
Gold	350.5	-0.28%
Euro	1.1525	-0.22%
Jpy	116.6	-0.43%
USDX	94.71	0.16%
US 10 Yr	3.64
3M Libor	1.29
DJ Stoxx 50	2291	-0.17%
N225	8190	-0.38%
Oil	27.82	1.72%

Macedon might have offered the Oracle to envision his son as a great ruler. Certainly the inhabitants of the shrine must have been grateful for Philip's help in freeing them from Phocian rule. Regardless, in the event Alexander proved an able general but poor ruler, with his greatly expanded Macedonian empire breaking apart in the years following his death.

I speculate on the topic because the issue of credibility seems particularly relevant at the current time. However achieved, the credibility of the Oracle stood the test of time for many hundreds of years before fading into obscurity as a seer of truth, long before Theodosios prohibited the cult of Apollo. While the


Phocian armies seemed interested only in the temple wealth, Hadrian's interest in the site seems consistent with an attempt to cloak state views with the aura of oracular credence, a sign that perhaps by that time, the views were for sale. Of the many aspects of successful institutions of man, credibility seems the most fickle, at least from the perspective of those who lose it. When the people of a state have faith in their leaders, dramatic change is often easily accomplished, while a lack of faith makes even the smallest change a subject of intense scrutiny. The transition between the two states, while apparently stark, may better be conceived as a extended process as the hopes of the people are slowly eroded, punctuated at the end by some climax. This is to argue that there is a lag, whose duration seems partially a function of economic well being, between the events which lead to a breakdown in credibility and transition to a state of rising skepticism. How then can one tell when the deceptions of the past are returning to haunt the current inhabitants of the trusted institutions of man? One method leans on the Jamesian notion of Pragmatism, to wit, when stories of a lack of credibility begin to resonate with the public, the trend towards rising skepticism is on its way. That large elements of the Tech boom were frauds was generally accepted among those with the requisite expertise seems apparent from the intra-office emails of Wall St. analysts, who called these stocks, inter alia, "dogs with fleas." However, the public continued to throw their money at these IPOs until the bubble burst. Now, suitably chastened, the public takes a dimmer view of the machinations of Wall St. This is a trend I expect to continue. Even the newspaper of record, the NY Times is not immune to losses of credibility, as the recent saga of Jayson Blair attests. More interesting to me will be the continued "traction" of the story with the public. Should this affair prove a one-off, the Times may retain its credibility with its readers. I would be remiss to overlook the downfall of the Nixon Presidency while on the topic of credibility. The textbook answer to the question, why did Nixon resign? is the Watergate cover-up. Yet, I think the above general analysis might offer a deeper view. While the Watergate story may have been the catalyst around which the general skeptical sense of the time managed to coalesce, the continued promises of peace with		honor in Vietnam had been ringing false for years, particularly as the Pentagon Papers painted a picture of deceit precipitating the conflict. I dwell on the topic as I think that earlier period may offer clues to the future course of events. With Florida Senator Graham charging a "cover-up" in the 9/11 investigation, and many private individuals charging much worse, we may have our version of the Gulf of Tonkin. The War on Terrorism, like the War on Communism seems to be creating more problems than it solves as post War Iraq and Afghanistan attest. Equally, then as now, the credibility of the US$ is under attack and consequently the economic climate is deteriorating. Nor is this lack of credibility confined to American shores as the continued turmoil surrounding Iraq's oil in the UN or the related resignation statement of Clare Short in the British Parliament, inter alia, makes clear. This is an environment which breeds skepticism. In a sense the only thing missing is the catalyst. Perhaps I should write that at this point in the process, the catalyst around which the rising sense of skepticism will coalesce seems unclear to me. Perhaps the 9/11 issue will prove to be that catalyst, or fears of the financial sector's control of prices or something I haven't noticed. Regardless, once the powers that be accept the need to restore credibility to the system it will seems as if the catalyst was "the event" when I believe the seeds of the problem will have been growing for some time. This is to argue the potential for a post Watergate financial market reaction sometime in the future as the rising tide of skepticism manifests in a shift towards real assets and away from paper assets. Gold is never more valuable than when faith in the institutions of power is on the wane. In closing, please turn your attention to today's graph. At a time when credibility is key, this graph highlights an interesting facet of recent US Trade flows. While oil imports have been a drag on US trade for decades, the correlation between oil imports and the trade gap was not high, except for the past few years. Since 1998 the rise in oil imports has coincided with a rapid deterioration in the US Trade gap. The just released data (Mar Trade Deficit $43.5B) show this relationship strengthening as 2003 crude oil imports through Q1 are already nearly $25B. Unless prices drop fast, the US is on track to import US$100B worth of oil this year. Yeah, I'm sure these considerations had little to do with the Iraq War. Now about that bridge I wanted to sell...


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