Kudos to Congressional Republicans for defending capitalism and rejecting central economic planning.  On Tuesday, Senate Republicans denied their Democratic colleagues the 60 votes needed to end debate and pass a windfall oil profits bill.  The bill would have put a 25 percent tax (windfall oil profits tax) on profits over what would be determined "reasonable" when compared to profits several years ago.  It would have regulated energy futures traders in order to limit market speculation.  It would have made price gouging of oil and gas a federal crime during a declared energy emergency by the president.  Lastly, it would have given the Justice Department authority to bring charges of price fixing against countries that belong to the OPEC oil cartel.  The measure was meant to address and punish those that are responsible for high prices at the pump – namely big oil companies, speculators and oil producing countries.  Of course, these Washington contrived villains are not ultimately responsible for high gas prices.  Even if they were, the measure would not have solved the problem.  It would only have made it worst.

It is amazing what short memories proponents of a windfall profits tax have.  In 1980, Jimmy Carter enacted one and from 1980 to 1988 (the last year of the tax) there was a 3 to 6 percent decrease in domestic oil production.  This happened because the tax increased the marginal cost of production, thereby reducing the quantity of gasoline produced.  A decrease in gas supplies without a corresponding decline in demand means even higher prices at the pump.  In a best case scenario, if the tax had been enacted oil companies would pass the tax expense on to consumers in the form of higher prices and we wouldn’t have to wait in long lines to fill up or be subject to rationing.

Windfall profit taxes are also bad because 41 percent of oil company stocks valued at over $267 billion are currently held in various forms of pension plans and retirement accounts.  The tax would cause the values of these accounts to dwindle causing negative effects on national savings and our senior population.  Rest assured, while the Democrats believe a windfall profits tax is the right thing to do, the measure’s vengeance would have been mostly felt by the American consumer.

The Democratic bill would have also required traders to put up more collateral in the energy futures markets and would have opened the way for federal regulation of traders who are based in the United States but use foreign trading platforms.  The Democratic leadership in Congress clearly believes that a group of speculators have gotten together all of a sudden to conspire to inflate the price of oil futures in order to reap huge gains at the expense of the rest of us.  Talk about conspiracy theories.  This belief ignores the relationship the current value of our dollar has with oil prices.  The rise in oil futures is a direct result of investors trading debased dollars for a commodity that has had, has, and will have into the future enormous value because of its necessity for the world economy.  If the government attempts to control the price of oil through regulation of futures trading, it potentially will have the same result that price controls have had in other sectors of the economy – a shortage of the product because the profit motive for producers is either limited or eliminated altogether.  Once again the opposite effect of what Congress is trying to accomplish will happen.  The price of gas will increase because Congress’s policy will cause a decrease in supply.

Two other provisions of the bill would have made domestic gasoline price gouging a federal crime and given the Justice Department the authority to sue countries in the OPEC oil cartel that price fix.  Common sense indicates that when the raw material that goes into a finished product increases significantly in price, the price of the finished product will also increase significantly.  There is no doubt that oil companies make large profits, but that profit is needed by them to carry out exploration, excavation, and refining of their product.  As to the Justice Department having the authority to sue another country, this is just indicative of how arrogant and wacky supporters of the bill have become.

In essence, the Democratic windfall profits bill was nothing more than election year pandering.  It was an attempt to show the electorate that Democrats are on their side when it comes to dealing with bad guys – oil companies, speculators, and OPEC.  However, not only would the bill have exasperated the current energy crisis by adding costs to oil production, depleting national savings, and causing gasoline shortages, it was misdirected in terms of who is ultimately to blame for high gas prices.

The primary culprit responsible for high oil prices are the monetary central planners at the Federal Reserve Bank.  According to Ron Paul, the Fed has roughly tripled the amount of dollars and credit in circulation since 1990.  It has added 4 trillion dollars to the money supply in the last 3 years alone.  This has caused a serious devaluation of the dollar.  The Kwacha, which is the Zambian currency, has gained 33% against the dollar in 3 years.  Zambia is a much poorer country than the U.S. and its money is on the rise against our greenback.  Because the dollar is the international currency of exchange for oil, the debasement of the dollar is responsible for the high price of oil.  It is also easy to understand why investors (speculators) are dumping dollars in favor of commodities, specifically oil.  So while the politicians in Washington and their friends in the media continue their campaign of blaming greedy business men, unscrupulous investors, and shady foreigners for our gas woes, remember that a rise in prices almost always is caused by too much money chasing too few goods.  The supply of oil is fine; it is the too much money part that Congress needs to deal with.

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.

This week the International Monetary Fund (IMF) announced plans to sell a portion of its gold reserves.  It seems the IMF is not needed as much as it use to be – many developing countries in Asia and Latin America possess large reserves of foreign currency, alleviating the risk of economic crisis and consequently the need for emergency loans from the IMF.  Thus, the bank has a shortfall of revenues and wants to liquidate some gold so it will have cash to invest to cover the current and any future shortfalls.

It is refreshing that the IMF is not “hitting up” its member countries for the funds needed to cover the shortfall.  After all the U.S. contributes a bunch of dough to the IMF already and with the Fed induced recession, and the endless wars we fight (e.g. poverty, illiteracy, Iraq, Afghanistan, terrorism, poppies, other drugs, etc…), things are a little tight there at home (For new readers I currently reside in Zambia).  Instead it is selling assets to do the job.  However, the proposed sale raises several questions in my mind.

First, I find the timing of the proposed sale of IMF gold curious.  Why at this moment when the worldwide economy looks like it is about to go into the toilet?  Six billion dollars is not a lot of money.  The IMF estimates that the Fed induced subprime crisis will cost the world economies over one trillion dollars.  So it can’t be that the IMF is planning to use the six billion dollars to help its members through this crisis.  I suppose the IMF will use the funds from the sale to invest in government and corporate bonds to make a profit to cover current and future shortfalls.  Question is, if the IMF is needed less and less for their services, why not just cut back operations to the bone like other businesses do that experience revenue loss and expect future revenue losses?

Second, why does the IMF have such large assets?  IMF gold reserves alone at current market prices are worth ninety-five billion dollars.  How can the IMF have amassed such a large endowment if its mission is humanitarian?  After all, the IMF’s purpose is to stabilize economic situations by providing emergency loans to developing countries that are in over their heads.  Further, if their business is that profitable why does Congress still commit the American taxpayer to contribute billions of dollars to them each year?

Third, even though the Fed and IMF are not directly linked, is the IMF not guilty of a form of insider trading?  The Fed caused the price of gold to skyrocket by debasing the dollar.  Along comes the IMF ready and willing to “dump” gold on the market to realize a windfall profit, as the politicians would call it. 

The sale of the gold is not automatic as it must be approved by the member countries of the IMF.  Given Congress’ inability to say no to the Fed I have little hope it will squash this sweetheart deal.  With tax day less than a week away, we should be demanding that Congress pull out of the IMF.  While the IMF can realize its golden opportunity by making a killing in the gold trade, the Congress should protect American taxpayers from the fiends that used our money to get rich.  

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.