This week Alan Greenspan pulled the rug from under those who have been suggesting that the Fed was convinced that we were on the edge of major surge in inflation, and that a series of drastic increases in interest rates would follow in short order.
As the Financial Times put it: “Alan Greenspan sounded a reassuring note on the outlook for inflation and interest rates, wrong-footing the market traders who had been anticipating faster rate hikes.”
With the core inflation rate at only 0.2 percent and with job creation still relatively sluggish, despite the overall vibrancy of economic activity in the United States, the Fed is most likely to adjust rates 25 basis points at a time.
This good news coming out of Washington would “normally” be sufficient to light the fire under a modest summer rally — with stock prices rising and bond prices at least holding their own.
But unfortunately, the American economy cannot prosper indefinitely on the benign intentions of the Federal Revere alone. We need both cheap money and cheap energy, in particular oil and its derivatives. The problem is that we can print our own money in any quantity the Fed deems sufficient to keep the economy humming along. But we can only provide 40 percent of the oil we must have from domestic sources. For the rest we are dependent upon such major petroleum exporters as Saudi Arabia, Iraq, Iran, Venezuela, and Nigeria.
All five of these sources which we depend upon for oil are becoming more unreliable by the day.
Iraq — which we were told would be contributing over 3 million barrels a day of the 80 million barrels the world now needs — today supplies zilch as a result of a series of attacks on the pipelines, port facilities and refineries that are integral pars of its oil industry.
Venezuela is in total political turmoil, with its anti-American pro-Castro president trying to escape a recall that has been organized by the discontent masses in the country. Its oil industry is in such a mess that this oil rich-nation is today forced to import gasoline to keep its cars and trucks running.
Nigeria verges on the edge of political chaos.
Iran is in the process of isolating itself and alienated itself even further from the United States by moving rapidly forward on multiple projects designed to produce nuclear weapons within two years.
All of the above pales when compared to what could happen in Saudi Arabia, which today provides the entire world with 10 percent of the oil it needs. Terrorists attacks there are increasingly and the targets are changing. Right now they are designed to frighten the foreigners who now run that industry for the Saudis into leaving.
Next step will be attacks on the oil industry’s infrastructure, as is already happening in Iraq. The ultimate target is the House of Saud and its overthrow. If and when it goes, the terrorists will completely cut off exports to the West at least temporarily in order to prove to the world that they are now the Masters of the Universe.
Compared to all this, what happens this June 30 in regard to the Fed’s decision on short-term interest rates and the granting of (limited) sovereignty to the Iraqi governing council will barely deserve even a small footnote in future history books.