Wednesday, April 21, 2010

A Narrative - The Unfolding of the Global Financial Crisis. Part 1 (Update 3)

In 1980 a series of large apparently engineered [1] increases in the global price of oil [2] led to the destabilisation of the global economy, particularly in debt-dependent third world nations. The resultant inflationary-deflationary spiral (stagflation) ultimately contributed to vulnerability in the US national banking system[3],[4]. Of other notable significance was the issuance of extraordinarily large loans issued by big financial institutions to a very small number of individuals - the Hunt and Saudi royal family[5] - for speculation in commodities.[6] The US-dollar devalued quickly. This situation prompted the Fed to take drastic action. It implemented a general credit squeeze throughout the domestic economy, which (in turn and along with the then usurious level of interest rates[7]) led to a record quarterly economic decline. Transnational corporations evaded this squeeze, however, through their global back-channel loan operations.

The public were left largely unaware that the Fed’s credit squeeze and experiment with monetarism had actually failed to control the US money supply.

Milton Friedman, the promoted idealogue of the 1970s, presented economic theories on inflation control. Friedman insisted that monetary authorities should adopt long-run targets for monetary growth and allow interest rates to go where they may in the attempt. The Federal Reserve followed his recipe, targeting effects rather than causes.

Several developments in the world economy confounded the monetarists. First, the velocity of money proved to have created an unreliable trajectory for M-1[8]. Secondly the existence of the large, concentrated[9] and unregulated Eurocurrency markets made domestic control over the US dollar supply unviable for the Fed[10]. Finally, it was observed that the US monetary supply continued to increase under the monetarist regime; in the context of a recession. The CPI index showed a drop in 'inflation', however. Friedman's theories were discarded. No public announcements were made to this effect.

The global shadow banking and finance system had been fueled by the overseas expansion of US banks along with the enormous supply of petrodollars[11] and the invention of new financial instruments . The Euromarket had increased eightfold since 1970 and was already forcing US domestic banks to bear the burden of the Fed’s restrictive policies and “shifting the responsibility of combating inflation to non-international banks and their customers.”[12] These stateless currencies[13] were largely a product US hegemonic control of the global reserve currency[14]. Their oversupply was exacerbated by a number of new developments in the global economy, for example, a mania for the discriminative deregulation of large businesses disguised as ‘neoliberalism’, bigness in capitalism[15] and uncontrolled global currency speculation. The latter was significantly worsened when floating exchange rates were introduced in 1973[16] .

Large corporations continued to borrow on a huge scale. Speculation increased through the leveraged buyouts of weaker corporations.[17] TNCs moved to reduce their costs in response to high input and credit costs and the associated poor consumer demand. US manufacturing labour was discarded through the process of automation and operations were moved offshore where ever feasible to take advantage of low-priced third world wages and resources along with relatively lax environmental regulations[18] . Within the US family farmers were pushed to the wall. In the US Great Plains the negative returns on real goods complicated debt problems for farmers who faced extraordinarily high real interest rates. An inexorable squeeze between farm prices and the price of credit resulted in tens of thousands of farmers experiencing bankruptcy.

Credit drained the resources of the more productive uses of money within the US domestic economy. The process of globalisation as well as the forced deflation in farm, forestry and labour prices covered for excessive inflation caused by debt, speculation and artificial demand around the world.

Prices for consumer items were kept down because governments negotiated below-cost royalties for their nation’s resources directly with transnational corporations. These businesses were permitted to exhaust local supplies of timber, water, minerals and nutrients and then go elsewhere. Production was stepped up to a faster pace and profits became short-term in nature. Local businesses that had to wait for resources to regenerate found themselves disadvantaged. They were forced to compete with privileged corporations that were permiited to “discount waiting time through going elsewhere.” The latter thus quickly gained a stranglehold over regional resources.

[To be continued…]

REFERENCES:
The Fake Oil Crisis of 1973
James Akins (US Ambassador to Saudi Arabia) testimony to Congress
"U.S. Ambassador to Saudi Arabia, James Akins, later testified in congress on the fact that when, in 1975, the Saudis went to Iran to try to get the Shah to roll back the price of oil, they were told that Kissinger told the Iranians that, “the United States understood Iran’s desire for higher oil prices.”[51] Akins was removed from Saudi Arabia in 1975, “following policy disputes with Secretary of State Henry Kissinger.”[52]

[51] [51] V.H. Oppenheim, Why Oil Prices Go Up (1) The Past: We Pushed Them. Foreign Policy: No. 25, Winter, 1976-1977: page 44

[52] Time, The Cast of Analysts. Time Magazine: March 12, 1979: http://www.time.com/time/magazine/article/0,9171,948424,00.html

As quoted in: Controlling the Global Economy: Bilderberg, the Trilateral Commission and the Federal Reserve
Aug 04, 2009 - 03:10 AM
By: Andrew G. Marshall,Global_Research.
http://www.marketoracle.co.uk/Article12509.html
References to this article are found at:
http://www.bikernews.net/index.cfm/d/news/p/read/newsid/12905

+
In 1974, when a White House official suggested to the Treasury to force OPEC to lower the price of oil, his idea was swept under, and he later stated that, “It was the banking leaders who swept aside this advice and pressed for a ‘recycling’ program to accommodate to higher oil prices.” In 1975, a Wall Street investment banker was sent to Saudi Arabia to be the main investment adviser to the Saudi Arabian Monetary Agency (SAMA), and “he was to guide the Saudi petrodollar investments to the correct banks, naturally in London and New York.”[56]

[56] F. William Engdahl, A Century of War: Anglo-American Oil Politics and the New World Order. London: Pluto Press, 2004: page 137

As quoted in:
Controlling the Global Economy: Bilderberg, the Trilateral Commission and the Federal Reserve
Global Power and Global Government: Part 3 by Andrew Gavin Marshall
Global Research, August 3, 2009
http://www.globalresearch.ca/index.php?context=va&aid=14614
+
MA Adelman (MIT, 1990)
In 1990 MA Adelman from the Massachusetts Institute of Technology wrote:

“A journalist, who was on a first-name basis with Secretary Kissinger, writes: "Nixon gave the Shah carte blanche to purchase any amount of military equipment short of nuclear weapons. This...led him to instigate the steep rise in the price of oil in 1973 to make it possible for him to finance his purchases." [Brandon 1988, p.354].”

MA Adelman observes that it wasn't credible that the Shah of Iran would have no wish for extra revenues in the absence of the purchase of arms by his Government. This, however, does not contradict Brandon's statements. Another reference to Kissinger, Iran and arms sales relating to 1974 makes it clear that the claimed arrangement between Iran and US was for the purpose of bailing out US defence contractors rather than being a response to the Shah of Iran's desire for more and expensive US armaments.

THE FIRST OIL PRICE EXPLOSION 1971-1974
M. A. Adelman
MIT-CEPR 90-013WP
May 1990
M. A. Adelman
Department of Economics and
Energy Laboratory
Massachusetts Institute of Technology
Cambridge, Massachusetts 02139
http://dspace.mit.edu/bitstream/handle/1721.1/50146/28596081.pdf?sequence=1
..\..\..\EconomicHistory\Oil_History\FirstOilPriceExplosion1971-1974.PDF
+
The Fake Oil Crisis of 1973 (QuestionsQuestions.Net)
The Fake Oil Crisis of 1973
From QuestionsQuestions.Net
http://www.engdahl.oilgeopolitics.net/1973_Oil_Shock/1973_oil_shock.html

Some "peak oil" writers have opined that the crisis of 1972-73 was a kind of "rehearsal" for what is supposedly in our very near future. It is startling to consider, in light of this, the evidence that that crisis was likely a completely contrived affair.

In "A Century of War -- Anglo American Oil Politics and the New World Order" (1992), petroleum industry expert and economist F. William Engdahl presents evidence that the 1973 OPEC "oil shock" and the accompanying oil "shortage" were secretly planned by the highest levels of the US and British elites, with Henry Kissinger playing a key role: more
[http://how-the-world-really-works.prosperitydoctor.com/output.php?ChapterID=38&BookID=5]
THIS LINK DOES NOT WORK (JUNE 2009)

A concise summary of the entire book can be found here:
http://how-the-world-really-works.prosperitydoctor.com/output.php?ChapterID=38&BookID=5
THIS LINK DOES NOT WORK (JUNE 2009)

Corroboration of Engdahl's account was provided a few years ago by Sheikh Ahmed Zaki Yamani, who was Saudi Arabia's OPEC minister at the time:

“I am 100 per cent sure that the Americans were behind the increase in the price of oil. The oil companies were in in real trouble at that time, they had borrowed a lot of money and they needed a high oil price to save them.”

He says he was convinced of this by the attitude of the Shah of Iran, who in one crucial day in 1974 moved from the Saudi view, that a hike would be dangerous to Opec because it would alienate the US, to advocating higher prices.

“King Faisal sent me to the Shah of Iran, who said: ‘Why are you against the increase in the price of oil? That is what they want? Ask Henry Kissinger - he is the one who wants a higher price’.”

Yamani contends that proof of his long-held belief has recently emerged in the minutes of a secret meeting on a Swedish island, where UK and US officials determined to orchestrate a 400 per cent increase in the oil price.
+
Henry CK Liu in 2005:
OPEC had been permitted to assume an effective cartel role only at the pleasure of the United States. The existence of OPEC serves several convenient US geopolitical purposes. It deflects political opposition to the international oil regime from the US toward a mostly Arab/Islamic organization, yet the health of OPEC is inseparably tied to the health of the energy corporations of the West that control all the downstream operations. OPEC is an example of how economic nationalism can be co-opted into Western-dominated neo-imperialist globalization….. One of the chief weaknesses of non-US producers is their exclusion from downstream operations.
The real problems with $50 oil
By Henry C K Liu. May 26, 2005
http://www.atimes.com/atimes/Global_Economy/GE26Dj02.html
_____________________

[2] The oil price increases appeared to have been engineered to counter the huge US balance of payments deficit that resulted from the Vietnam War. Economist Michael Hudson claims that “the war was single-handedly responsible for pushing the [US] balance of payments into deficit.” [See: Super Imperialism - The Origin and Fundamentals of U.S. World Dominance. Second Edition
Michael Hudson. http://www.soilandhealth.org/03sov/0303critic/030317hudson/030317.imperialism.pdf ]
______________________

[3] 'Bigness' in capitalism provides the open invitation for economic corruption because the lines drawn between ‘private’ and ‘public’ became sufficiently blurred.
______________________
[4] The US Fed requested that banks not loan for speculation but compliance was voluntary with its President, Paul Volcker, claiming that the Fed lacked the regulatory power to force compliance of the banks.
______________________
[5] “In February and March of 1980 according to former Representative Henry Reuss, the Hunts consumed about 9 percent of all new bank credit in the United States. They consumed nearly 13 percent of new business loans.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk Page 186
______________________
[6] Hunt Silver-Related Borrowings
(August 1979 – March 1980)
($ Millions)

Principal Lenders Loan balance Loan balance Loan balance
8/1/1979 1/17/80 (3/27/80)
ACL International $29.8 $80.5 $134.2
Bache $38 $43.7 $235.5
Swiss Bank Corp $70 $150 $200
First Chicago $30 $10 $100*
EF Hutton $100.5 $100
Citibank $25 $90
First National
Bank of Dallas $79.2
Merrill Lynch $54 $169
Placid Oil $110

SOURCE: Securities and Exchange Commission, ‘The Silver Crisis of 1980, October 1982.
*This actually understates the extent of First Chicago’s involvement with the Hunts. The bank had a total of $223 million in loans to Hunt interests, plus another $75 million loan to Bache which lent the money to the Hunts.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk Page 186-187.
_____________________
[7] These record-high levels of interest rates were made possible by the Carter administrations deregulation of interest rates. They did this because a prolonged period of negative real interest rates arose as a result of the oil-price-driven inflation on the 1970s. The rhetoris in government was for defending the small saver – “the very people the Democratic Party had always spoken for. This was not quite the case, as Senator Robert Morgan of North Carolina and the handful of other dissenters pointed out. “The majority of consumers, with or without savings, particularly families of low income, including one-half of the elderly families, would probably suffer a net economic loss,” Morgan predicted [13]. The “small savers” whom Democrats wished to help were actually a limited group, mostly abvove the median income. First of all, 37 percent of American families had no savings account at all. Another 29 percent had savings balances below $2,000. If these families received another 1 to 3 percent interest on their accounts, that would return at most only $60 a year in additional income. Meanwhile, as borrowers, they would of course pay higher interest rates. As consumers, they would also pay higher prices since business was a major beneficiary of the hidden subsidy of interest-rate controls. When businesses had to pay more for credit, the costs would be passed on to their customers…”
‘Secrets of the Temple – How the Federal Reserve Runs the Country’ by William Greider. Simon and Schuster, 1987. ISBN 0-671-675556-7 pbk. Pages 165-166.
____________________
[8] “M-1 was a reliable measure…only if velocity [of money] followed its predicted trend line. If people abruptly changed their spending and money-handling habits, for whatever reasons, then velocity changed unexpectedly and M-1 became grossly misleading. The government, including the Federal Reserve, could do nothing to control this wild card in the economics of money. Perople were not, after all, compelled to circulate their money at a prescribed speed. Velocity was the Achilles’ heel in Friedman’s theory – the uncontrollable variable that could throw his confident prescriptions about money totally offtrack. Nor was this insight particularly new. For years, the critics of monetarism (including those at the Fed) had pointed out that Friedman was assigning a constancy to money relationships that did not, in fact, exist. The alluring simplicity of Friedman’s doctrine – control M-1 and forget about everything else – was also its central fallacy. Except now M-1’s reliability was more than a theory for debate amongst economists. The Federal Reserve was relying on the same fallacy to regulate the entire economy….”
‘Secrets of the Temple – How the Federal Reserve Runs the Country’ by William Greider. Simon and Schuster, 1987. ISBN 0-671-675556-7 pbk. Page 480.
________________________
[9] “…The highly concentrated nature of Eurolending magnifies the dangers of failure. Whereas the capital base of all U.S. banks may be sufficient to carry the liabilities involved in the process of recycling petrodollars-- one of the major forces behind the growth of the Euromarket--recycling is largely the province of a select group of international banks. Of the 14,000 banks chartered in the U.S., for instance, only 130 participate in Eurocurrency dealings. And the ten most active, such as Citibank, Chase Manhattan and the Bank of America, account for fully 70 percent of all foreign lending by U.S.' banks. With composite capital-to-asset ratios of only 3.6 percent, there is real question whether the capital bases of these ten giant international banks have been stretched too thin. Given the intertwined nature of Eurobanking, there is even greater question whether the few foreign institutions involved are not even more precariously balanced….”
The Multinational Monitor
APRIL 1980 - VOLUME 1 - NUMBER 3
V I E W P O I N T
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
______________________
[10] In April 1980, Jim Leach, reported in the Multinational Monitor that “The Eurocurrency market has expanded so rapidly in the last 'two decades that in gross size it now dwarfs every other national banking system and is about the same size as our own. Its growth is largely a function of the overseas expansion of U.S. banks. In 1960, for example, only eight U.S. banks operated international branches, with overseas assets totalling $3.5 billion. By early 1979, over 130 U.S. banks had established operations outside the country, with foreign assets of $306 billion….”
The Multinational Monitor
APRIL 1980 - VOLUME 1 - NUMBER 3
V I E W P O I N T
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
http://multinationalmonitor.org/hyper/issues/1980/04/leach.html
______________________
[11] “While oil importers accumulated huge bills they could not pay, oil exporters accumulated large amounts of U.S. dollars - more than they knew how to use. These dollars were known as "petrodollars."
Is there such a thing as TOO MUCH money?
Oil-exporting countries found themselves with so much money, they could not spend it fast enough. Some had small populations; many were still at early stages of industrialization. They could not import enough from the countries that bought their oil to keep from piling up enormous dollar surpluses.”
Reinventing the System (1972-1981)
Part 4 of 7
Recycling Petrodollars
https://www.imf.org/external/np/exr/center/mm/eng/rs_sub_3.htm
__________________________
[12] The Multinational Monitor
APRIL 1980 - VOLUME 1 - NUMBER 3
V I E W P O I N T
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
http://multinationalmonitor.org/hyper/issues/1980/04/leach.html
_________________________
[13] “…What is now considered the Euromarket encompasses banking activities not only in Western Europe but also in other industrialized countries and offshore centers such as the Bahamas, the Cayman Islands, Hong Kong and Singapore. There, the world's leading private banks hold deposits in and lend the world's major currencies outside their countries of origin. It is largely a -Eurodollar market: about three-fourths of the market's stateless currencies are U.S. dollars, while half of the remainder are German marks….”
The Multinational Monitor
APRIL 1980 - VOLUME 1 - NUMBER 3
V I E W P O I N T
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
http://multinationalmonitor.org/hyper/issues/1980/04/leach.html
______________________
[14] “As long as Saudi Arabia accepts payment for oil in dollars, other countries must first buy dollars before they buy oil.” Thus, oil price rises tended to strengthen the US dollar’s value in international currency markets.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk. Page 166.
_________________________
[15] “Between 1950 and 1971 the 200 leading U.S. corporations increased their control of all U.S. manufacturing assets from 46 to 87 percent.” Quoted from: American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975
________________________
[16] The neoclassical economists and free-traders Gottfried Haberler and Milton Friedman campaigned for a regime of national fiat currencies linked to another by flexible exchange rates. Haberler the resident scholar at the American Enterprise Institute for Public Policy Research [a Republican think-tank in Washington DC] “denounced labour unions as the primary cause of inflation and urged a flood of cheap imports to undercut wages as well as the repeal of minimum wage laws and other ‘privileges’, as he called them, that workers enjoyed.”

Richard Parker’s Bio of John Kenneth Galbraith. Hardcover. Page 483. In the Chapter entitled ‘Galbraith and Nixon: Two Keynesian Presidents.”
_______________________
[17] 1981 - a large share of the funds raised by US firms in the Euromarket in 1981 consisted of mammoth loan syndications by corporate giants like Mobil, US Steel and DuPont to finance mergers and acquisitions, such as the fabled Conoco and Marathon Oil takeovers. The surge of borrowing to support M&A as it is known on Wall Street, was particularly strong in the summer of 1981

In the three years since the adoption of the October 6 [1979] measures, that is exactly what has happened. The multinationals have had access to all the credit they need, whereas small businesses, home buyers and consumers have been clobbered. Despite the astronomical rise in interest rates, new corporate borrowing has continued at high levels. Moreover, a large share of the funds raised by US firms in the Euromarket in 1981 consisted of mammoth loan syndications by corporate giants like Mobil, US Steel and DuPont to finance mergers and acquisitions, such as the fabled Conoco and Marathon Oil takeovers. The surge of borrowing to support M&A as it is known on Wall Street, was particularly strong in the summer of 1981. though only half of the credit lines were actually drawn
[‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk. Page 210]
__________________________
[18] "The 1979 visit of Deng Xiaoping to the US was followed in June 1980 by the equally significant encounter in Wall Street of Rong Yiren, chairman of CITIC, and David Rockefeller. The meeting, held in the penthouse of the Chase Manhattan Bank complex, was attended by senior executives of close to 300 major US corporations. A major agreement was reached between Chase, CITIC, and the Bank of China, involving the exchange of specialists and technical personnel to "identify and define those areas of the Chinese economy most susceptible to American technology and capital infusion."
The people with the endless bios - An introduction to the world we live in. Project for the Exposure of Hidden Institutions website. http://www.pehi.eu/introduction.htm
________________________
[19] ‘Globalisation and its Terrors – Daily Life in the West’ by Teresa Brennan. Routledge, USA and Canada. ISBN 0-415-28522-4. 2003 Page 15

20 comments:

dodz said...

i hate global crisis it affect on my business

Anonymous said...

The trail of cause and effect is scary... people able to make half-baked decisions in the financial interests of their handful of entities. No thought to the well-being of the people and environment left to deal with the consequences.

It is just obscene that one country cannot import enough stuff to use up their wealth and a few hundred kilometres away people are starving.

How do we manage to contain this ultimately self-destructive evolution and bring some reason and ethics into the control of our "economic" lives?

Brenda Rosser said...

I think Loren Goldner's ideas are interesting. (Better to be proactive as the system will break of its own momemtum):

"...In abolishing fictitious capital, we impose “global accounting standards” or
“world resource accounting” to take an “inventory” of total existing means of production and labor power, in terms of use values (The goal is pushing all production beyond the necessity of exchange, so that social “measurement” occurs neither in price nor in labor-time but is strictly in use-value terms of real goods and services produced. )

1) implementation of a program of technology export to equalize upward the Third World.
2) creation of a minimum threshold of world income.
3) dismantling of the oil- auto- steel complex, shifting to mass transport and trains.
4) abolish the bloated sector of the military; police; state bureaucracy; corporate bureaucracy; prisons; FIRE; (finance- insurance- real estate); security guards; intelligence services.
5) taking the labor power freed by this to begin retraining and reeducation
around real needs.
6) crash programs around energy: nuclear fusion power, solar, wind, etc.
7) application of the “more is less” principle to as much as possible. (examples: satellite phones supersede land-line technology in the Third World, cheap CDs supersede expensive stereo systems, etc. )
8) a concerted world agrarian program aimed at using food resources of the US,
Canada, Europe and developing Third World agriculture.
9) integration of industrial and agricultural production, and the of
breakup of megalopolitan concentration of population. This implies the abolition of suburbia and exurbia, and radical transformation of cities. The implications of this for energy consumption are profound.
10) automation of all drudgery that can be automated.
11) generalization of access to computers and education for full working-class
participation in global and regional planning.
12) free health and dental care.
13) integration of education with production.
14) the shift of R+D currently connected with the unproductive sector into productive use
15) the great increase in productivity of labor makes as many basic goods
free as possible, thereby freeing all workers (e.g. cashiers, etc.) involved in collecting money and accounting for it.
16) global shortening of work week.
17) centralization of everything that must be centralized (e.g use of world resources)
and decentralization that everything that can be decentralized (e.g control of labor process within the general framework)
18) measures to deal with the atmosphere, most importantly the phasing out of fossil fuel use.

Once again, in conclusion, the usefulness of such a basic program, much of which can be quickly implemented by working-class power, is that is cuts through the appearances of the deep distortions of fictitious development since at least World War II. It cuts through the debates about “forms of organization” (party, class, councils, soviets). We don’t want soviets and workers’ councils in finance, insurance, real estate, and many of the other sectors mentioned which exist only because the system is capitalist; we want to abolish those sectors.

This text is from the Break Their Haughty Power web site at http://home.earthlink.net/~lrgoldner
"

rosserjb@jmu.edu said...

I don't think "the US" engineered the oil price increase of 1979 (nor that of 1973), even though US oil companies did make lots of money out of both of them. The 1979 one in particular was triggered by the collapse of the Shah's regime in Iran, who had been supported by the US government. In the chaotic aftermath, oil production collapsed in Iran from about 6 million barrels per day to about 600,000 barrels per day, with the Saudis actually increasing their production by about 2 million barrels per day in an effort to moderate the price increase. But the price nearly quadrupled anyway.

Brenda Rosser said...

"I don't think "the US" engineered the oil price increase of 1979 (nor that of 1973), even though US oil companies did make lots of money out of both of them..."

Well, who do you think engineered the 1973 increase Barkley?

The 1979 price hike, as you say, is/was not so straightforward. I stand corrected on that one.

Brenda Rosser said...

By the way, I have read that there was a steady increases in the oil price from 1970 onwards to the mid 1970s (when the oil price appeared to stablise before climbing again).

Not shown in these graphs, however.
http://www.wtrg.com/oil_graphs/oilprice1947.gif

http://www.russiablog.org/2006/08/kommersant_mideast_war_means_m.php

Brenda Rosser said...

Barkley wrote: "In the chaotic aftermath, oil production collapsed in Iran from about 6 million barrels per day to about 600,000 barrels per day, with the Saudis actually increasing their production by about 2 million barrels per day "

From an anlysis of the price of oil at that time (see below) it appears that the invasion of Iran by Iraq had more to do with the interruption and drop in the production of oil. I guess it follows that prices would rise in the absence of alternative strategies such as rationing.

The invasion by Iraq into Iran may not leave the onus for high oil prices completely off the shoulders of the US elite. But I'm not sufficiently read to comment further on this question.

" In 1979 and 1980, events in Iran and Iraq led to another round of crude oil price increases. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November 1978 and June 1979. At one point production almost halted.The Iranian revolution was the proximate cause of what would become the highest price in post-WWII history. However, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution, production was up to 4 million barrels per day.

In September 1980, Iran already weakened by the revolution was invaded by Iraq. By November, the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. Consequently worldwide crude oil production was 10 percent lower than in 1979.

The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from $14 in 1978 to $35 per barrel in 1981.
"

Oil Price History and Analysis
(Updating)
http://www.wtrg.com/prices.htm

One Salient Oversight said...

I have trouble with this statement:

Significantly - and against the contemporary monetarists dogma of Milton Friedman - the Fed’s credit squeeze and record-high interest rate regime (predictably) failed to control the US money supply.

M1 Money stock graph aligned with Effective Federal Funds Rate here

M3 Money stock graph aligned with Effective Federal Funds Rate here.

Data from the St Louis Fed.

In both cases there is a clear causal relationship between higher federal funds rate and lower rates of monetary growth. This data clearly contradicts the statement I quoted above.

I suppose the money supply could've become static and even reduced had the Federal Funds rate been higher for longer, but Paul Volcker probably wanted to keep his job.

Brenda Rosser said...

Between 1981 and 1985 thee was an average 18.5% return on bonds (Shearson Lehman Government/Corporate Bond Index) as quoted by William Greider Secrets of the Temple page 682.

"For the five years from 1974 to 1979, M-1 grew by an average of 7 percent. It was a period of excessive money growth and roaring inflation. From 1979 to 1984 M-1 grew by 7.4%. Yet that was a period of tight money and shrinking inflation. How could this be so?....Milton Freidman, the intellectual fther of modern monetarism... [said]'I don't feel there has been any repudiation of the theory...After all, it's a science in which theories must be tested. So, if we've been wrong about some things, they have to be corrected.' After years of self-confident predictions and caustic criticism for his opponents, this was as close as Milton Friedman could bring himself to acknowledging that, in the real world, his theory did not work.

'I feel sorry for him [said Charles Partee]. He's an old man now. He spent his life on this theory. Now it's destroyed. The decision to let money go and try to have enough stimulus to keep the economy going pretty much finished the monetary aggregates. This is the second time we've had to do that and it proved right both times. The aggregates can never again be a discipline on monetary policy. The next time the aggregates tell you to tighten when the economy looks weak, you can say: "Look, it would be suicide to follow them."

The interview with Milton Friedman was on July 19th 1984.
William Greider, Secrets of the Temple page 684-685

One Salient Oversight said...

From 1979 to 1984 M-1 grew by 7.4%. Yet that was a period of tight money and shrinking inflation.

This graph clearly shows that the Federal Funds rate declined markedly between 1982 and 1983. This was a period of looser monetary policy, though still high by historical standards. In response to this looser policy, the money supply rose. This is why the money supply increases at the end.

There is also the "bump" between the two recessions after 1980, when interest rates dropped drastically, only to be increased again once inflation broke out again.

The reality of the 1979-1984 period was not that it was a period of "tight money", but a period of tight, then loose, then tight, then loose, money.

TheTrucker said...

The "reality" of the 1979 through 1985 period was that the US economy was devastated by the Uncle Milty monetary policies implemented by Paul Volcker and made worse by the idiot tax policies of Ron the Con Ray Gun. And isn't it amazing what a major recession will do to the demand for oil.

The primary result of the Volcker Reagan two step was that rich people could return to remaining rich forever by loaning money to the government instead of paying taxes. REAL returns to money that had languished since the second world war recovered all the lost ground during the Reagan Miracle and continued onward and upward in the following years.

TheTrucker said...

Blogger Brenda Rosser said...

"I'm gonna make my long list."

Why not condense all this down to a few initiatives that will get the job done?

1. Convince the people that basic civics and classical economics must be part of the FREE education afforded all persons in all sovereignties that provide at least 9 years of tax funded education.

2. Empower those who understand these concepts by reducing the size of electoral districts and insisting on population based representation inside of every sovereignty.

3. Return to sovereignty based trade policies that allow the people of each sovereignty to work in their own best interest without all the high level politics.

This will naturally result in improving all of the stuff you seem to want to micromanage. The exception may be the need for some sort of world monitoring of environmental pollution. But enforcement is again a reason for sovereign trade sanctions. Monetarism is a failure on all fronts. Fiscal policies are the only viable means of control.

Brenda Rosser said...

Where did I write: "I'm gonna make my long list" Trucker? Or is that really 'Trucker' posting?

I would not support your 3 points of social change. Of what particular value is 'classical economics'? Would the promulgation of this constitute 'education' or mere propaganda?

'Empower those who understand 'classical economics'! You've lost me completely here.

Brenda Rosser said...

One Salient Oversight said: "
This graph clearly shows that the Federal Funds rate declined markedly between 1982 and 1983. This was a period of looser monetary policy, though still high by historical standards. In response to this looser policy, the money supply rose. This is why the money supply increases at the end. There is also the "bump" between the two recessions after 1980, when interest rates dropped drastically, only to be increased again once inflation broke out again. The reality of the 1979-1984 period was not that it was a period of "tight money", but a period of tight, then loose, then tight, then loose, money.
"

I think we are both getting lost in the debate here. Your original objection, 'one salient oversight' was to my statement:
"Significantly - and against the contemporary monetarists dogma of Milton Friedman - the Fed’s credit squeeze and record-high interest rate regime (predictably) failed to control the US money supply."

However, Miton Friedman's monetarist theories were premised on the need to control the money supply. In February 1982 Milton Friedman wrote:
"monetary authorities should adopt long-run targets for monetary growth that are consistent with no inflation....

Friedman was not focussed on the interest rate result of limits in the supply of money nor the short-term interest rate outcome. But rather on the acquiring of a zero inflation outcome.

I think that my original statement (as you quoted above) needs modification in order to emphasise this point.

The proliferation of stateless currencies, combined with the failure to regulate the Euromarket, made it impossible for central banks to follow Milton Friedman's advice - to ensure that the supply of money would remain consistent with zero monetary inflation.

Barkley Rosser said...

Regarding 1979-81, oil prices peaked in March, 1981 and dropped after that to a high level, where they stayed until 1986, when the Saudis got tired of cutting back production so that Iran and Iraq could cheat on their quotas to fight their war with each other.

In 1973, while the major oil companies were not at all unhappy about it, it was the Saudis. They were unhappy about US support for Israel in the Yom Kippur War and put on an embargo of oil to the US. This triggered the price increase.

Brenda Rosser said...

Correction to my above statement: "The proliferation of stateless currencies, combined with the failure to regulate the Euromarket, made it impossible for central banks to follow Milton Friedman's advice - to ensure that the supply of money would remain consistent with zero monetary inflation.

William Greider points out (quote above) that Friedman's theories were found to be invalid in the respect that when the supply of money within the US domestic economy increased the rate of inflation went down. That is, inflation went in the opposite direction to what Milton Friedman had predicted - down, rather than up.

Why did inflation drop in a period of higher rates of money growth? Third world countries such as Chile and Zaire sold copper at a loss because closing their mines - and thus inviting social rebellion - was not an option. Farmers produced more product in response to a lower price received. Processes of disinflation kicked in, responding to high interest rates and slower consumer demand.

Brenda Rosser said...

Barkley, there have been question marks raised about the true nature of the Yom Kippur War. Some observing that the US administration assented to this 'war'. Some evidence that such a confrontation in the Middle East was sought and actively limited in order to provide a justification (and a scapegoat) for the 1973 oil price hikes.

I will try to compile the research I've done on the events of 1973 into a more in-depth article.

Brenda Rosser said...

By the way it appears that a relatively small decline in oil production during the Iraq-Iran war resulted in oil prices more than doubling. why?

Tonight, I found href="http://libcom.org/library/notes-international-crisis-mario-montano-zerowork">an interesting article:
"..The price hike of the Teheran agreement (1971), jointly imposed by OPEC members and the U.S. State Department, dealt a first preliminary blow to the working class in Europe and Japan. In 1973, the Yom Kippur War marked the beginning of a new multinational anti-workingclass offensive led by the U.S. It caused simultaneously an intensification of the attack on Western Europe and Japan, an escalation of an anti-working-class attack in the U.S. and starvation in selected parts of the "Third World".

In 1973, the bulk of the Seven Sisters' profits came from sales to Europe and Japan. At the end of the year, The Wall Street Journal could editorialize with satisfaction:

"It seems like just the other day everyone was worried that Japan was going to buy up the rest of the world at the same time it was burying it in Toyotas and Sonys... Doomsayers here and abroad were concluding that for the U.S. the party was over... The Arab oil squeeze has changed all this... The oil embargo stripped Japan of its aura of industrial invincibility... Even when the oil embargo ends, the higher prices will remain and no doubt advance. Every increase further changes the terms of trade to the disadvantage of Japan and Western Europe.24"

By 1974, however, the oil weapon was turned against the North American working class and big profits were squeezed out of the U.S. market.

Behind the ritualistic position of diplomatic adversaries that the U.S. and OPEC countries necessarily entertain during international bargaining sessions, stands their Holy Alliance. OPEC rulers can maintain their earnings and thus their own power only if oil demand or oil prices strengthen in the years ahead. As far as the surplus funds are concerned, "We don't have to beg them to invest in oil-consuming countries," says a Federal Reserve System economist, "They have no choice."25

The U.S. and the multinationals also need OPEC as a major market for goods and as a main source for loans. In 1974, total OPEC imports were up 50 percent. The considerable expenditures on the infrastructures and internal development programs undertaken by the OPEC rulers will have the effect of strengthening consumers' markets in the more populated OPEC countries. ..

Brenda Rosser said...

"Why did inflation drop in a period of higher rates of money growth? "

Hmmm....this raises another question. Surely higher money growth experienced in the context of a recession (ie a drop in the amount of real goods and services) is 'inflation'.

What are the failings and biases of the consumer price index (CPI)?

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