How do interest rates impact the price you pay for gas at the pump?
There were two oil embargoes during the 1970s. During the Ford administration, OPEC, the new organization of petroleum exporting countries, caused a worldwide oil crisis when it embargoed oil and forced prices to rise. Again, toward the end of the 1970s, the country of Iran had its own oil embargo and, once again, prices rose and people paid the price at the fuel pumps. For every dollar worth of fuel, the Japanese were paying 295 yen. Talk about high gasoline prices! Imagine what we would be paying for fuel if our dollar were devalued. Really, you don’t have to imagine very much because the dollar has been devalued to the equivalent of 80 Yen. Now when we pay a dollar at the gas pump it is costing us the equivalent of 80 yen.
During the 1970s the Federal Reserve increased interest rates to fight the inflation that was caused by the high price of oil. How do rising interest rates work to stop inflation? High interest rates stifle economy activity. Often, small businesses cannot borrow money to buy equipment for a start up or for ongoing operations. As the economy slows and unemployment rises, workers have less money to spend. As spending slows businesses are forced to cut more jobs and more people are put out of work. Meanwhile, foreign investors buy more high interest bearing, dollar denominated securities. The demand for those securities drives up the value of the dollar. The high value of the dollar makes our goods expensive and foreign made goods cheap. Our exports shrink and imports surge, and more jobs are lost, perhaps forever. That puts more pressure on American manufacturers and workers.
High interest rates attract investors, foreign and domestic, and stifle economic activity. During the 70s and into the 80s treasury securities paid high rates of interest. Investors found them very attractive. Our trading partners found a great place to invest foreign trade surplus funds. When we bought their goods, they made profits, and invested them in U.S. securities and businesses. The very attractive interest rates made the dollar a valuable commodity. In fact, the dollar rose in foreign exchange rates to a high of 295 yen to the dollar.
For decades, oil has been priced in dollars. When our suppliers: Canadians, Mexicans, Venezuelans and Saudis sell oil, the prices are based on U.S. dollar. In the case of Japan, they will pay 80 yen for a dollar’s worth of oil. As for those of us who live in the United States, we cannot expect lower oil prices in exchange for our devalued U.S. currency. The Republicans are blocking further stimulus plans that would increase economic activity in this country and strengthen the value of the dollar. If you are unhappy with gasoline prices at the pump, blame the Republicans who led us into a deep economic recession and a very weak housing market. Now that they control the Congress and the checkbook, they have put the brakes on the economy; instead of spending to stimulate our economy and to create jobs, they are pushing for more spending cuts that will lead to more job losses and will extend the recession. Our economic expansion started as soon as Obama and the Democrats were in charge of the Whitehouse and both houses of the Legislature. The economic expansion ended when the Republicans won control of the House of Representatives. Austerity budgets will always make a bad economy worse.
The Republicans are balking at increasing the debt ceiling. Imagine what would happen if our country were to default on our debt. Who would loan us money? What would happen to the purchasing power of the dollar if worldwide investors lost confidence that our government would meet its obligation to redeem its debt? The value of the dollar would plummet and imported goods and commodities would become very expensive. How would you like to pay $10 per gallon for gasoline? It could happen if the Republicans have their way and refuse to increase the debt limit.
