Oil. Oil. Oil.

For those that have been in a coma, the price of crude oil reached a intra-day high of $139.12/bbl yesterday. The frustrating thing has been the analysis trying to prove the merits of one theory over another instead of just understanding that oil's meteoric rise has been a confluence of multiple theories. So far, conventional wisdom suggests the following theories, all of which are valid: increased demand in the emerging countries; subsidization of gasoline prices throughout the world; speculation; and, the latest saber-rattling between Israel and Iran. But to me, an ignored cause is the falling dollar caused by our failures in monetary and fiscal policy. As of said numerous times, the Fed's attempt to fix the credit and liquidity crises involved both lowering rates and easing borrowing standards. Meanwhile, Congress hasn't helped matters by increasing the election year largesses, with among other things, a $180B stimulus package and a $300B farm bill. Throw in the GI Bill, a builder bailout, and a couple of foreclosure packages, and you're really talking about real money. And yes, Congress is seriously considering a second stimulus package this summer, and that's before anyone has even addressed the impending heating crisis this winter.

So yes, the US Dollar is toxic right now; the world realizes that American authorities do not believe in tough love and will continue to throw money at the problems. I would hate to be either China or OPEC realizing that the trillions they own are getting more worthless by the day. Our leaders worsen the situation by not fully disclosing it to the public because the weakened dollar represents failures by the government and the American people. Furthermore, the only solution to this problem will betray both parties; taxes have to be raised, and spending has to be cut. Budget-neutral policies will not solve the problem, not with Medicare and Social Security looming in the background. And to those that use the withdrawal from Iraq as the complete panacea for our fiscal policies, the total costs for the war in 5 years has been only $525 Billion.

The following chart from econobrowser.com shows how bad the situation with the dollar really is.