A Crisis of Confidence

March 23, 2008 at 6:33 pm

Not long ago, President Bush visited Saudi Arabia to ask the Saudis to turn up the spigots.

The Saudis, however, didn’t bite and stated that the price of oil may be the least of our concerns.

”The concern for the U.S. economy is valid, but what affects the U.S. economy is more than the price of oil,” said Saudi Arabia’s oil minister, Ali al-Naimi.

OPEC currently sells oil in dollars. This means that the falling dollar may actually be one of the reasons for the high price of oil. In terms of Euros, oil looks much more stable, but the lack of confidence in the U.S. market and government is causing oil to seem higher in terms of dollar valuations.

Money is only a promise that works so long as their is confidence that the promise will be fulfilled. The safety and security of the government behind the currency determines the value of money in the world market. The value of the dollar against currencies such as the Euro is at record lows.

Several factors have combined to undermine confidence in the U.S. economy and subsequently U.S. currency:

  • The Iraq War
  • The housing and lending crisis
  • A lack of confidence in the U.S. government

The costs of the Iraq War are obvious: billions of dollars a month. The housing and lending crisis has also received much media coverage, dominating the business news for the past several months as huge firms like Countrywide and Bear Stearns collapse.

But the lack of confidence in our government is the real crisis. The federal government keeps pulling interest rates down and announcing plans to help out these firms, but will the financial community, the markets, and the world believe us any more?

Our isolationist policies and free-wheeling mortage rate policies may be coming back to haunt us. Instead of offering to help boost production, the Saudis gave President Bush a lecture on capitalism and market forces during his visit. The message seems clear: clean up your mess at home.

OPEC is considering dumping the dollar as the major currency for oil. Iran has already cut ties with the dollar. Kuwait has unlinked it’s currency from the dollar and the UAE is expected to follow.

It’s time to start listening to the market. The key to restoring the economy is to restore confidence by setting sound economic policies. We need to:

  • Set a realistic strategy for Iraq that doesn’t continue to burn billions a month and isolate us from the rest of the world
  • Restore confidence in our economy through effective regulations that provide confidence to investors
  • Cut our deficit spending
  • Be honest about the situation instead of continuing to deny that it exists

No one believes us right now. The President claims there is no recession yet his Fed Chairman takes extraordinary steps to try to bail out Bear Stearns and prop up the securities industry. Yet the stock market continues its downward trend.

The market is not buying it. If you’re looking for a measure of what confidence is held in the United States and our current policies, look no further than the price of the dollar and the current stock market.