I listened to various experts talk for over thirty minutes on Radio 5’s afternoon show last week about the high oil price. Not one mentioned Peak Oil. Not one mentioned out-of-control money supply. Not one mentioned increasing Asian demand..

Yes, oil is overbought; yes, oil is going to correct at some stage…but it’s not a bubble.

Then we had Anatole Kaletsky in The Times tell us the rising oil price ‘threatens to do far more damage to the world economy than the credit crunch.’ He’s right about that. Unless of course you’re long of oil in some form or other, in which case things are looking rather rosy.

Kalestsky goes on, ‘The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 80s, tech stocks in the 90s and, most recently, housing’. Does it?

In a bubble supply overwhelms demand, yet prices continue to rise. In the 1990s tech companies with no earnings issued masses of stock; in the US housing boom-bust, builders built everywhere and there was an oversupply of inventory. Is there an oversupply of oil?

The chart below from IEA statistics shows oil supply and demand 2003-2007.

Since 2007, supply has remained constant at about 85 million barrels per day, while demand is now around 88 million barrels per day. No supply-glut there.

Kaletsky goes on to say that the Gulf is ‘crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell’. Hang on, are you sure?

A bit of research reveals there are in fact ten supertankers ‘cramming’ the Gulf, with about twenty million barrels between them – or less than 25% of one day’s global demand. They are carrying heavy Iranian crude, just at the peak of the refinery maintenance season in Asia and the Mediterranean, when refineries have seasonal shut downs for repairs. It’s just a temporary lack of refining capability for heavy oil, that’s all.

It’s worth noting that just a few weeks back, when oil was $100, George Blake, a geologist who studies hard data, rather than an info-spinning journalist, noted an imminent shortage of refinery capacity in Canada and Australia and said it was going to shortly lead to $160 oil. He was laughed at and dismissed. As we touch $135, it’s starting to look now like one of the calls of the decade.

What about other commodities? Are they in a bubble?

So is this commodities bull market a classic financial bubble as Kalestsky asserts? Below is a long-term chart of commodities prices since 1749:

Since 1792 there have been five major bull markets in commodities. These lasted 23 years, 21 years, 23 years, 18 years and 12 years – an average of 19.4 years. The current bull market began around 2000, so we are 8 years in. If history is any guide, this bull market is not even at the halfway stage. Unless, of course, ‘it’s different this time’ and this is the shortest commodities bull market ever.

The extension of the ‘supervisory’ powers of the Fed to non-bank (deposit) financial houses like stock brokers), derivative dealers, insurance companies, and even to the private, high-risk investment companies of the rich, like hedge funds, is dramatic to say the least. But when it is realized that, in return for supervision, the Fed will stand behind those industries as a lender of last resort, the true revolutionary magnitude of today’s proposal becomes manifest.

Power grab

The new initiative was described persuasively as an attempt to ‘modernize’ our national financial monitoring systems and bring them in line to cope with the free-wheeling cowboy dealings that financed some $26 billion of bonuses paid to Wall Street firms alone in 2007! It all sounded so patriotically ‘good’ and deserving of massive popular support.

The truth is staggeringly different… so different that it commands a certain admiration for how the political/financial ‘pro’ Paulson was able to keep a straight face!

Reason to worry

The truth should alarm every hardworking American taxpayer who supports the improvement of our country and the handing of a working economy on to our descendants.

Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke, more than any two people on earth, were too well aware that two weeks ago, we faced a systemic collapse of our financial system that risked spreading to much of the developed world in short order.

Further, they knew that their emergency action to salvage Bear Stearns and other troubled brokerage houses would only postpone disaster, not prevent it. What was needed, to stand a chance of long-term survival, was a lender of last resort with massive resources.

When Hank Paulson soothingly mentioned “deleveraging”, he knew more than most that it meant some $12 trillion in the residential real estate market alone, excluding the excessive debt in the commercial real estate, auto loan and credit card markets!

Tax-payer insurance for Wall Street

The ‘real’ problem is far, far larger than the $800 billion balance sheet of the Fed can absorb! This fact alone should provide a salutary shock to investors who still hold U.S. dollar assets. It certainly did for our Treasury and Fed.

The Treasury and Fed realize that, over the past decade, they have pumped in so much money that has, in turn, become excessively leveraged, by banks and derivatives, that the government no longer has the funds available to avert a systemic financial disaster. That sort of mega-money could only be ‘captured’ directly from American citizens.

Behind Paulson’s responsible and pro-active sounding modernization plan is the most cynical plan to rob American citizens further, by making their government, through the Fed, the lender of last resort for Wall Street’s Billionaire speculators.

In the last resort, the Fed is financed by the Treasury, which, in turn, is financed by borrowing, taxing many Americans and robbing every single American through the debasement of their hard-earned dollars. Instead of allowing the free market to punish speculators, Paulson is now asking Congress to force the American citizen to stand as a lender of last resort, via the Fed, for the speculators on Wall Street, insurance companies, derivatives and, most amazingly, the most speculative of all rich investors – hedge funds!

The cynical arrogance of this ‘civic robbery’ is hard to accept.

The worst is yet to come

Make no mistake, the coming economic storm will be painful for us all. As if to rub salt into the wound, the hard-pressed citizen is now to be forced into bailing out Wall Street with injections not of billions, but of trillions in dollar liquidity.

To make it more politically acceptable, the Government must focus peoples’ attention on an attractive use of funds. Green, alternative energy would fit the bill handsomely. Indeed the President has already announced a massive increase in nuclear power generation as a first step.

Soon we should expect to see massive (trillions of dollars) government programs announced and the funding farmed out via the ‘needy’ on Wall Street.

In the meantime, direct financial aid will be administered via the Fed as lender of last resort.

In addition, we should expect accounting rules to be changed to allow the reality of ‘marking to market’ to be eradicated, allowing technically insolvent financial institutions to continue their vastly profitable operations.

The economic drag effect of the increased regulation is yet to be seen. But it is likely to prove insignificant when compared to the great latent damage done to the basic productive economy of America by hyperinflation.

What does all this add up to for the investor?

First, expect a continued erosion of the U.S. dollar as interest rates are lowered further to avert depression and as inflation subsequently morphs into hyperinflation.

Eventually, we should expect massive growth in the dollar earnings of green alternative energy companies as the confiscated largesse of the American citizen is pushed into that sector of the economy.

It remains to be seen whether Congress will authorize the required massive level of trillions of dollars in funding soon enough to avoid the present recession morphing into a depression.

Whatever the result, it is increasingly clear that the government intends to leave it for future generations to pay the ‘real’ bill for the reckless conduct of Wall Street and our Fed over the past decade.

In the meantime, investors keen to preserve their wealth should look abroad to the productive corporations and currencies of economies that continue to produce more than they consume