In the free market system, when demand exceeds supply, prices rise, and there’s excess profit. So, new supply is created, until excess profit disappears. This is a mechanism to keep supply and demand in equilibrium. “Speculation” helps keep future supply and demand in equilibrium, to prevent future shortages.
The price of oil has risen from $50 to $135 a barrel over the past 18 months. In the 2000s, the U.S. underproduced and overconsumed, while export-led economies overproduced and underconsumed. The price of oil is linked to the value of the dollar, i.e. a negative correlation. For example, when the U.S. Fed increases the money supply, economic growth is stimulated. cannabidiol So, demand for oil increases. China’s economy is linked to the U.S. economy. Consequently, when the U.S. economy is stimulated, China’s economy is also stimulated, i.e. when the U.S. raises actual output towards potential output, China overproduces even more. However, China is adding “fuel to the fire” by subsidizing oil, which adds to overproduction.
The U.S. has made the proper adjustments. On the production side, U.S. firms became substantially more energy efficient. However, on the consumption side, there was less energy efficiency, because U.S. houses, autos, etc. became even larger. However, China has not made the proper adjustments to slow its overproduction. Instead, it continued to subsidize oil, with dollars, including shifting the flow of dollars from U.S. Treasury bonds into barrels of oil. China continues to squander its gains of trade to maintain high output and employment, while the U.S. has captured its gains of trade. The free market system has allowed the U.S. to either gain the most or lose the least, in the global economy, while Chinese economic policies created a lose/lose situation in China.
The free market system contributed to least three major booms in the U.S. during the 2000s. U.S. households had a consumption boom, including the housing & related goods booms (through rising incomes, abundant & accessible capital, low interest rates, and low prices). U.S. firms had a profit boom, because they offshored low profitable goods for higher profits, imported those goods at lower prices, and shifted limited resources into higher quality/higher priced/higher wage/more profitable goods. The U.S. government basically was able to refinance its debt at lower interest rates. Consequently, U.S. living standards rose at a steeper rate, while the U.S. economy strengthened substantially.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.