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Guest post by Daniel Wilson.

United States gasoline prices are up over 13 percent since the start of the new year, standing at a national average of $3.92 a gallon. On a seasonal basis and in nominal terms, gas prices are the highest ever.

High and escalating gas prices have become a major political issue with numerous politicians and pundits in the media quickly coming to false conclusions on the issue.

One of the most common fallacies perpetrated by politicians on both sides of the aisle is that investors speculating in futures markets cause prices to rise and fluctuate dramatically.

Typically so, politicians have it backwards, speculators actually play a vital and important role in the economy. Speculators make markets more liquid by adding additional buyers and sellers, thus aiding transactions and improving efficiency. Also, speculators actually make markets less volatile. In order for speculators to make money they have to buy low and sell high. Buying at a low price, increases the low price, and selling at a high price, lowers the high price, causing the market price to have a lower variance in the long run.[1]

In addition, a recent study by the Federal Reserve Bank of Dallas demonstrated that speculators didn’t contribute to the run up in oil or gas prices over the last decade.[2]

Another common myth about gas prices is that the big oil companies control and manipulate prices upwards in the name of greed and corporate profits. This myth runs wild within the Democratic party, many of them have recently scolded the oil companies for price-fixing gas and oil to profit at the expense of everybody else. Oil companies control gas prices like grocery stores control cereal prices. Measured by profit margins, oil companies rank 114 out of 225 different industries.[3] Big oil companies, like Exxon Mobil only earn seven cents per gallon of gas. Compare that to the $.50 a gallon excise tax that’s embedded into the price of gas that local and federal governments collect.[4] In other words, governments are collecting seven times more in taxes than oil companies make per gallon of gas. So, the next time you fill up at a gas station, ask yourself, who’s actually greedy, big oil or big government?

One of the most conspicuous causes of higher oil and gas prices, that often goes ignored, is the depreciating value of the U.S. dollar on international exchange markets. People generally accept that individual prices go up or down based on changes in supply and demand. However, they fail to understand that the value of the dollar, in which goods are priced, is also determined by supply and demand. Therefore, when the Federal Reserve system prints excessive amounts of money for misguided political and economic reasons, the supply of US dollars increases, which then reduces the value of the dollar. Over the past 10 years the US dollar has lost 35 percent of its international exchange value. This means that commodities, such as oil, that are sold in international markets denominated in dollars, have to go up in price since the value of the dollar has fallen. To sum this up, when the value of the dollar falls from an increase in its supply, everything priced in dollars becomes more expensive, it’s called inflation.

Measured in Swiss francs, a strong currency, the price of oil has risen to a less extent. For example, since 2010 the price of oil has risen by 15 percent in Swiss francs, but 30 percent in US dollars.[5] Measured in terms of gold, which has historically been used as a monetary unit, oil prices are below their 40 year average.[6] Both of these measurements indicate that a large portion of higher gas prices are due to a falling U.S. dollar.

The Joint Economic Committee released a study showing that just a 10 to 15 percent appreciation in the dollar would lower gas prices by 43 cents.[7]

Politicians should stop wrongfully blaming big oil companies and speculators and worry about the real problem that threatens this country’s economic future and that’s the declining dollar. The resurgence of a strong greenback would lower gas and oil prices more than any other political solution.

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Guest Post by Daniel Wilson

The true and classical definition of inflation is an expansion of the supply of money in an economy relative to the total amount of goods and services, resulting in an increase in the general level of prices. Milton Friedman, a Nobel prize-winning economist, described inflation as a monetary phenomenon, noting that a rise in the average price level only occurs when central banks print too much money. In the United States, the central bank is the Federal Reserve, created in 1913 under Woodrow Wilson.

Since the inception of the Federal Reserve System, the U.S. dollar has lost over 90 percent of its value. The legacy of the Federal Reserve is an ever declining currency and perpetual inflation. Under the classical gold standard, from 1870-1914, a period without a central bank and a strong tie between the dollar and gold, prices actually fell while the economy boomed, proving to be the greatest growth period in American history. One of the many great aspects of a free market is to lower prices in the long run as production and productivity increase the supply of goods and services. However, central banks can increase the supply of money faster than the growth of the economy, substituting inflation for deflation.

Today, inflation is commonly measured through the consumer price index reported by the Bureau of Labor Statistics. Since World War II, the CPI has averaged around 3.5% a year. This means the average price of goods and services doubles every 20 years. The most infamous spouts of inflation occurred during the 1970s after Richard Nixon closed the gold window in 1971. As a result of ending the last linkage between the dollar and gold, the money supply, measured by M2, grew at a much faster rate than in previous decades. The CPI averaged more than 7 percent in the 1970s, reaching a high of 14 percent in 1980. The complete removal of the gold standard eliminated the only constraint on the Federal Reserve’s ability to print money.

Unfortunately, inflation is still alive and well. Misguided policies by the Federal Reserve in response to the recent economic downturn have dramatically increased inflationary pressures. In the name of economic stimulus or quantitative easing, the Federal Reserve has basically printed money out of thin air to buy U.S. treasury debt. Stated differently, the U.S. government is printing money to monetize the deficit, which currently stands at a whopping $1.3 trillion.

Inflation is essentially a tax, lowering the rate of return on work, savings and investments. The inflation tax has a particularly disparate impact on the middle class, which has seen their incomes fall over recent years. In spite of economic stimulus, household incomes have actually fallen more during the recovery then the actual recession. Intuitively so, households’ net worth will diminish with a continuation of higher prices on consumer items and falling incomes.

Luckily, there are several ways households can protect themselves from higher inflation. If you have any savings, look to make some investments. A great investment strategy is in real assets, such as gold. At $1700 an ounce, gold still offers a great buying opportunity. There is no ceiling on the price of gold because there’s no floor on the value of the dollar. The combination of trillion dollar deficits and loose monetary policy as far as the eye can see, provides impetus for upward movements in its price. Goldman Sachs projects an ounce of gold to rise by 20% for 2012, while Morgan Stanley forecasts 30%.

Another investment households should consider is buying stock in mortgage real estate investment trusts. As long as the Federal Reserve continues its commitment to keep short-term interest rates artificially low, MREIT’s offer a great buying opportunity. Many MREIT’s provide a very high dividend yield; American Capital Agency Corp. (AGNC) is currently paying a 20% dividend.

In short, considering inflation, you’re losing money by keeping it in a bank account that pays 0%. Provided you have the means, look to protect yourself from inflation by investing in real assets like gold and high dividend yielding stocks. If you can, buy the dips, and sell the rips.

Daniel Wilson is a senior who is majoring in economics at James Madison University. 

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