By Don Kuehn

The media and the public appear to be slow in grasping the reason behind today's unbelievably high gas prices. Now, I'm no expert but, it seems fairly simple: Oil is priced on world markets in U.S. dollars, and there hasn't been a weaker dollar in recent history.

The Bush administration's monetary policies, the seeming incompetence of Secretary Henry Paulson at the Treasury Department and the tinkering of the Federal Reserve have combined to wrench most of the buying power out of the greenback. There has even been speculation that commodity traders could consider dumping the dollar and switching to the euro as the basis for pricing crude oil. What a blow that would be to American economic supremacy and prestige around the world.

Oil cost around $3 a barrel in 1970, and the dollar was strong. Then OPEC began manipulating oil prices by controlling supply. Sure, there were spikes in prices—a peak at about $38 in the early 1980s dropped to under $10 in 1997. Oil "soared" to $30 before dropping sharply after the Sept. 11, 2001, attacks ($18 a barrel), according to the Energy Information Administration.

But since then, throughout the Bush administration, oil has climbed steadily until recently going through the roof, surpassing $113 a barrel. And the dollar has slumped.

I remember negotiating a contract on Oklahoma City in the 1990s when oil was so depressed it wasn't worth the cost of pumping and refining. There was no money available for salary increases in that state's petroleum-based economy. We offered management a wage reopener to defer negotiations until oil was trading over $18 a barrel! Things are sure different now.

Been abroad lately? The British pound is trading (as of mid-March) at $2.03, the euro at $1.56, and even the once-laughingstock Canadian dollar is worth more than a U.S. buck ($1.01). All the product of the weak dollar.

I may not be the sharpest knife in the drawer, but the Federal Reserve, going back to the tenure of Alan Greenspan and continuing into the Ben Bernanke era, is foundering.

The Fed has taken one knee-jerk action after another in its effort to stabilize the U.S. economy. Whether the decision-makers there have zigged when they should have zagged may not be known for some time. But they have done an awful lot of zigging lately.

In the past few months alone, there have been numerous cuts in the discount rate and six cuts in the federal funds rate—remarkable in both their depth and frequency. Since September, the fed funds rate has been cut from 5.25 percent to 2.25 percent. Every cut does a little more to undermine the value of the dollar—making the price of dollar-denominated imports and commodities more expensive.

The central bank also has underwritten the bailout of the big investment bank Bear Stearns (at about 10 cents on the dollar), colluded with the European Central Bank and the Swiss National Bank to prop up the dollar, flooded the domestic banking system with cash, and applied one Band-Aid after another to try to retroactively stabilize the failing economy.

One of the more "creative" moves was to come up with a $200 billion swap of mortgage-backed securities for T-Bills—a veiled bail-out for holders of billions of dollars in near-worthless bundled mortgage instruments (you might hear them referred to as collateralized debt obligations or CDOs).

While all of this rate cutting is going on, consumers like you and me are facing higher interest rates on credit card and other consumer accounts as lenders tighten their credit standards.

I'm no expert, but I do know that consumer spending is one of the key factors that drive the economy in this country. The tax rebate/stimulus checks that are now being issued will do little to fuel a resurgence in consumers' attitudes about the economy. I expect most rebate checks will be used to pay down debt or just be assimilated into regular spending as families try to keep above water.

If the Fed would let market factors resolve the current crisis, even though that would entail a lot of pain in the short term, things would eventually find equilibrium. All of this tinkering only leads to more fixes—kind of like trying to shorten the legs of a table.

A few months ago, I wrote that I didn't think the economy would lapse into a full-blown recession. Now, I'm not so sure. Too many factors are coming together to drive this thing into a ditch: the housing problem, of course; and high consumer interest rates, which lead to weak spending; high prices for food and energy; there's the war; soft corporate earnings; state and local tax collections are way off (which could mean layoffs in the public sector); and consumer confidence is way down.

The Conference Board's Consumer Confidence Index has tanked from a high point last July of 113 to a March reading of 64.5—the lowest level in five years.

I also see trouble looming in the farm economy (unless you're a farmer). With every state now mandating ethanol in gasoline, the price of corn hit records in March, at levels above $5.50 a bushel. That spreads throughout the economy for everything from basic food products to higher cattle feed, as well as the cost of gas. Soybeans and winter wheat are also at farmer-friendly prices for a change. While we should all want farmers to make a living, none of this is particularly good news for consumer food prices going forward.

Energy prices at the consumer level were up 19.6 percent in January 2008 from the year before. Food prices were up 4.9 percent for the same period. Overall inflation in February (Consumer Price Index for all Urban Consumers, or CPI-U) was up 4 percent for the year.
We also feed the world with huge amounts of grain exported to foreign markets. If the dollar weren't so weak, our farmers might really be rolling in dough—get it?

If you haven't been paying attention, gold on the spot markets, which was selling at around $250 an ounce pre-Bush, recently has traded above $1,000—a sure sign that the guys wearing the smarty-pants believe inflation is bubbling.

Did I mention housing prices? In recent columns, I have given enough space to talking about the subprime-loan-bred-crisis and the trauma wrought on homeowners by mortgages that have doubled (in some cases) as adjustable loans have reset.

Foreclosures are flooding local markets and auctions on courthouse steps are not uncommon in some areas. Unless you are poised to buy in this "buyers' market," homeowners everywhere are absorbing part of this debacle through depressed values in their own homes. The March-to-March drop in home prices was 11.4 percent.

If you don't think you have a horse in this race, think again. It's your money, and it's mine, too. I want the factors that have wrecked this economy to be resolved—and "normalcy" to return—so we all can prosper.