By Franz Schurmann

---

Prediction #22 for Tuesday, July 20th,1999

Come Y2K Peace With High Oil and Low Gold Prices

• Prediction:
  By early 2000 global oil prices will still be around US$20 a barrel, gold around US$250 an ounce and an expanded Mideast peace process in full swing. All this with virtually zero inflation in the advanced industrial countries.

• Outcome:
  Evaluation will be made on Leap Year Day, February 29, 2000. By "around" I mean $1 difference in the case of oil and $10 in the case of gold.

Today market shares dropped steeply, oil prices shot up and gold inched upwards. Investors are scared.

Only a few months ago oil price rises would have aroused fears of inflation. But for several weeks now rising oil prices elicited yawns. Investors seem to think inflation has been tamed --- forever?

Only a few weeks ago gold was still trading near the US$300 mark. But then the Bank of England decided to phase out its gold holdings. So prices started plummeting. Getting rid of gold is a sign of peace breaking out. But hoarding gold is a sign of war fears. Are people again afraid of war in the Taiwan Straits, between the two Koreas or the world in general?

Are the bears now taking over the markets from the seemingly entrenched bulls? If so, that means the end of a boom market which, I believe, began in August 1982 (see graph [2]).

I don't think the bears are coming back out of the mountains. The bulls will remain and the pastures will continue to be green. It's not that I'm pro-bull and anti-bear. For a quarter of a century --- from the time my "Logic of World Power" (Pantheon 1974) appeared --- I've been writing about the formation and extension of the American empire. It's now bigger and more intricately organized than ever. I think it has control and influence over the world economy much greater than ordinary people think and the experts are willing to admit. That explains why I think the bull market will continue and therefore Prediction #22 .

However we shall see what we see on Leap Year day February 29, 2000.

There is an intricate history as to how the global economy came under such pervasive American control. Here I can only mention some key events that led to our current US economy which features moderate growth, high employment, a 17 year running bull market (10 years by conventional reckoning) and close to zero inflation.

One important part of that history is the way the links between oil prices, inflation rates and employment levels have been severed.

It used to be that when global oil prices spiked upwards so did the inflation rate. That was the case in October 1973 when the Saudis --- with full support from the big Anglo-American oil companies (the "Seven Sisters") ---forced a 400 percent rise in oil prices. The following two years the entire industrial world was rocking from the double whammy of recession and inflation. See my book, "The Foreign Politics of Richard Nixon," IIS, UC Berkeley, 1987).

It was also the case in 1980 when in that US presidential year the triumphant Islamic Revolution in Iran caused oil prices and inflation to shoot up. When Reagan took office on January 20, 1981 he was accompanied by what was quickly dubbed the "Reagan recession." It ended around August 1982 when the stock market began its at first slow but by 1990 increasingly steep ascent to the current 11,000 mark. Why?

From our current perspective not long before Y2K we know that in the early 1980's the American power elite, using the new information-gathering mechanisms allowed by the computer revolution, started building the machinery required for controlling and manipulating the global economy. This is a big reason the Reagan recession ended so rapidly.

It used to be textbook doctrine that high employment leads to high wages which will ignite high inflation rates. The Federal Reserve Bank ("the Fed") then would "cool down" the economy by raising interest rates. That made credit more expensive leading to less business investment which resulted in rising unemployment. All this was pictured in a graph called the Phillips curve: when unemployment was high inflation was low; when unemployment was low inflation was high (see graph [1]).

But already in 1969 economic analysts saw that something was wrong with this neat either-or. When President Nixon induced a recession in 1969 to cool down the economy the inflation rate, rather then going down, kept going up. It was labeled "stagflation," standing for stagnation-with-inflation. The Reagan recession could be called Stagflation #2. Few if any of the economic theorists of the time could explain why this aberration was occurring.

The appearance of stagflation undermined the foundations of conventional economic theory. In classical and neo-classical theory inflation was supposed to be closely linked to employment (particularly wage levels). Instead inflation now seemed to have its own dynamics independent of employment and wage levels. So money is one thing, employment is another, and the twain shall never meet!

In 1974 the noted oil economist M. A. Adelman came up with an explanation for the stagflation following the October 1973 oil crisis. He had predicted lower oil prices for the 1970 but instead they shot up. His explanation took the form of a rhetorical question: "Who could have predicted OPEC?" What he meant was that a non-economic, "exogenous," factor wrecked his prediction.

I think that Adelman's remark indicates a dawning recognition on his part that politics moves economics and not the other way around.

Oil is the main commodity of the modern world. It fuels transportation, provides a lot of the world's electrical power and is what plastics are made of. Even now most of the world's oil is under Anglo-American control. OPEC, from its inception in 1960 --- some 13 years before it became notorious --- always worked together closely with the Seven Sisters and the US government. That meant the price consumers pay at the pump is not determined by markets but by political power.

After oil prices spiked up again in the early 1980's the inflation rate too shot up, as it had in 1974. But this time Fed chairman Volcker used his interest rate weapons to wage a fierce battle to bring down inflation. Only when he won the battle did he allow the Reagan recession to end.

At the time the Phillips curve still seemed operative. But it soon became evident that something was wrong with it. Employment rose again yet interest rates remained high. Some thought that was due to Reagan rearmament policies. But now we know that the new control mechanisms were already sufficiently in place to allow for employment levels, inflation rates and oil prices to become independent variables which could be independently manipulated.

But after the economy picked up later in 1982 there never again was a serious oil crisis. Oil prices stabilized during the rest of the eighties. The market tumbled in late 1987 but quickly pulled itself together again. That drop had nothing to do with oil or inflation. Interest rates remained high but no longer seemed to be a drag on recovery. Recession hit in the aftermath of the collapse of the Soviet Union in 1991 but the cause was a plummeting defense budget, not a Phillips curve syndrome. American states heavily dependent on defense spending suffered the most, especially California. In this case the politics were foreign policy and defense.

By the early 1990's it seemed that money and production were getting farther and farther away from each other. That helped sink conventional as well as Marxist economics.

The most dramatic events involving oil and inflation came a few weeks ago. Oil prices which seemed to be stuck in a deflationary spiral started to rise again. Only some weeks ago prices had fallen below US$10. Now they are up to US$20 a barrel. And the talk is that US$20 is around where they should stay.

In earlier years when OPEC tried to use its own crude politics to reverse prices it failed. This time the White House gave the full backing of the American empire to a new OPEC arrangement. Though founded by Venezuela in 1960 OPEC eventually became a mainly Mideastern institution. But now key oil producer Mexico has become a de facto member and Venezuela's role has become significant. And, of course, both are closely linked to the US. This time the "production cutbacks" stuck. Down went oil supplies and up shot prices. Did they really go down? In California where oil prices have shot up 44 cents above the US average the companies are having a tough time convincing customers that there really is an oil shortage.

But miracle of miracles no inflationary spike! Fed chairman Greenspan raised interest rates by a tiny 1/4 percent and the markets were delighted. It seemed to all the players on the markets that the control machinery was working beautifully.

The mainly Mideastern producers will now get a new bonanza of oil royalties. A lot of that money will serve as a Mideastern Marshall Plan which will spark large-scale development in the region. Not so much "land for peace" but "greed instead of hatred" is the substitution the new Israeli prime minister Ehud Barak wants to sell to Israelis.

In a few days or at most a week or so we'll find out whether the new world economy control mechanisms developed by the American empire are working well, so-so or not at all. All spikes whether upwards or downwards are dangerous to the control machinery. That requires oil and gold prices at stable levels. Stable oil prices keep the global economy going at a steady speed between the extremes of inflation and deflation. That means prosperity. Low gold prices mean people believe peace is here to stay and war fears are just a few transient clouds.

In two of his San Francisco speeches last spring Clinton said peace, prosperity and freedom are the centerpieces of his vision for the world. I think that vision is real and not just words. It built the control mechanisms of the world economy. And "freedom" (= "democracy") was the reason the American-dominated NATO went to war in Kosovo.

So what's happening now in the world's markets is a test of power for the new American empire. Prediction #22 holds that when just two months into Y2K the empire will have successfully met this current test.