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Another installment in our new series, “Government Gone Wild.” This site could be dedicated solely to this topic, so to avoid boredom and to keep the marginal value of such entries sufficiently high, I will do my best to restrain myself from posting too much on this topic. In any case, the next installment has to do with the way the government deals with the inherent distrust of markets, and of things in which no one is in control.

Do my readers recall the great pen shortages in the 1990s? Or the horrific nerf football shortages of Christmas’ past? Of how about those terrible Thanksgiving Day turkey shortages? If you think I am writing nonsense, you are correct. Not only have these things never happened, but all of us sleep soundly every night not worring about whether entrepreneurs would supply more of these things in the event that they became more scarce for some reason (such as more of us wanting them). Even though Cabbage Patch kids were enormously popular, the company made more. Even though iPods and iPhones were enormously popular, Apple made more. Even though every Thanksgiving the demand for Turkeys skyrockets, we never worry about not having a turkey available on Thanksgiving. In fact, I just returned from a supermarket in a very small town (Cuba, NY) on the day before Thanksgiving, and I swear there were more turkeys there than there are people in this town.

So why, when it comes to natural resources, in particular minerals and oil, does our government decide that people do not respond to incentives, that companies do not seek profits, that someone needs to be control, etc. otherwise we will face enormous shortages? We all know the rhetoric, but of course, the behavior of government is also consistent with this rhetoric. For example, the US has a “Strategic Petroleum Reserve” that can hold up to 727 million barrels of oil, and has plans to expand its capacity. WHY? Stockpiling oil and other resources is insane.

It is insane for a couple of reasons. The first is that it flies in the face of every single bit of historical evidence on the scarcity of oil, gas, energy, minerals, … or virtually ANY natural resource. The long term trend for just about any resource is that it has become less scarce, as indicated by the real cost of securing such resources. If these are the trends in scarcities, what sense does it make to stockpile these minerals in order to stave off future scarcity? For simplicity’s sake, if the US is sitting on a stockpile of 700 million barrels of oil, that it spent an average of $70 per barrel for, it is the equivalent of investing $49 billion in an oil security. That is a pretty bad idea if the long term price path of oil is downward (which it is). We know that the government likes to act as a hedge fund from time to time (current bailouts anyone?), so if that were its mandate, it would be much better off investing $49 billion in alternative financial instruments or projects.

The second bit of nonsense is that by stockpiling resources when their prices are high (with the expectation that those prices would rise), not only are we “paying too much” for such resources, but we are also contributing to currentg price increases, the very reason we wanted to stockpile in the first place. Why? In times when speculators believe prices will rise, they have an incentive to hold existing assets off the market so that they can be sold when prices are higher in the future. But this action today raises prices today. Thus, the government purchases lead to an increase in price instability. Recall that President Bush was seeking to aggressively add to the nearly maxed out petroleum reserve when oil prices were well over $100 per barrel.

Does our all knowing team of well-meaning hedge fund managers in Congress only do this with oil? Heck no! For example, the Defense Logisitics Agency in 1993 held a firesale of diamonds that they were hoarding for possible industrial and military uses because they feared prices of diamonds would rise uncontrollably. Soon after the stockpile began to accumulate, it was realized that synthetic diamonds performed just as well as natural diamonds in industrial applications, and of course were less susceptible to theft than enormous hoards of federal diamond holdings. The US did the same thing with NINETY other materials between the 1950s and 1990s. Of course, the economic scarcity of all of these resources fell substantially over this time, leading to tens of billions of dollars of losses borne by taxpayers.

And all of this because of the propensity of people, via their government, to not only distrust markets, but to be hostile to them … and are comfortable only when someone has “control” over vast amounts of resources. This is particularly true when they do not have to foot the bill themselves.

And now we seem to be stockpiling financial resources at a clip that I could not even have imagined a year ago. Telling readers to watch their wallets is silly when not only is the cash being taken, but so too is the wallet, your back pocket, pants, wardobe, and entire house too.

One Response to “Stockpiling Stupidity”

  1. Speedmaster says:

    If you put the federal government in charge of the Sahara Desert, in 5 years there would be a shortage of sand. — Milton Friedman

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