Adventures in Causality

Econoblogger Felix Salmon, or a sharp-eyed reader of Felix', found two headlines on the WSJ home page on the morning of June 23d that made an odd pairing.

On the one hand "Euro Climbs as Oil Prices Recover." Think about that for a minute. In the world since the demonetization of gold, when one writes of the rise and fall of a currency, one means: RELATIVE TO other currencies. When one writes about the rise of the euro, one is saying chiefly RELATIVE TO the dollar. The headline and the arrticle that folows it maintain in essence that the rise of the price of oil is driving down the value of the dollar, relative to the Euro -- i.e. increasing the value of the Euro.

Right next to it, another headline, another story: "Crude Rallies on Dollar Weakness."

This headline and article suggest that the weakness of the dollar is the cause, and crude's rally is the effect.

Can they both be true? Do we have a chicken and egg scenario? Is the dollar declining because oil prices are heading up AND vice versa?

I think not. If people and institutions have more dollars because the US Treasury under Obama and Geithner (and under their predecessors in the last few months of the prior administration) has been foolishly determined to pump dollars into the economy then the price of EVERYTHING will go up, and oil may simply be an early beneficiary of this process. That's called inflation, folks.

So my view, humbly though I offer it, is that the second of these headlines has a hold of the truth of the matter. The first of them is daft.

That's our adventure in causality for today.