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Pumped up

Money | Rapidly rising gas prices could mean trouble for a nascent recovery

Issue: "The battle," March 24, 2012

The nationwide average for regular unleaded gasoline is now more than $3.70 a gallon, up 35 cents since Jan. 1. Some parts of the country are over $4, a level economists say affects consumer behavior. Prices could reach a record $4.25 a gallon by late April.

Why the sudden jump? Many analysts blame the Federal Reserve Board's cheapening of the dollar. John Felmy, chief economist for the American Petroleum Institute, blames nervousness about oil-producing Iran, drops in Libyan production, and-most importantly-increased demand as the global economy recovers.

The irony here is that the recovery-driven rise in gas prices will likely slow the recovery itself. Every 25-cent jump in gasoline prices, if sustained over a year, costs the U.S. economy about $35 billion. That's only 0.2 percent of the total U.S. gross domestic product (GDP), but 2012 GDP growth projections are less than 3 percent, which is barely above inflation plus normal productivity gains. So a 0.2 percent difference could have a significant impact on unemployment rates in the coming months.

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Dirt rich

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For the past four years, economic news has focused on housing, debt, and jobs. That's made it easy to overlook the segment of the economy that keeps us all from going hungry: agriculture.

The U.S. Department of Agriculture's annual Agricultural Outlook Forum took place in late February. It traditionally kicks off the new year for the agriculture sector. Forecasters there said the upward trajectory of everything from crop prices to farmer income is about to end. The price of corn, the No. 1 U.S. crop, could fall 20 percent this year. Because of expanding production globally, corn stockpiles would likely double.

But don't cry for farmers. Demand for corn has been so strong that farm and ranch land prices are at all-time highs in parts of the country, making many farmers millionaires. They're also flush with cash after a multi-year run-up in crop prices: U.S. farm income topped $100 billion for the first time ever in 2011. -Warren Cole Smith

Does Europe matter?

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Europe is still a mess. Greece finally got a debt swap deal in late February, but Fitch ratings agency downgraded Greece further into junk status, from "CCC" to "C," when details became public. The agency said even with the deal, default is "highly likely" in the near term. And that's after the bond swap forced private creditors to write off $141 billion of Greece's debt-a bitter pill for banks and other creditors.

Yet the global stock markets act like what happens in Europe will stay in Europe. The Dow Jones Industrial Average is up more than 2,000 points since October. Japan's Nikkei and Hong Kong's Hang Seng exchanges are at six-month highs.

So has "Old Europe," as the EU is sometimes derisively called, become irrelevant? Not completely, of course. Germany, France, and England remain global economic powers. To borrow from the old Monty Python skit, Europe is "not dead yet." But it is now far from dominant. In fact, the real historical significance of the current European crisis-especially the debt problems of Greece and Italy-could be that it's making plain just how little influence the cradle of Western civilization now has on the rest of the world. -Warren Cole Smith

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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