Steve Forbes Interview: Why He Thinks Oil Prices Are Going Down

by Mark Skousen

Steve Forbes Interview: Why He Thinks Oil Prices Are Going Down

By Dr. Mark Skousen, Chairman, Investment U

Thursday, October 13, 2005: Issue #477

Steve Forbes, editor and publisher of Forbes magazine, has been a friend for many years. I knew his father, Malcolm Forbes, a flamboyant showman who flew around the world in his "Capitalist Tool" balloon. Steve took over as editor of Forbes when Malcolm died in 1990. Steve is more down to earth. He was named after his father, but prefers to be called Steve. When I came to Forbes headquarters for an interview, he came downstairs and met me personally. That's Steve.

Forbes is my favorite business magazine because it is unabashedly free market and irreverent. Under curmudgeon editor Jim Michaels, I wrote a column for Forbes called "Ideas Matter" from 1994 until 2001.

So why an interview with Steve Forbes? Because he's one of the most astute geo-political observers I know, and a great investor. He's not your typical businessman with a narrow focus. He knows the importance of applying sound economics in business and government. Steve's also just written an important book called The Flat Tax Revolution.

Steve has so many valuable ideas for anyone interested in building wealth that this interview needed to be split into two parts - for today's issue and next Monday's. Here, we'll get Steve's views on the bull market in oil and gold, the Fed's reckless monetary policy, and why he's pushing for a 17% flat income tax to replace the current hodgepodge tax code.

In Part 2, we'll see why Steve attacks the Sarbanes-Oxley securities law, why the stock market is floundering (his answer surprised me), and what he thinks of the war in Iraq.

You'll also find his answer to my questions, "What's the most important lesson for investors today?" and "What is the most important lesson of life?"

Enjoy these ideas, exclusive to Investment U.

The Investment U Interview with Steve Forbes

Mark Skousen: At the Las Vegas Gold Show last month, I brought up your idea that oil prices would fall to $35 a barrel next year. All the panelists pooh-poohed any kind of a fall in oil prices. So you're definitely in a minority position there.

Steve Forbes: Probably a good place to be.

Mark Skousen: So you still think that's going to happen in the next year?

Steve Forbes: Yes, assuming the one caveat, the Fed. It continues to be expansionary, despite its interest rate policy.

Mark Skousen: So you think the Fed raising rates is nothing compared to expanding the money supply, that they are still too inflationary?

Steve Forbes: They're fighting a fire with gasoline. They're creating a milder version of what happened in the '70s, which was to let rates go up, but inject too much money into the economy. It's not enough to raise interest rates. Raising the nominal price of money is not going to do it. Only soaking up excess liquidity will control inflation.

Mark Skousen and Steve Forbes

Investment U Chairman Dr. Mark Skousen (Left) with Steve Forbes

Mark Skousen: Do you think gold is going to go up to $500 an ounce?

Steve Forbes: Well, if it does, it means we're going to have a recession.

Mark Skousen: So you don't predict it, you just use that as a monitor?

Steve Forbes: I use that as a barometer.

Mark Skousen: In my new book, Vienna and Chicag Friends or Foes, I was critical of your gold monetary policy - using gold as a monitor - because it's so volatile. What's your response?

Steve Forbes: I don't agree. Gold is volatile because monetary policy is volatile. Markets react to that. So if gold shoots up, it's not volatility, it's the market saying that the Fed is overshooting. Gold is a constant. It's like the North Star. It fluctuates based on what people perceive, the value of the dollar and monetary policy. When gold collapsed in the late 1990s, it meant that the Fed was deflating, and that helped bring about the recession. When you have deflation, it hurts commodities, hurts commodity producers, and hurts manufacturing.

Mark Skousen: Now, what about an inverted yield curve, where short-term interests exceed long-term rates? Do you think that's a possibility?

Steve Forbes: It's a very real possibility. Again, it means that the Fed has blundered.

Mark Skousen: I carefully read your book, The Flat Tax Revolution. Regarding privatized social security, a flat tax and a balanced budget amendment, why does it take so long for government to solve these types of problems?

Steve Forbes: In the public square, the way you make things happen is by having a vested interest, organizing to push your interest, and then politicians respond to those interests. So petitioners have a bigger voice than the general public. The way you try to change something with the public is to put an idea out, advocate it, and start organizing around it, and eventually you will triumph if people feel it has legitimacy.

I just think that you have to marinate your ideas. For example, on the flat tax, one of the things we're doing is in New Hampshire. Every candidate that comes into that state is going to get questioned, Democrat and Republican alike: "What are you going to do about this horrific tax code? If you've been in Congress, why haven't you done anything about it? Why wouldn't you go with a flat tax? Why wouldn't you go with lower rates?" You put pressure on that way. I hope that in the 2008 Presidential primaries, at least one candidate will be entrepreneurial enough to stand out and take an unusual stand on an issue where there seems to be some real public resentment, where the public is ready to explode.

Mark Skousen: Would that candidate be you in 2008?

Steve Forbes: Not me in '08. I'm an agitator now, but it could be a Democrat or Republican, or a couple of both. A Democrat could easily pick up on the flat tax idea and run with it. They may not endorse my version of a flat tax, but they might support a low rate like 15% that would apply to the big capital gains, dividends, death duties, income, etc. It would be a vast improvement over what we have now. It certainly could appeal to a piece of their constituency because of the high exemptions. If the Republicans don't get serious about this, a Democrat is going to run with it.

The other thing is, in the real world, events can push policy. Everyone now knows we face more tax competition. Everyone now knows more of the world is getting its economic act together. In the Cold War, you had a big portion of the world under a horrific ideology that was anti-growth. You had mild variations of socialism, which is anti-growth Now, the world is catching up. You know about China and India, Central and Eastern Europe - they are determined to replicate what Ireland did

Mark Skousen: A 12.5% corporate rate?

Steve Forbes: Ireland went from the weakest economy in Europe to the most vibrant, and now enjoys a higher per-capita income than Great Britain. It is phenomenal. As we look around the world, and we look here at our own horrific tax code, I think people are going to say, "we don't have to take this any more." And we won't. Ben Franklin may be right that taxes are inevitable, but how we're taxing is not inevitable. In other words, we as a free people should determine the tax structureIt's our money the government uses, so how much they take, how they take it, should be determined by us, not by Washington.

Mark Skousen: You spoke of events. One of the big events here is a ballooning deficit, and a possible tax increase. It seems to me, any kind of tax reform, such as a flat tax, is off the table now. They're not discussing it. That's a scary thought.

Steve Forbes: It is, and that shows why leadership, management, politics and the public square are just as vital as it is in the private sector. Good management can succeed, given the diversity. Bad management can destroy even a splendid company. You see it happen all the time. Conservatives have not done an adequate job at promulgating the idea that reducing tax rates leads to a stronger economy.

High tax rates retard economic growth. So why would we retard the economy when we're asking more from the economy with these extraordinary events? It's like telling a patient, you have pneumonia and you just broke your leg, but we're not going to give you antibiotics until your leg gets cured. No. You continue with the cure, which is lower tax rates. The government had record growth of revenue last year, up 15% on the federal level. The problem is Washington spends it all. It's not a revenue problem; it is a spending problem.

Mark Skousen: Ben Franklin, by the way, once said, "No revenue is sufficient without economy."

Steve Forbes: Exactly. There are always unmet needs. One of the things that Washington does all the time is come up with an excuse for why they need to spend more. If times are tough, we need to stimulate the economy. If times are good, we have the money and unmet needs. They always have an excuse.

Stay tuned for Part 2 of my interview with Steve Forbeswhere we'll discuss the stock market, the war on terror, corporate legislation and more.

Good trading, AEIOU,


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