Over the last 6 months, the world has been treated to a front row seat as to how economic policy can be used to seriously undermine enemies in the modern world. Specifically, the fall in the price of oil has fallen from around $110 dollars in July to about $56 now (a decline of 49%). For countries such as Russia, Iran, & Venezuela, who need oil prices north of $100 to balance their budgets, a drop of this magnitude is devastating and will hinder the ability of these countries. Given that none of these countries are friendly to the U.S. and given that lower oil prices mean that U.S. consumers are paying less at the pump (the equivalent of a tax cut for them), the low oil prices are a win-win-win for the U.S.

However, even more fortuitous for the U.S., and problematic for Russia & Iran, is that these developments are not the result of some temporary unique factors like a freak weather event, but rather are the result of several factors. One factor is that with fracking and drilling technology advancing, the U.S. has more natural gas but is also drilling more oil (as a percentage of world production) than it has in decades which is creating downward pressure on prices. While nobody can (or did) predict when a new technology (or an advance in an old technology) will arrive on the scene and completely upend a market, this is what has happened since the middle of the last decade. Although the new technology is like a freak accident from the point of view of energy producing countries, its effects are permanent.

Another factor is that Saudi Arabia is standing in the way of OPEC reducing production to prop up prices, and indeed seems determined to drive prices down. While there are several theories being put forth to explain why Saudi Arabia seems to be acting against its own economic self-interest in driving prices down, there are really a couple of factors. One long-term consideration is that Saudi Arabia would like to make the new wells that have come on-line in the U.S. un-economical and take them out of the game so to speak. The idea is that with lower U.S. production, Saudi Arabia will have more influence in world oil markets and can drive the price higher. The effects of this gambit remains to be seen, but with the U.S. and Russia being number 3 and number 1 respectively in oil production as of 2013 (i.e. two non-OPEC countries), Saudi Arabia is unlikely to exert the impact on world oil prices to the extent that it did in the 1970’s. The second consideration is that lower oil prices hurt Iran and Russia. While Saudi Arabia unlikely sees a rival in Russia in that it is siding with a Saudi rival in Syria (and by extension Iran), it sees an existential threat in Iran with its nuclear program (much like Israel). Anything that hurts Iran, creates political/economic instability for them, and thereby hampers their ability to obtain nuclear weapons while also reducing their influence throughout the Middle East is something that can be considered a vital interest of Saudi Arabia’s.

A final factor is the actions of the Federal Reserve. While perhaps not directed at the price of oil, the winding down of the quantitative easing and indications that the low interest rate policy of the U.S. will not be kept for forever is having the effect of strengthening the U.S. dollar in foreign currency markets. Because oil prices are denominated in U.S. dollars, a strengthening dollar has the effect of lowering oil prices across the board, all things being equal. As the U.S. dollar strengthens, we can expect to see lower oil prices than would otherwise prevail in any given set of market conditions.

In summary, we normally think of military build-ups or military action as the way to combat implacable enemies like Iran and rivals like Russia and China. Certainly, those actions have their place. But economic policies also have a place and can be used to undermine enemies without having to blow things up. And when an economic policy can help you (low oil prices for U.S. consumers) while creating economic & political instability in your enemies, that is an unbelievably positive development.

Over the last week, the talk of the punditry is the apparent monumental shift in U.S. policy towards Cuba since JFK was President. It appears that the U.S. will begin down the path of normalizing relations with Cuba. While some (especially on the right) are upset about this change and some (also on the right) believe that this is yet more confirmation that Obama is a closet socialist, the policy change is long overdue and one that Americans should embrace if they want Cuba to be a free, open, and economically prosperous society.

The first reason for embracing this policy is that the fact that Cuba is willing to respond positively to these overtures is recognition that they need the United States. Another way of looking at it is that it is a tacit admission that the socialism the Cuba thought would bring it economic prosperity hasn’t. While America hasn’t really thought much about Cuba over the last 30 years or so, Cuba has thought a lot about America. For a country that has viewed the U.S. as a mortal threat for so long and who the government has blamed for its economic woes, normalized relations that will likely open the country up to American tourists, American dollars, and American influence, could very well have the effect of undermining the regime. The historical record tends to be that once a country/economy that is closed to the United States opens to it, economic improvement (if not always political freedom i.e. Vietnam, China, etc.) tends to follow. Once people have a taste of prosperity, they tend to want it to continue, and this can be very destabilizing to autocratic regimes. Even China, as imposing as the Communist Party still looks on the outside, owes its legitimacy to the tacit bargain that it has stuck with the population that it will keep the prosperity growing in exchange for power. If it fails in this, the regime could become quite unstable, something that would likely be positive for U.S. geopolitical goals in the region. It would be ironic if it was the scrapping of the U.S. embargo on Cuba which was intended to bring down Castro that ending up setting in motion the forces that led to the end of single party rule in Cuba.

The second reason for ending the embargo and normalizing relations with Cuba is that embargo simply hasn’t worked. Its goal was to end the Castro regime and communism in Cuba and it simply hasn’t happened. Keeping it in place for 3 more years, or 5 more years, or 10 more years isn’t likely to have the desired effect. Even if communism were to collapse in that time, a subsequent claim that it was due to the embargo would be highly suspect. To put it another way, when people have been born, grown up, lived lives, had kids, and then passed on, all the while a certain policy was in place, it is hard to credit any subsequent ‘victory’ for that specific policy. I don’t think that the embargo was put in place with the idea that Castro (or the Castros to be more accurate) would still be in power in 2014. Consequently, as embarrassing as it might be to some and as painful as it maybe for some to hear the Castros spinning the détente’ as the U.S. giving up in failure, leaving a failed policy in place doesn’t promote U.S. interests.

Whatever else one thinks of President Obama’s policies, changing this policy is more likely to help U.S. interests in the region than damage them. Historically, opening to the U.S. has often (Eastern Europe) but not always (China, Russia, Vietnam) led to freer government & populations friendly to the U.S. as the people have tasted the economic benefits of a freer market. Even in those countries whose governments aren’t exactly friends of the U.S., the opening of the country to U.S. trade has benefited the population and contact with American businesspeople and tourists likely led to an improved American image in those countries among the general population. Over time, this is likely to lead to more trade with the U.S. and also to governments that are, if not friendly, at least less hostile to the U.S. To take a hostile and closed off enemy and turn them into a trading partner and, maybe eventually, a friend, strengthens the U.S. economically and politically.

Changing U.S. policy towards Cuba has the potential to accomplish both of these goals.

When economic historians review the last 10-15 years, one observation that is likely to come to the fore is that this was a period when the assumptions as to what was necessary to obtain personal prosperity began to change. To be sure, the economic forces underlying the changes had been in process for some time. However, it is only in recent years that people have actually started to recognize that the rules had, in fact, changed.

One assumption that more and more people are starting to question is the rule that you have to get a college degree. To be sure, those with a degree make more on average than those who don’t over an entire lifetime. However, people are starting to notice that whereas any degree was valuable before, today it depends on what you are studying as to whether a degree is worthwhile. Degrees in math, science, and engineering are often worth the money, but those in 17^th century French literature are not. Furthermore, college has become more expensive and a student can end up leaving school with a degree and the equivalent of a mortgage payment. For degrees that will give you a good job, this might be a worthwhile trade off. For someone with a useless degree, having to make the equivalent of a mortgage payment (that could have gone to a real mortgage payment) can seriously hobble their attempt to build a future.

The second assumption that is being called into question is that prosperity requires that you buy a home. When it seemed that housing prices could only increase, then buying a home was a form of forced savings. Even today, buying a home in certain places can still be a good investment. However, as the economic downturn taught us, buying a home is not a “sure thing”, and in some places can still be a wealth-killing investment. Buying a home is no longer the automatic key to prosperity that it once was.

The third assumption that has been called into question is that the next generation will be more prosperous than the one before it. Through the baby boom generation, the experience was that the next generation was materially better off than the generation before it. However, with the economic downturn and subsequent anemic recovery, this assumption is also being called into question. There are several factors that are driving this pessimism. Globalization and the shortage of well-paying manufacturing jobs have meant that engine of economic prosperity for the middle class has been shifted into a lower gear. In addition, large school debt has meant that college graduates are now graduating having to pay off loans, which hampers their ability to build savings. The debt & consumer culture that emphasizes having it now means that many have gone into debt to buy “toys”, as well as the fact that Generation X is having to raise their kids, prepare to take care of aging parents, save for junior’s college, and suffer from stagnating wages, and the economic headwinds are overwhelming for many people.

Going forward, many Americans will have to (and indeed already are having to) recognize that what is possible is somewhat more limited than it was in the past. Reduced expectations and more realistic planning can help to navigate this new reality. For example, it may be that for many, kids, a great house in a great neighborhood AND a comfortable retirement may simply not be possible and they will have to make trade-offs. For Americans raised to believe that they can have it all, the new reality is the biggest assumption change of all.