Reply to: The Price of Oil

[Rebecca Loos]

I reckon it's the complexity of it all that makes the world a bad place. I mean, if yours dearly (i.e., me) cannot get her head round the movements of the US dollars, what chance the President of the United States of America?

adviser: "Mr Bush, the dollar is going down"
GWB: "is this bad?"
adviser: "well, yes"
GWB: "whose fault is it?"
adviser: "it's a bit complex but really it's the oil market"
GWB: "right, let's bomb it!!!"

adviser: "Osama, our people are complaining heaven is not what it used to be"
OBL: "what's wrong with it?"
adviser: "not enough virgins"
OBL: "how can that be?"
adviser: "well we need 76 virgins per holy warrior/martyr/true believer"
OBL: "yes I can see that's a lot. Whose fault is it?"
adviser: "there's less and less western virgins"
OBL: "right, let's bomb the f*ckers!"

[bfg]

for the love of alah, if you are going to come up with some bullsh1t timeline at least make it believeable!

Mailman

Just a few dates for you MM:

25 October 2002: US formally proposes a new resolution on disarming Iraq to the UN Security Council.

4 November 2002: Saddam Hussein says Iraq will comply with a new UN resolution as long as it does not serve as an excuse for US military action.

8 November 2002: UN Security Council unanimously passes a new resolution on Iraq's disarmament, warning of "serious consequences" for material breaches.

12 November 2002: Iraq's parliament rejects the UN resolution.

13 November 2002 Iraq's Government accepts the UN resolution.

18 November 2002: Hans Blix leads UN inspectors back to Baghdad to start their mission.

[AlfredJPruffock]

Having said that, surely it is not in the interest of China and Japan to be the proud owners of worthless US dollars... so surely they will do what they can to sell them in a way that doesn't make it depreciate too much...

Well they could always buy Gold with the dollars as the Russians have done, but you are right Rebs, lets all just go to the pub instead and forget about everything ?

[AlfredJPruffock]

Indeed this is an interesting question whether the change in demand would lead to a change in exchange rate. The law of supply and demand does not always apply to currencies because the supply of money is not fixed. The government can print money or take money out of circulation. And I suspect that if Iran starts selling some oil in euros, EU will print more money and US will destroy some money to keep inflation stable, and the economies won't change because the investments won't change (US economy will keep growing due to productivity gains, and EU economy will keep stagnating due to a useless socialist government...)

Food for thought there Sc.

I do hope this scenario is the most likely one.

Meanwhile on a more mundane note I am impressed that the rerouting of the local bus service means I no longer have a five minute walk to my bus stop to get home as now I can board the bus outside of my work place, so my public chaffeur is now truly offering a door to door service.

I shall ponder on your remarks and join again the debate of the World of International Petroleum Trading and Currency Exchange tomorrow, it certainly brightens up an otherwise dull day at the office.

[Rebecca Loos]

but surely the US can only destroy the dollars that they own.... if the Chinese and Japanese own loads and want to sell them, surely the US will have to buy them first before burning them?

Not convinced that you can just "burn money" either.....

Having said that, surely it is not in the interest of China and Japan to be the proud owners of worthless US dollars... so surely they will do what they can to sell them in a way that doesn't make it depreciate too much... oh it's too complicated - can't we just have a wee war and be done with it within a few years?

[Skeptical]

Indeed this is an interesting question whether the change in demand would lead to a change in exchange rate. The law of supply and demand does not always apply to currencies because the supply of money is not fixed. The government can print money or take money out of circulation. And I suspect that if Iran starts selling some oil in euros, EU will print more money and US will destroy some money to keep inflation stable, and the economies won't change because the investments won't change (US economy will keep growing due to productivity gains, and EU economy will keep stagnating due to a useless socialist government...)

[AlfredJPruffock]

Very true and this is the reason why it does not matter in which currency oil is traded. As long as the US economy grows faster than EU economy, money will be invested in US and not in Europe. And as long as China's insane growth continues, money will be invested in China.

But you see if the petrodollar is replaced then the dollar will plummet as less demand is required for the dollar due to nations no longer requiring dollar reserves to purchase Oil but rather the Euro.

Again it really does matters to the the US that Oil is traded in the petrodollar.

[Skeptical]

But, throughout history, the fundamental value of a currency, is based on the economic output of a country. As China becomes the major manufacturer in the world, and the US output shrinks to almost nothing, the fundamental fact is that our currency has no real value, and we are just buying time by assuming that the Asian countries will continue to bail us out, by buying our debt.

Very true and this is the reason why it does not matter in which currency oil is traded. As long as the US economy grows faster than EU economy, money will be invested in US and not in Europe. And as long as China's insane growth continues, money will be invested in China.

[ALM]

Ahh mailman ... glad you've reappeared! Any luck with the names of those leading economists who back your argument that the US dollar would surge upwards in the event of oil being traded in Euros?

[Mailman]

U.S. Treasury Secretary John Snow issued a warning recently that the U.S. Government is on the verge of collapse - as the statutory debt limit imposed by Congress of $8.184 trillion dollars would be reached in mid-February - the government would then be unable to continue its normal operations.

Can you post John Snows original quote.

Mailman

[ALM]

Alfred, please can you enlighten me on why a strong dollar - rather than a weak one - is key to the strength of the US economy. Not too clear on this ... as imports will increase and exports will decrease (other things being equal) - surely leading to the trade deficit increasing even more?

Although a strong/rising dollar does help reduce the trade deficit, it is the beneficial effects it has on US interest rates, consumer expenditure, capital investment and inflation that promote economic growth. See the following link for more information. URL=http://money.cnn.com/2001/08/15/economy/dollar/

[AlfredJPruffock]

Finally Bob another observation on this,not mine I hasten to add !

Again it would be interesting to learn the views of those with a sound background in economics such as ALM etc


If you want to read some serious economic discussion of this, try reading Bonner and Wiggin’s best-selling book "Empire of Debt: The Rise of an Epic Financial Crsis". (That is, if you can find a copy....last I heard Amazon was sold out.)


It is a serious discussion by real economists, and is recommended reading by some of the leading economic journals. If found it so riveting, that I couldn’t put it down, until I had read it straight through.

The assumption of many people like you, is that Asian countries like Japan and China will be forced to continue buying US debt, because if they don’t, the US economy will collapse, and so they would lose their export market, and that would hurt them too much. So, in self-defense, they will continue to buy worthless US bonds.

That is, indeed, the only thing that is keeping us from collapse at this time.

But, throughout history, the fundamental value of a currency, is based on the economic output of a country. As China becomes the major manufacturer in the world, and the US output shrinks to almost nothing, the fundamental fact is that our currency has no real value, and we are just buying time by assuming that the Asian countries will continue to bail us out, by buying our debt.

The trouble is, by selling debt, we are in essence, printing more money. By issuing no-interest loans, and continuing to fuel the economy by consumer indebtedness, inflation is inevitable. (In fact, inflation is starting to take off.) As long as there is inflation, the price of gold will go up (gold has more than doubled, since Bush took office, as a result of his incredibly high deficit spending).

The longer we fool ourselves into thinking the Asians will bail us out, the worse inflation will get, and the higher the price of gold. At some point the Asians will increase their gold holdings (countries like Russia have just announced they are doing just that.)

For China to increase their gold holdings by just 5%, I think I heard, would mean something like 67% of the world’s gold supply....thus resulting in another phenominal increase in the value of gold.

The point is, these factors are completely out of our control.

The longer our debt economy lasts, the worse off the economic fundamentals will be. And there has never been a time in history, when the economic fundamentals didn’t rule in the end.

My worst concern, is that if, and when, we finally collapse, how will we be able to recover?

In previous economic collapses, we were still one of the only industrial countries in the world.

So, it was just a matter of finally getting it together, and getting the capital together, to fund our recover.

But now, with places like China and India taking the economic lead, with people working for 16 cents/hour....how could we ever recover to the point of competing in the world, without lowering our standard of living to that of a third world country?

[AlfredJPruffock]

Why does the press say that treasury bond purchases by foreigners are propping up the US economy? What does that really mean?

Perhaps BS this is what it means ?


U.S. Treasury Secretary John Snow issued a warning recently that the U.S. Government is on the verge of collapse - as the statutory debt limit imposed by Congress of $8.184 trillion dollars would be reached in mid-February - the government would then be unable to continue its normal operations.

Considering the current total U.S. debt stands at $8.162 trillion dollars, once the official debt ceiling ($8.184 trillion) is reached, the U.S. government’s credit abroad (its borrowing power) is gone.

Those countries (mainly China) who presently keep America afloat by holding U.S. Treasury Notes, will most likely no longer continue doing so.

[bobsmithldn]

Given that because the US dollar converted from the Gold Standard to the Petrodollar as from 1971 after the agreement with the House of Saud ,to price Oil transactions in US Dollars, it became necessary for countrys to hold Dollar Reserves to purchase the Oil, thereby promiting the strength of the Dollar due to the fact that Oil purchases are unavoidable, perhaps akin to a global Oil currency tax.

If you are effectively printing the US Dollar as the Global Currency then it matters little if you are importing beyond your means, as the US does, nor if you have a whopping deficet as a result, as nations have to buy your Dollars to make the Oil Transactions thereby strenghtening the currency irrespective of your economic perfrormance.

Again I am not an expert in this field and I imagine ALM and others could give a better explanation, but I hope this gives an idea of why the Dollar needs to be strong, as long as the PetroDollar is the de facto trading currency then imports are not a problem , but were the petrodollar to be replaced, my oh my ....

Why does the press say that treasury bond purchases by foreigners are propping up the US economy? What does that really mean?

[AlfredJPruffock]

Alfred, please can you enlighten me on why a strong dollar - rather than a weak one - is key to the strength of the US economy. Not too clear on this ... as imports will increase and exports will decrease (other things being equal) - surely leading to the trade deficit increasing even more?

I have read that the Fed intends to stop reporting M3 which includes foreign holdings of $ - could this be related to the Iranian bourse situation, etc.?

http://www.federalreserve.gov/releases/h6/discm3.htm

Given that because the US dollar converted from the Gold Standard to the Petrodollar as from 1971 after the agreement with the House of Saud ,to price Oil transactions in US Dollars, it became necessary for countrys to hold Dollar Reserves to purchase the Oil, thereby promiting the strength of the Dollar due to the fact that Oil purchases are unavoidable, perhaps akin to a global Oil currency tax.

If you are effectively printing the US Dollar as the Global Currency then it matters little if you are importing beyond your means, as the US does, nor if you have a whopping deficet as a result, as nations have to buy your Dollars to make the Oil Transactions thereby strenghtening the currency irrespective of your domestic economic perfrormance.

Again I am not an expert in this field and I imagine ALM and others could give a better explanation, but I hope this gives an idea of why the Dollar needs to be strong, as long as the PetroDollar is the de facto trading currency then imports are not a problem , but were the petrodollar to be replaced, my oh my ....