"A Credible Hard Currency"
Mahmoud Ahmadinejad: "They get our oil and give us a worthless piece of paper. All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency." Hugo Chavez: "Don't you see how the dollar has been in free-fall without a parachute?"
Some of the other statements by those two at the OPEC summit last weekend were over the top, as usual. But the ones above reflect the main geopolitical theme of this blog during the past few years. I trust regular readers haven't been surprised by (and maybe even profited from) the financial market manifestations of that theme: a lower dollar, higher oil, and higher gold. But make no mistake: in some quarters, those comments from Ahmadinejad and Chavez are just as incendiary and threatening as anything to do with a nuclear program. And it's a sad time indeed when Backstop Ben and Hapless Hank, credibility shot, can't even pretend to man the monetary ramparts in response without eliciting a global guffaw.
Some of the other statements by those two at the OPEC summit last weekend were over the top, as usual. But the ones above reflect the main geopolitical theme of this blog during the past few years. I trust regular readers haven't been surprised by (and maybe even profited from) the financial market manifestations of that theme: a lower dollar, higher oil, and higher gold. But make no mistake: in some quarters, those comments from Ahmadinejad and Chavez are just as incendiary and threatening as anything to do with a nuclear program. And it's a sad time indeed when Backstop Ben and Hapless Hank, credibility shot, can't even pretend to man the monetary ramparts in response without eliciting a global guffaw.
posted by The Cunning Realist at Tuesday, November 20, 2007
4 Comments:
This is a little thought that's been bothering me for a while:
If you're in the oil business - big oil like Exxon, or an oil rich country - and oil is traded in dollars, a lower dollar means you get paid more dollars for your oil. If you have enough cash on hand that you can sit on it for a few years (like Exxon) until, say, the dollar goes up in value again under the next administration, that would dramatically increase your profits on past sales, just by doing nothing. Based on where the dollar is now, versus where it should be again with responsible people at the helm, that's like a savings account paying double digit interest.
If you sell oil, devaluing the dollar is a way to get the most dollars for your product - get lots of dollars while they're cheap, then sell or use them later when the value goes up. Buy low, sell high.
Does that make sense, or do I have it backwards?
If it does make sense, isn't that a pretty big incentive to let the dollar drop as it has? Could explain a lot.
I asked this on another blog not too long ago and haven't gotten an answer yet. Bush turned the instruments of temporary stimulus (tax cuts, deficit spending, rate cuts) into permanent policy. At this point, if the economy tanks next year, what does the next president have left in their short-term stimulus basket?
Oil and Gold go up and down in value. Depending on Supply and demand. The dollar only goes in one direction. Down. It might go up in value compared to other fiat currencies...it might go down at a slower rate...but it only goes in one direction. Even our own government admits that.
http://www.bls.gov/cpi/#overview
Gold fell out of favor as a storage of value in 1980 when Volcker raised rates and established something close to a sound fiat money philosophy. Inlfation was truly minimal during those years...the cost of storing gold...purchasing fees...and low inflation (real low inflation not the government claimed low inflation of today)made gold unattractive for awhile. Nobody has had a sound fiat money philosophy since Volcker left...and if they did...it would cause a recession...a much needed recession by the way. A recession is not necessarily a bad thing. It forces politicians and Wall Street to look at what they did wrong and make some attempt at real economic reform vise printing money to hide past mistakes...which actually encourages Wall Street to make more mistakes (I mean who needs to worry about making investment mistakes when the government bails you out everytime). All papering over mistakes does is cause more mistakes and a bigger problem in the future.
...I digress as usual. Gold has been undervalued as a storage of value for 2 decades now. It is just coming back in favor as a storage of value. I keep on repeating the phrase "storage of value" because that is what money is supposed to be. What we are experiencing today is the USD is falling out of favor as a storage of value. Why would anybody want to be paid in a currency that is seen as unstable...or not a good storage of value.
...Saudi Arabia, Quater, Kuwait, UAE, etc. are part of our empire. We bought and paid for their politicians a long time ago. Some of them are a bit restless but I don't think they are ready to completely turn their backs on us. China, Russia, Venezula, Brazil, Argentina, Iran, India, etc. There are many countries out there who don't benefit from using the USD. They use it because it is the currency of the "Global Economy". It is the currency of the "Global Economy" because when the sun set on the British empire...they handed us the baton in the Bretton Woods agreement. The US was an economic powerhouse with a strong military and a stronger manufacturing base and a huge supply of federally owned gold. Nobody was in a position to complain at the time. Times are a changin...many countries are starting to complain. I don't blame them. Why do I buy Gold? Because I think the federal government is going to continue to inflate to minimize the effects of a coming recession. I believe more people (Americans and otherwise) are waking up to the fact that Gold is a better "Storage of Value" than the dollar. This creates a larger demand for Gold and causes Gold to increase in value. Volcker made people forget about gold. There are no more Volckers. Only Clintons and Bushs...would do not look kindly upon people standing in their way of implementing their visions of utopia for the world. To bring about utopia...they need money...dollars...and alot of them!!!
The people who should be bitching about the worthless paper are the Chinese. Except while a big part of the $600 billion or whatever it is agency paper they have bought the last two years is literally worthless and the Treasury paper is no great shakes, especially since at some point some politicians could decide to default on it, those dollars have already done their job internally.
It is little understood that the Chinese don't sterilize their forex currency operations. First they exchance the dollars for RNB's, increasing their money supply. Then they buy US paper and increase ours. Think about this transaction and then think about Ben's theory of a worldwide savings glut. Obviously our elites are morons.
Anyway if, when and how much the Chinese get stiffed on their 'investment' in US paper doesn't really matter. As in internal issue those dollars have sent China's growth into outerspace, for better or for worse. Anything they get back from Uncle Sam is icing on the cake.
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