The whole world is playing a game of financial fiat musical chairs on a tilt-oh-whirl that is spinning to fast it gives it a sense of stability, artificial gravity if you will, but the bolts and structure are eroding exponentially. It's a perfect storm of government failure and banking greed about to change the face of the earth...what might have been a worldwide systematic crash due to fraud and misallocated resources has now been exasperated by Benocide Bernanke's monetary polices, coupled with wallstreets symbiotic relationship with the federal government, which is bringing the world wide foundations of civilization to its knees
The whole US monetary system is a ponzi scheme in which money is created out of debt. There is always more debt in the system than there is money to pay off the debt. New money must always be created to pay off the old debts, which are compounding. This means that money creation in itself, is exponentially increasing, as is the debt. It is inherently inflationary and punishes savers, which in turn undermines capital investment and promotes speculation which leads to even more inflation. This system is clearly unsustainable, and will inevitably reach a tipping point in which even if the citizens are taxed 100% of their income, it is not enough to even pay the interest on the new money creation. With National debt at $14 trillion, social security and medicare at $77+ trillion, and fannie mae and freddy mac debt (which is kept off US balance sheets, along with medicare, medicaid, and social security) the total debt balloons to multiple times the US GDP.
We have reached that tipping point after 40+ years of this fiat system. The only choices are a US default on the debt, or a slow inflationary default on the debt. The Fed Reserve has chosen the latter with its QE policies. A slow inflationary default on US debt by printing money and saying "here is the money we owe you!"
With QE the federal reserve is trying to get rid of banking debt and national debt via printing money and buying treasuries from dealer banks (such as JPM, Morgan Stanley, Goldman Sachs, etc.) The Federal Reserve is now the largest single owner of US debt, surpassing China this last fall. These banks are investing excess liquidity into the equities market, which is a huge reason why stocks have been rallying despite 3 years straight of mutual funds pulling out of the stock market. The powers that be have manipulated the economy in a way that the only way markets can function is ever increasing deficit spending, since the government must always borrow more and more because expansionary monetary system requires it.
The thing about QE is that excess liquidity that the banks got from dealing treasuries to the Fed are pouring into commoditties, causing inflation. Inflation fears are causing long term treasury yields to rise, meaning people are starting to dump them. It's a two sided coin as Ben must impose QE to keep the ponzi scheme together, however the money printing he is creating is pouring into commodities and adversely affecting the bubble he has blown in treasuries.
Inflation hasn't been felt too bad here yet, minus food inflation and commodities. This is because with world reserve currency status, the US can print, monetize debt, then export the inflation to the rest of the world. US monetary policy is the number one driving force behind these food inflation riots world wide, despite Paul Krugman insisting to his readers that it is global warming and not his own monetary policies he supports.
There is no end in site for QE, no exit strategy at all, with exponentially increasing money and debt, we have passed the point of no return. Who is the Fed going to unload these treasuries to at the rate of $15B per day? Ben Bernanke, in his hubris and desperation to keep the ponzi going, has blown the last bubble he can, the treasury bubble. This is the most dangerous bubble as when it bursts, it won't be an asset like housing, or equities like in the nasdaq bubble, thats get affected, but the currency itself. The dollar becoming toilet paper.
The problem Bernanke faces is that he might have to sacrifice the equities market, hoping people pour their liquidity into treasuries (the standard fall back) to keep the bubble alive, or they could pour it into commodities, which would spur a treasury dump and massive inflation.
It is possible that this system can go on for years, as the world has no alternative to the dollar and the US military industrial complex protects the system in which the world must accumulate dollars because all OPEC nations require oil be purchased in dollars. They are trying all they can to get out of the US dollar ponzi scheme run by our overlords..
When QE2 ends in June, I expect there to be plans for QE3, which will buy state and muni bonds, and QE will go on forever until the treasury bubble bursts or the dollar loses its reserve currency status as it is inflated away to toilet paper.
Showing posts with label petrodollar. Show all posts
Showing posts with label petrodollar. Show all posts
Tuesday, February 22, 2011
The Petrodollar
Near the end of WW2, countries and leaders from all over the world assembled in New Hampshire to discuss a new global monetary system to be put in place after the war. The monetary system consisted of global trade dominated by the US dollar. The dollar was pegged to gold, but only for international payments between countries. The dollar had already been taken off the gold standard in 1932 by Roosevelt domestically to fight deflation. Because of the immense economic power of the United States following WW2, the dollar became the de facto world currency as we were the largest exporter of goods. Many currencies were pegged to the dollar. However, in 1971, Richard Nixon and the US decided to default on redeeming dollar reserves for gold. Since there were so many dollars out there with no intristic value except faith, the US had to find a way to put some commodity or resource pegged to the dollar to keep reserve demands high. The answer was oil.
in 1978-1979, the United States reached a deal with OPEC nations that all oil had to be dealt in dollars and dollars alone. This forced countries to accumulate mass amounts of dollars in order to buy oil so that their countries could function. Since only the US could print dollars at will, it forced these countries to open their markets and become exporting based economies. It is no coincidence that this occurred at nearly the same time the US switched from an industrial economy where we actually made things, to a service economy. The world economy became a system in which the US printed money out of nowhere, and the rest of the world made goods that dollars could buy. As long as American's could keep consuming and working, and countries needed oil for their economies and country's to function, the system worked.
The system, however, was extremely exploitative and imperialistic. Dollars were printed out of thin air to buy goods, real tangible assets, or wealth, at very cheap prices. Countries were competing to export as cheaply as they could to the US for dollars. Most of these countries had dollar reserves in a certain ratio with their own domestic currency to devalue it, so that they could compete for exporting. This meant that after a country purchased oil, and had the correct reserve ratio, they had an issue with what to do with excess dollars. Too high or too low of a ratio would either deflate or inflate the local currency. These countries had to spend their dollars, and what else can be bought with USD besides oil? US treasury notes of course. So these countries would spend their excess dollars on UST. This is one factor that helps explain how the United States was able to having a growing economy, despite the fact that we imported more than we exported. Essentially they were funding their own exploitation. Adam Smith taught in The Wealth of Nations that the wealth of a nation is determined by how much it produces and exports. The US found a way around this through dollar hegemony, petro dollar and reserve demands globally all around the world. As long as America, 4% of the world's population, consumed as much as they could, and oil was dealt in dollars, the system would work.
in 2000 Saddam Hussein, trying to break away from this dollar imperialism, announced that he wanted to deal his oil in other currencies, namely the euro and yen. The US would not have this, and invaded Iraq on the premise of "weapons of mass destruction". The oil fields were reclaimed, and were put back on the dollar. in 2006 Iran announced it was opening the Iranian Oil Bourse, and would deal oil in other currencies other than dollars.....catch my drift?
If the dollar is decoupled from oil, and with the amount of dollars out there, the dollar would hyperinflate to points never experienced in human history. Countries would no longer need to hold dollar reserves, and could simply dump their dollars and free themselves from dollar imperialism. This is the biggest and scariest bubble that faces America today, and no one EVER talks about it, at least in main stream media. It puts all of us in such an unimaginably vulnerable state. I just laugh when I hear the media saying China is artificially devaluing its currency and it is hurting America. Of course they are devauling their currency to compete in the global system America created, to compete with exporting to the US.
When you hear about China owning so much US debt, it's because they bought UST with their excess USD like I explained earlier. China and the USA are like two legos stuck together right now. China needs us to consume their exports while they are domesticating and internalizing their economy like crazy, hence them buying our debt, and the US needs to consume Chinese goods to keep petrodollar demand high. Recently, however, China has surpassed the US as the largest consumer of energy and oil....it will be interesting to see what China does, if they get strong enough domestically, and simply dump their US dollars and free themselves from dollar imperialism....it will be interesting to see what happens.......
in 1978-1979, the United States reached a deal with OPEC nations that all oil had to be dealt in dollars and dollars alone. This forced countries to accumulate mass amounts of dollars in order to buy oil so that their countries could function. Since only the US could print dollars at will, it forced these countries to open their markets and become exporting based economies. It is no coincidence that this occurred at nearly the same time the US switched from an industrial economy where we actually made things, to a service economy. The world economy became a system in which the US printed money out of nowhere, and the rest of the world made goods that dollars could buy. As long as American's could keep consuming and working, and countries needed oil for their economies and country's to function, the system worked.
The system, however, was extremely exploitative and imperialistic. Dollars were printed out of thin air to buy goods, real tangible assets, or wealth, at very cheap prices. Countries were competing to export as cheaply as they could to the US for dollars. Most of these countries had dollar reserves in a certain ratio with their own domestic currency to devalue it, so that they could compete for exporting. This meant that after a country purchased oil, and had the correct reserve ratio, they had an issue with what to do with excess dollars. Too high or too low of a ratio would either deflate or inflate the local currency. These countries had to spend their dollars, and what else can be bought with USD besides oil? US treasury notes of course. So these countries would spend their excess dollars on UST. This is one factor that helps explain how the United States was able to having a growing economy, despite the fact that we imported more than we exported. Essentially they were funding their own exploitation. Adam Smith taught in The Wealth of Nations that the wealth of a nation is determined by how much it produces and exports. The US found a way around this through dollar hegemony, petro dollar and reserve demands globally all around the world. As long as America, 4% of the world's population, consumed as much as they could, and oil was dealt in dollars, the system would work.
in 2000 Saddam Hussein, trying to break away from this dollar imperialism, announced that he wanted to deal his oil in other currencies, namely the euro and yen. The US would not have this, and invaded Iraq on the premise of "weapons of mass destruction". The oil fields were reclaimed, and were put back on the dollar. in 2006 Iran announced it was opening the Iranian Oil Bourse, and would deal oil in other currencies other than dollars.....catch my drift?
If the dollar is decoupled from oil, and with the amount of dollars out there, the dollar would hyperinflate to points never experienced in human history. Countries would no longer need to hold dollar reserves, and could simply dump their dollars and free themselves from dollar imperialism. This is the biggest and scariest bubble that faces America today, and no one EVER talks about it, at least in main stream media. It puts all of us in such an unimaginably vulnerable state. I just laugh when I hear the media saying China is artificially devaluing its currency and it is hurting America. Of course they are devauling their currency to compete in the global system America created, to compete with exporting to the US.
When you hear about China owning so much US debt, it's because they bought UST with their excess USD like I explained earlier. China and the USA are like two legos stuck together right now. China needs us to consume their exports while they are domesticating and internalizing their economy like crazy, hence them buying our debt, and the US needs to consume Chinese goods to keep petrodollar demand high. Recently, however, China has surpassed the US as the largest consumer of energy and oil....it will be interesting to see what China does, if they get strong enough domestically, and simply dump their US dollars and free themselves from dollar imperialism....it will be interesting to see what happens.......
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