US Debt and the Currency Wars
Previously we have discussed the currency wars and the creation of new US debt. While the current amount of debt in US dollars is high, and has led to calls for a different standard of international trade, the US still remains the economic powerhouse of the world and the most stable of all G8 economies, by far.
The Results of the Recent Fed Action
If one takes a dispassionate overview of what has just happened, the U S Fed, in an attempt to “talk down” the value of the dollar, announced a massive additional purchase over time of $600 billion of debt. Once again I remind the reader that the announcement predates the actual deed by some time. It is obviously an attempt, as has been done other times recently, to talk down the value of the US dollar – see our comments in previous blogs about the currency wars.
Just as predictably, the stock market jumps up on the day of the economic announcement, as also does the price of gold. How interesting that these two events happen concurrently. By normal economic standards and expectations, and historically, the price of gold goes up when the market has fears and stocks fall. Clearly the market is being manipulated to convince the public that the government actions are good for the people and good for the markets.
And just as certain as in previous similar actions, a day later, the market falls back when the short term manipulation disappears. Sometimes I wonder if the government thinks the world is “Dumb and Dumber”.
I found the following commentary interesting and quote it because it reflects some of the angst in reaction to the Fed move.
Buying $600 Billion in Debt with Debt
Source: James West, Midas Letter 11/05/2010
Here is the glaring hole in the United States Federal Reserve’s approach to what it calls stimulus, and what history will one day categorize as fraud: You can’t use your own debt to purchase more debt when you can’t repay the original debt. The crime is compounded when you know you’re never going to repay the debt. It amounts to treason to intentionally destroy the integrity of the nation’s money. The Federal Reserve’s ability to “purchase” U.S. Treasury Bills is completely dependent on the fact that there is no overseer above the Board of Governors of the U.S. Federal Reserve to call an end to such self-destructive, immoral and just plain criminal behavior.
That stock market’s rise in reaction to the news is no surprise: that $600 billion will find its way into the pockets of major financial institutions, and will go nowhere near the vast majority of bank accounts owned by people who are out on the street, thanks to the collusion, or rather, the subjugation of the government of the United States to the Financial Service Industry. The rise will be temporary, and as this most recent mutation of the disease engulfing certain nations right now, debt addiction is going to suffocate future generations for decades
Although these are not my words, in many ways they reflect what just happened. I do disagree with the strong language as the US in my opinion does have the resources over time to deal with the debt. I absolutely disagree with the word “fraud”.
The Price of Oil
All of which brings me to the price of oil. Oil is measured in US dollars. As I mentioned in my last blog, the fact that over the long term, in spite of supposedly brimming tanks of oil in inventory, the price of oil rises, rather than falls. The following quote from Bloomberg is illustrative of the point I am making.
U.S. Increases 2011 Crude Oil Price, Demand Estimates
Source: Bloomberg, Mark Shenk 11/09/2010
The Energy Department increased its crude oil price forecast for 2011 on projections of greater U.S. economic growth and fuel consumption.
West Texas Intermediate oil, the U.S. benchmark, will average $85.17 a barrel next year, up from last month’s forecast of $83, according to the department’s monthly Short-Term Energy Outlook, released today. Prices in 2010 will average $78.80, $0.83 higher than October’s estimate of $77.97.
The department raised its outlook for global oil consumption next year to 87.77 million barrels a day from 87.44 million last month.
Sometimes We Miss the Obvious
If one ignores the news media demand for sensationalism and the need for headlines, some trends become apparent. One of these trends is the price of oil.
We have reduced demand for oil (supposedly). We have disruptions around the world. We have ‘green’ demands that the use of oil must be reduced. We have demand for lithium to feed the demand for electric cars. We have windmills popping up in the most unlikely places.
Yet the price of oil stubbornly refuses to drop. Remember how when oil was $12 per barrel and then we had the oil embargo? The price of oil sparked anger and fear and politicians everywhere made speeches about conservation and alternative energy sources. There was doom and gloom about how the Western world would be bankrupt if the price of oil stayed above $30 per barrel.
What would they say if the price of oil in a supposed period of low demand stayed above $70 per barrel, or even above $80 per barrel, as it is now.
Wake up and smell the roses. The demand for oil continues to exceed supply and the price of oil will continue to rise. Forget about doom and gloom. Forget about the currency wars. Buy oil. Buy oil calls. Buy oil producers. And then sit back and wait.
In hindsight, you will look very astute.
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