Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Posted: Wed Sep 28, 2005 1:55 am Post subject: Re: World Dollar crash?
Quote:
Question: I once read that one of the various reasons for holding Dollars in reserve is to hedge against sudden spikes in the price of oil. That would suggest that the Dollar has practically become a derivative of oil. Is this correct?
It is quite easy to back test. Take the daily price of oil for the past 3-years and put it in a spread sheet. Take the daily price of the dollar either against the euro or the yen for example. You can use a basket price if you wish. Then run a simple regression analysis. It will tell you to what extent the dollar is correlated to the price of oil or to what extent the price of oil is correlated to the price of the dollar. What you will see is that the correlation is very low. (I will run it today and post the results).
Whereas the dollar in the past 3-years weakened off from 0.9600 against the euro (for example, but also will check against yen) to a high of 1.3670 (or approx. 42%) at the end of 2004/begin 2005 the price of oil rose approx. from $25 to $45 over the same period or about 80%. Since the begin of 2005 the dollar has fallen from 1.3670 to 1.20 area or about -13%. Meanwhile the price of oi has risen from $45 to a high of $70.85 or another 57%. So while the price of oil went from $25 to $70 (or 280%) the dollar against the euro fell 25% in value, but went both up and down. Not a very strong trading signal and a lousy hedge.
One of the factors which drove the price of oil up was a weak dollar. This made oil less expensive in euros, yen and other non-dollar currencies (not in absolute terms, but comparatively).
I just chose 2003-2005 because I happened to have the charts in front of me. If I used 1999 when oil was $15.60 and the legacy currency the euro the ECU (or the basket of DEM, FFR, NLG, etc.) was at approx. at Par with the USD then the dollar weakened off 20% while the price of oil rose 450%. Far from getting a free ride on the back of oil, America pays more for the stuff than Europe or Asia because the dollar has been weakening.
Quote:
Please note, I did this very quickly using the charts in front of me and not actual data to calculate the exact percentages, so my methodology is not water tight. The conclusions are the same. I used the front month of WTI for my price of oil. And, quarterly data for the FX.
_________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Wed Sep 28, 2005 7:06 am Post subject: Re: World Dollar crash?
...an exert from my book as an fyi...
In 2004 several surprising stories appeared in the foreign media that addressed the complex issues of OPEC’s momentum toward a potential petroeuro, giving further credence to Turk’s theory that OPEC may be tacitly pricing oil in the euro. [1] The following commentary from February 2004 reinforced this assertion:
'The average price for the Organization of Petroleum Exporting Countries’ basket of seven benchmark crudes slipped by 8˘ to $30.44/bbl Thursday.
‘The value of the OPEC basket has been above the $22–28 target range for 108 trading days over the past 8 months,’ Horsnell noted. ‘Over the same period, the value of the OPEC basket in euros has stayed within a 22–28 euros band on all but just 2 trading days, and on those 2 days it was below the band.’
He said, ‘This is of course just a rather bizarre statistical coincidence. It certainly does not imply that the target band has been secretly switched into euros or that the dollar has lot its primacy in the oil market.’ [2]
Whether this observation was a “bizarre statistical coincidence” or purposeful design, it is clear that OPEC members are trying to maintain their purchasing power in the face of a devalued dollar. The question is, Can OPEC be motivated to continue pricing oil exclusively in dollars if under threat from neoconservative unilateralism, or will they gradually move toward a formal euro pricing mechanism? The likely answer to that question was addressed in the following excerpt from a Toronto newspaper, the Globe and Mail, in January 2004:
'OPEC is considering a move away from using the US dollar — and to the euro — to set its price targets for crude oil, the highest-profile manifestation of the debilitating effect of depreciation on the greenback’s standing as the currency of international commerce.
Several members of the Organization of Petroleum Exporting Countries are seeking formal talks on using the euro, as well as the US dollar, when determining price targets for crude, a senior oil minister within the cartel said Monday. ‘There are countries that are proposing this,’ Venezuela’s Oil Minister Rafael Ramirez said in Caracas. ‘It’s out there, under discussion.’ Mr. Ramirez did not specify which OPEC members are pushing the proposal, but much of the impetus is believed to come from Persian Gulf producers."
The November 2004 Center of American Progress’s study of the dollar, euro, and price of crude oil illustrated that oil prices and the dollar’s valuation are now moving in the opposite direction. The economist who analysed this reached the same conclusion previously noted:
"To compensate for this loss of buying power, [oil producers] may have raised the dollar price for oil. As a result, while oil prices in dollars rose by 162 percent from their low point in January 2002, they climbed by less than half that rate measured in euros, 77 percent. At that rate, oil prices would have only risen to $34 per barrel in October 2004, instead of the actual $52, without changes in the dollar’s value.” [3]
Since 2002–2003, American energy consumers have felt the effects of higher oil prices far more than EU consumers. This is the opposite of what one would expect if OPEC were pricing oil trades solely on the US dollar. While it is very doubtful that all ten OPEC countries (excluding Iraq) would voluntarily chose to abandon the dollar completely, it is increasingly likely that they, along with Russia, will continue to pursue methods to retain their holdings by shifting currencies in their central banks, increasing the price within the pricing band, or formally denominating oil sales in a basket of currencies.
OPEC contemplated this last option in early as the 1970s, following the collapse of the Bretton Woods Agreement, and ongoing macroeconomic trends will result in a formal announcement to price oil a basket of currencies. [4] The dollar’s accelerating decline makes this inevitable. This is yet another reason why reducing excessive consumption and subsequently the level of imported energy is in the long-term economic and national security interests of the US.
Posted: Wed Sep 28, 2005 11:21 am Post subject: Re: World Dollar crash?
Quote:
"To compensate for this loss of buying power, [oil producers] may have raised the dollar price for oil. As a result, while oil prices in dollars rose by 162 percent from their low point in January 2002, they climbed by less than half that rate measured in euros, 77 percent. At that rate, oil prices would have only risen to $34 per barrel in October 2004, instead of the actual $52, without changes in the dollar’s value.” [3]
Since 2002–2003, American energy consumers have felt the effects of higher oil prices far more than EU consumers. This is the opposite of what one would expect if OPEC were pricing oil trades solely on the US dollar. While it is very doubtful that all ten OPEC countries (excluding Iraq) would voluntarily chose to abandon the dollar completely, it is increasingly likely that they, along with Russia, will continue to pursue methods to retain their holdings by shifting currencies in their central banks, increasing the price within the pricing band, or formally denominating oil sales in a basket of currencies.
I agree with most of this except I do not believe it was OPEC trying to impose their will on the market, but rather a cheaper dollar stimulated demand for oil which contributed to its rise in price. Keeping in mind that OPEC does not control the price of oil alone, but shares this honor with non-OPEC producers, at least at the moment. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Sep 29, 2005 5:50 am Post subject: Re: World Dollar crash?
very good article in the Guardian linked from LATOC (thanks Matt!).
Larry Elliott is starting to sound like Stephen Roach...
but he is really just analysing what the IMF is saying about the US economy, and, well, it's starting to sound quite ominous.
like the IMF economists are bracing for when TSHTF.
you know, like...Stephen Roach
We can do this the nice way ... or the nasty way
Larry Elliott, economics editor
Tuesday September 27, 2005
The Guardian
Quote:
To trigger a crisis, holders of US assets don't necessarily need to sell them; all they need to do is to stop buying more. To be sure, the US can be allowed to continue along its current path, with the cooperation of the central banks of China, Japan and other Asian countries, but this would mean an even bigger adjustment in exchange rates when the day of reckoning finally arrived, and an even bigger haircut for those awash with US assets.
Apart from the dire consequences for the global economy that would result from a disorderly unwinding of the imbalances, there are two additional causes for concern. One is that while the IMF has analysed the dilemma with aplomb, neither it nor any other body involved in global economic governance seems to have the clout to do anything about preventing a meltdown. There is a vacuum that needs to be filled and urgently.
The second concern is this: underlying the policy recommendations of just about every global analyst is the belief that the rest of the world needs to emulate the economic model of the US. The calls for structural reform in Japan and Europe stem from the belief that the Americans and the other "Anglo-Saxon" economies have the sort of flexibility that breeds success. Yet that hardly squares with the IMF's notion that the US economy could be going down the pan at any moment. As Mark Weisbrot of the Centre for Economic and Policy Research, a Washington-based thinktank, points out, nor does it square with the long-term needs of sustainability. Europe's energy consumption per head is half that of the US: Weisbrot says the idea that the Europeans should work longer so that they can buy more things is dangerous and he's right.
Perhaps the Germans were a lot smarter than they've been given credit for in their scepticism about the need for neo-liberal structural reform.
Posted: Thu Sep 29, 2005 10:26 am Post subject: Re: World Dollar crash?
MrBill wrote:
... Far from getting a free ride on the back of oil, America pays more for the stuff than Europe or Asia because the dollar has been weakening.
I do not understand how you can see the that the US is not getting a free ride on the back of oil. (Or maybe I misunderstood what you meant with getting a free ride)
If it takes hardly no effort to print more money and the devaluing coming from it is paid for by everyone sitting on US$ (like foreign banks), while the US now gets more US$ and a thus a larger share. The underlying assets haven't changed but the US now has gotten a larger share for free. It will probably cause an increase in the price of a barrel of oil in US$, but the foreign holders of US$ will be the ones that pay for it. And demand for US$ will rise from these countries (should oil demand and everything else stay the same, which it never does). I call that a free ride (and it applies to everything that is only traded in dollars). That however does not mean that this is the only thing that affects the value of the US$ or the value of the euro or the price of oil. Speculators affect the value of the currencies and oil as well as you mentioned in another thread. To me that makes it impossible to filter out this free ride from the endresult numbers: USD/EUR and oil (WTI) in USD. (Are you searching for the pattern if oil is down -> USD/EUR is down. And if oil is up -> USD/EUR is up? )
I see it like when you print your own money which makes the value of the money go down a lot, even though I give you some of my gold for free to back some of that money. Then you say you don't get a free ride from me, because you cannot find a correlation between me giving you gold for free and the value of your money. To be able to see it you would have to know how much all the other factors are influencing the value of your money (and I doubt anyone can in reality).
Posted: Fri Sep 30, 2005 12:49 am Post subject: Re: World Dollar crash?
Mr. Bill, you seem to offer some compelling arguments about how the dollar has devalued relative to other currencies over the course of the past quarter century. That said, I am confused about how so many people can still contend that a) prior to this past recession, the US was pursuing a strong dollar policy and b) that the Dollar has been overvalued for some time now, explaining both the globalization push and our appetite for importing consumables.
What am I missing? Because of my work, I am switching from a heavy background in engineering and applied math to finance theory. However, sometimes I still feel like I can't see the forest for the trees. So, any help in reconciling my understanding of the above is greatly appreciated!
Posted: Tue Oct 04, 2005 2:25 am Post subject: Re: World Dollar crash?
I think this is the nut of the argument. There are no easy answers. You cannot separate the value of the dollar from the value of oil. Nor is that to say that the dollar is strong because the price of oil went up. It has not. The dollar is in a state of decline, punctuated by brief rallies. I wish my PC was networked with my Reuters so that I could post some charts for illustration. I will have to work on that.
In the meantime, let us say for argument's sake that one barrel of oil is worth $65 and the dollar is worth 1.2000 against the euro and 115 against the yen.
One barrel costs $65 for the American, EUR54.17 for the European, and JPY 7475 for the Japanese consumer. Let's get this straight. No one is paying for their gasoline in gold or going down to the service station for work for 5-6 hours for a tank of gas. They are all paying in their home currencies which are printed by their national bank.
Fast forward one year. Oil prices are high, so demand goes down slightly and this time next year we find the price unchanged at $65 per barrel. However, Bush pushed through tax cuts and borrowed another $500 million to pay for Iraq, Katerina, etc. So, everyone at Peak Oil said enough is enough and they sold their dollars to buy euros and yen. Now the dollar is worth 1.4000 against the euro and 98.50 against the yen. The dollar has lost about 14-15% of its external value against the euro and the yen. The US still imports at least 60% of its energy needs the same as before. It has to buy oil, but so do Europe and Japan. Nothing has changed except for the value of the dollar.
Americans still pay $65 for their barrel of oil. However, Europeans only pay EUR46.43 and the Japanese only pay JPY 6403. The European saves EUR 7.74 while the Japanese pay JPY 1072 less for the same amount of oil. They are better off. The American is not better off he still pays the same while his competitors pay less. And, as the Japanese buy America's debt they either get the same amount of US debt for less yen or they can buy more US debt.
Meanwhile, the US government happily prints money to make up this short fall. Inflation goes up, so not only do Americans now pay more for their gasoline relative to the Europeans and the Japanese, but they have less money to buy imports from the Europeans and the Japanese because inflation is higher, interest rates are higher to attract foreign capital to subsidize the deficit, and as Americans pay more for their gas than Europe or Japan their consumers have less money for other things like BMWs and Toyotas.
Fast forward two years from now. Oil is still $65 due to that lower demand and new supply coming online. America is still running a budget and trade deficit, but to pay for it interest rates are higher again and the dollar is weaker still. Say 1.600 and 72.50 or another 15%. I think at this point the Arabs are very unhappy about pricing oil in dollars and the Japanese are no longer keen to buy US debt. Then interest rates have to go significantly higher causing a recession or stagflation or the US would have to take the unbelievable step of issuing debt in euros or yen. This is the end game.
I hardly call this a free ride just because the transaction and price discovery mechanism are in dollars. It comes down to purchasing power parity of the dollar versus the euro and the yen. However, a stronger euro and yen will also tend to lower their own domestic inflation and hurt their export industries. They may experience just as much pain as America if it goes thud! _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Oct 04, 2005 2:36 am Post subject: Re: World Dollar crash?
Quote:
What am I missing? Because of my work, I am switching from a heavy background in engineering and applied math to finance theory.
You are indeed luckier than I am. Not only am I dislexic, but I suffer from math anxiety and my one and only engineering class was beyond my limited understanding.
I wish I could better understand more complex mathematic models rather than just interpreting the results, and as in the words of Mssrs. Black & Sholes, "vacuum coins off the bottom of the swimming pool that no one else can see"? Mind you it didn't help them much at Long Term Capital as they forgot about the concept of auto-correlation and about how important liquidity is to the market! _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Mar 28, 2005 Posts: 399 Location: Northern California, USA
Posted: Tue Oct 04, 2005 3:20 am Post subject: Re: World Dollar crash?
[quote="MrBill"]
Quote:
And that investors are not smart enough to learn the truth, so they continue to buy US treasuries in what appears a very deep and liquid market, but it isn't?
OH YOU WANT LIQUIDITY! Mr Ben Bernanke will give you LIQUIDITY!
Speech By Fed Governor Ben Bernanke Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
They also regularly use this electronic printing press to buy treasuries via open market operations.
It seems like you guys act like Europe and the Euro are going to be the economic wonderland of the future.
WRONG!
Everybody is dying for someplace to invest that is better than America and they can't find it. Asia is already way overinvested because the state owned banks, especially in China, have flooded the markets with all kinds of ridiculous loans that they don't care if they're ever paid back. How are you going to give better terms than that, the Chinese companies don't wnat your freakin' money and they don't really care if you buy their stock either . They have free loans from the government!
All the saver money piling up in China wants to go to Europe but the rates on Bond yields are going to nothing because what are the Europeans going to do with it when the economy is so screwed that they have rates at 2% in germany and they have 10% unemployment?
Don't even think of putting your money in Russia. If you make too much you'll wind up in jail or on Putin's S*** list just like Berezovsky and Khodorkovsky.
So what does that leave? South Africa and South American which have both been going bonkers lately. Japan has finally washed out too after 15 years of stock market collapse! Oh yeah and if you really need to throw money away there's those super risky U.S treasuries.
Posted: Tue Oct 04, 2005 8:03 am Post subject: Re: World Dollar crash?
Quote:
Don't even think of putting your money in Russia. If you make too much you'll wind up in jail or on Putin's S*** list just like Berezovsky and Khodorkovsky.
Dunno? RTS up 70% this year? Lukoil gone from $28.80 to $60.60 or +100%? Russian Federation bonds up 15%? The ruble has lost just 3% of its value against a stronger dollar, but is up 9.5% againt the euro? There are worse places to invest than Russia. China was your example. Mind you don't mix business with politics. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Mar 28, 2005 Posts: 399 Location: Northern California, USA
Posted: Tue Oct 04, 2005 8:09 am Post subject: Re: World Dollar crash?
MrBill wrote:
Quote:
Don't even think of putting your money in Russia. If you make too much you'll wind up in jail or on Putin's S*** list just like Berezovsky and Khodorkovsky.
Dunno? RTS up 70% this year? Lukoil gone from $28.80 to $60.60 or +100%? Russian Federation bonds up 15%? The ruble has lost just 3% of its value against a stronger dollar, but is up 9.5% againt the euro? There are worse places to invest than Russia. China was your example. Mind you don't mix business with politics.
Yeah, you're right! Thanks for pointing that out. Come to think of it, Russia will probably be a great investment. They're well on their way to becoming the world's energy hub and they really have the industrial and science capacity and China connections to exploit their resources effectively. However, they do default on bonds. They do renationalize companies occasionally. They have somewhat politicized tax enforcement. It's a high return market with a lot of potential but you should be aware of the political situation. For instance you could have bought this winner :Yukos which went from 60 to 1.5 because the CEO rubbed Putin the wrong way (Thought it might be a good contrarian play right now). If you want to invest in Russia you must follow politics and who is buddies with Putin and who isn't or one day you'll find that the whole board has fled the country the CEO is in jail and the assets of the entire company are frozen.
The U.S has plenty of coal and Uranium but far too many radical environmentalists and lawyers willing to work on their behalf for free to do anything but be a deer in the headlights during the coming energy crisis. There are a lot of people, especially on this board, who would rather see the whole country collapse and half the population starve to death than build another nuke plant. It seems that even Bush can't get anywhere with regards to energy policy with a Republican congress, senate and supreme court.
Posted: Tue Oct 04, 2005 8:38 am Post subject: Re: World Dollar crash?
By the way, if anyone is interested you can read a different take on where to invest in Russia written by Eric Kraus & crew at Slovlink Securities. They cover a lot of second tier investments. More than the so called Russian Blue Chips like Lukoil covered by everyone else.
They are very pointed in their criticisms when they have them.
Eric Kraus was on CNN yesterday in case anyone caught him? In any case, Truth & Beauty can be had by contacting
Quote:
research@sovlink.ru
p.s. I have no affiliation to them and only read them out of interest. For me, Russia is a great would of, should of, could of investment, but too rich for my blood right now. Cheers. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Sep 01, 2005 Posts: 276 Location: New Hampshire USA
Posted: Sat Apr 19, 2008 9:49 pm Post subject: Re: World Dollar crash?
Quote:
Fast forward two years from now. Oil is still $65 due to that lower demand and new supply coming online. America is still running a budget and trade deficit, but to pay for it interest rates are higher again and the dollar is weaker still. Say 1.600 and 72.50 or another 15%. I think at this point the Arabs are very unhappy about pricing oil in dollars and the Japanese are no longer keen to buy US debt. Then interest rates have to go significantly higher causing a recession or stagflation or the US would have to take the unbelievable step of issuing debt in euros or yen. This is the end game.
It's been over two years since this was written. What I would like to know, will the US take up the Euro or Yen to pay off debt? Sounds unbelievable, but many thing do these days!
Posted: Sun Apr 20, 2008 7:25 am Post subject: Re: World Dollar crash?
MrBean wrote:
After you, for example do you agree or disagree with what I said in the part that of my post you didn't quote or comment? But even humble ignoramus like me has read enough to know that those figures are not generally worth the paper they are printed on, OPEC reserves, GDP, rigged inflation numbers, rigged employment numbers, PPT rigged stock exchange etc., the whole field of mainstream economics of market fundamentalism that almost categorically ignores the empirical methodology and intellectual honesty that is required for a field of science.
there are economists and there are economists.
e.g. John Shoven & George Leland Bach, 2 of my professors in college. they would look at rigged inflation numbers and say, "hey ! these are rigged !"
if memory serves, when some admin. needed a Stanford prof. to put a seal of approval on some BS economics wise, they hired Boskin.
not all economists are in the vein of bought-and-paid-for science. _________________ http://www.LASIK-Flap.com/ ~ Health Warning about LASIK Eye Surgery
Hmmm Europe is going to loss alot of trade to the US especialy in the big high tech areas, Arianespace, Airbus and EADS amoung others will be the losers. But on the other hand the old Germans have lived with strong currencies since the 70s at least.
Id guess a two or three year recession is better than 'locking in' (to use the trendy British term) inflation and price instability. They will attract more foriegn investment and capital to soak up the credit 'crisis' (there must be a bloody better term than subprime crisis or credit crunch) in there financial institutions leaving them in a stronger long term position.
Better to take the hit on the dollars "begger thy neighbour' devaluation and still be able to buy raw materials like say ooooh oil on the world market.
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So, any help in reconciling my understanding of the above is greatly appreciated!
