Tuesday, April 26, 2011

America: The Best Government Money Can Buy

These gas prices are kicking all of us in the rear end. Many blame the President, others commodity market speculators and still others OPEC. But they all are off from the way I see the issue. The real issue and the culprit is the US dollar. Specifically, its reduced value and purchasing power.

It seems almost intentional, avoiding the declining value of the dollar for the pricing increases we are seeing in everything from oil to food to gas. Politicians seem to just want to exploit the issue by appealing to popular sentiment. The fact is that the US dollar continues to hit record lows against all major foreign currencies especially the yuan, Euro and the Yen. Add to that the recent IMF findings that China’s economy will surpass that of America in 2016, it is more that meets the eye when speaking about the rising cost of gas. Why? Because we are not going through a recovery as the government suggest but rather a debt spending boom based on the home buying explosion of years past.

Truth is US household debt reached a high in June of $8.7 trillion, and with rising unemployment and no economic growth, it is reflected in the reduced value of the dollar. Such impacts negatively US Treasuries especially since now the Japanese government will need to sell its US Treasuries to deal with and pay for cleaning up and rebuilding after the Earthquake. Add to this gumbo China, which has the largest dollar surplus in the world, saw it foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Now back to oil and gas. In simple terms, the weakness in the US dollar is causing everything to go up. This in an environment in which the rate of new debt growth among families is growing and the overall US manufacturing economy declines. This inherently impacts the dollar since what politicians ignore in their budget and deficit battles is the fact that US trade deficits and the Dollar System are connected.

Historically, in 1944 the Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, defining the dollar in value to be 1/35th of an ounce of gold. In 1971, when President Nixon refused to pay out any of our remaining 280 million ounces of gold, he made the dollar what is today.

Oil is a critical economic and strategic resource and since it is traded in US$, when the US$ weakens, in terms of any other major foreign currency, the countries exporting oil get less. Thus when the dollar goes down in buying power they ask for more US$ for a barrel of oil. This gets even trickier since there is no shortage of oil via production currently. But what they see is our economy, let us say compared to a China which by estimates will expand from $11.2 trillion this year to $19 trillion in 2016, while the U.S. economy will rise from $15.2 trillion to $18.8 trillion. Strange, since it was just a decade ago when the U.S. economy was three times the size of China’s.

All I am trying to say is that the America we once knew with the all powerful dollar bill isn’t the same. The fact is that we have a surplus of oil and that we are not refining gasoline/ In addition, what we are seeing is the impact of a weaker dollar on oil demand in non-dollar economies. Oil producers sell their products in dollars. The dollars they get are used to buy other stuff around the globe. If it cost them more dollars to do so then they have to sell their oil for more dollars.

And as long as the U.S. Dollar is continuously devalued (inflated) by Federal Reserve and U.S. government monetary policies, oil producing nations will lose money if they don’t raise the price.

Yep the problem is our government and our monetary policies. The dollar may never be the same. Yet all the time wall street, big oil companies and politicians are getting richer as the sell all that made America great away to corporations and other nations through our monetary policy. Yep, that’s America; the greatest and best government money can buy.


rainywalker said...

Agree completely!

gih said...

Well, that's really existed.


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