Musings Report 2017:38 9-23-17 The US Dollar, Debt, Oil and Collapse
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The US Dollar, Debt, Oil and Collapse
Last week I wrote a lengthy explanation about why the US dollar (USD) isn't about to crater, as so many expect.
In this Musings, I want to extend that discussion a bit.
Why should we care whether the USD is up or down against other major currencies? It's true, currency /Foreign Exchange (FX) fluctuations don't really matter much in our everyday lives--except for one thing: the price of oil.
As you can see on this chart of the trade-weighted USD, when the dollar is strong (peaks),oil is cheap, and at the troughs (valleys), oil is expensive.
The reason why is straightforward: if the dollar gains 50% more purchasing power against other currencies, it buys more oil for each dollar.
Conversely, when the USD weakens, its purchasing power declines and it takes more USD to buy an imported barrel of oil or unit of natural gas.
(Note that the price of domestically produced oil is largely set on the global marketplace. West Texas crude oil may be a few dollars less per barrel than Brent crude oil, but if the global price skyrockets, so does US-produced crude.)
Since oil and gas are the essential resources of the industrial economy, the price paid by consumers and commercial users matter.
The one way the US can get an across-the-board global discount on imported oil/gas is to push the purchasing power of the USD higher. That is an enormous incentive that few commentators ever mention. Instead, pundits talk about the benefits of a weak dollar, which boil down to lower priced exports.
This is a very modest gain compared to the "discount" on imported oil/gas reaped by a rising USD.
If a recession were to pressure household budgets, the one sure way to lower household spending on oil/gas would be to strengthen the USD.
There are two basic ways to do this: raise interest rates, so global capital flows to the US to earn the higher yield, and a global financial crisis which causes global capital to seek the relative safe haven of the USD.
In a global crisis, liquidity and credit will dry up, and all those holding the $11 trillion in USD-denominated debt I mentioned on Friday will be scrambling for USD to service their debts. This will also increase demand for USD higher, pushing the USD higher.
That said, the entire overleveraged fiat-currency/debt system will collapse at some point, for it's not creating new real wealth, it's simply piling phantom wealth on the same real-world assets. We know the end-game (collapse) but not the "when" or the precise "how."
Summary of the Blog This Past Week
The Demise of the Dollar: Don't Hold Your Breath 9/22/17
Loving Our Debt-Serfdom: Our Neofeudal Status Quo 9/21/17
Financialization and The Destruction of the Real Economy 9/20/17
What Is Real Wealth? 9/19/17
Are Facebook and Google the New Colonial Powers? 9/18/17
Best Thing That Happened To Me This Week
I'm halfway through the rewrite of my secret project, i.e. my next book. The lash had to cut deep to keep me at the grind wheel...
Market Musings: Copper and Oil: Which is Right about the Global Economy?
Last week I looked at copper as a gauge of global economic expansion/reflation. Copper took off like a banshee around November 2016, paused in summer and then exploded higher.
Copper is signaling the global economy is already expanding sharply. Oil begs to differ.
While stocks and copper have levitated higher since November 2016, oil has remained range-bound since April of 2016--roughly 18 months of going nowhere.
Oil is signaling that global demand for the most important resource--fossil energy--is flat or stagnating.
It's hard to see how demand for energy can be stagnant in an expanding global economy.
So it seems only one can be correct--copper or oil. If both roll over, the global reflation will be revealed as a speculative play driven by central bank liquidity rather than real-world demand.
From Left Field
Why the Trump dynasty will last sixteen years -- how's that for an incendiary title? Don't be too quick to dismiss Luttwak...
How is a corrupt criminal like Jamie Dimon, not in prison for fraud? -- a question the MSM never asks....
The Empire Strikes Back with a Coordinated War on Cryptocurrencies -- it's not coincidence...
Hang on to your cash. This dash to digitise payments is dangerous
The End Of Capitalism Is Already Starting–If You Know Where To Look
What we sow is what we eat -- yup...
Biased Algorithms Are Everywhere, and No One Seems to Care -- or know how to deal with this issue...
Do yoga, work harder: how productivity co-opted relaxation -- we must use our free time to become more productive, lest we get culled from the corporate herd...
A Wonk on the Wild Side -- a review of Hillary Clinton's new book
This ancient mnemonic technique builds a palace of memory -- lots of memorization took place in the Gulag...
A hundred years of Crypto Anarchy -- Elaine Ou, unfailingly interesting....
When Stalin Faced Hitler -- insightful long read, recommended for history buffs....
"You cannot find a peril so great that the hope of reward will not be greater." Prince Henry the Navigator
Thanks for reading--
charles |
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