Dollar: Faltering Foundation of US Economic Strength

I wrote this article back in Jan of 2008 in an attempt to shed light on the past history and likely future of the US Dollar as the World's reserve... Bottom line, dollar hegemony will eventually end and when this happens our standard of living will fall precipitously.

Since the end of World War II, the central foundation of US Economic Strength has rested on the US Dollar. Many of our strategic plans, geopolitical strategies, past and future wars--the entire global chess board if you will, has been played out by trying to maintain our undisputed economic power, based primarily through ownership of the World’s Reserve Currency.

SOME HISTORY ON THE DOLLAR

Throughout the history of the world, there have always been strong currencies, usually held by the economic powerhouses of the day. Theses currencies were primarily called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).

Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).

The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that we were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is ~ $900).

This Nixon shock of August 1971 caused a swift devaluation of the US dollar (gold doubled in price by 1972) and numerous efforts followed (by U.S. leadership) to develop a new system of international monetary management. They felt they must find another way, as currencies around the world were in turmoil and were now floating among one another…

The year 1974 provided the much needed answer. In June of 1974, Secretary of State Henry Kissinger established the US-Saudi Arabian Joint Commission on Economic Cooperation. One of the major components of this commission stated that OPEC would officially agree to sell its oil only for dollars—meaning any country purchasing oil from OPEC had to pay in U.S. dollars. This agreement enormously increased the demand for the floating dollar, as oil importing countries now had to earn or borrow dollars to pay for their oil.

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

Bottom Line: this 1974 act reestablished the dollar as the global monetary instrument and oil now replaced gold as basis for a strong dollar. Countries competed for dollars and they accumulated huge dollar reserves to sustain their own currencies.

Please allow me to shift gears a bit—we’ll get back to the dollar in a moment:
Post WWII, the US was the world’s manufacturing powerhouse, as our continent was unscathed by the ravages of war and the military industrial machine was running at maximum efficiency.

That however has changed over time, as thousands of corporations succumbed to the pressures of improving their bottom lines. Entire sectors were outsourced: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology and numerous others are now gone. Heck, you can’t even find a pair of Levis (the American Trademark) made in the good ole USA anymore.

Why did this happen? It’s all related to profits… A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $15-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like. Delphi, General Motors and Ford are prime examples of the growing trend of companies feeling the pressures. I expect to see more US corporate and worker problems in the future…

Outsourcing however did have its benefits. For many years we Americans were able to export inflation through the import of cheap manufactured goods and recycled dollars. Foreign manufacturing allowed Americans to purchase many things that otherwise they could have never afforded had they been made in the USA (e.g. $20 Jeans, $29 DVD players, $50 Microwave ovens, $60 cell phones, $100 TV’s; $200 computers, the list goes on and on). Our standard of living rose, but we eventually became a service-based economy dependant upon 1) selling each other foreign made goods and 2) foreigners recycling their excess dollars back to the US.

This foreign recycling of dollars provided Americans with low interest rates, plenty of available credit and it allowed us to live far beyond our means through cheap debt.

On the negative side, foreign governments built up huge dollar denominated holdings that they could use to secure long-term energy agreements, purchase Global assets/corporations, etc and these massive holdings realistically (it will never be admitted) tied our hands geo-politically, as foreign governments could now threaten to dump dollars into the world market as retribution for disliked policy.

Back to the dollar:

Once removed from the gold standard in 1971, the US dollar became a fiat currency (tied to nothing tangible and it was backed only by the word of the US government). The Fed Reserve Banking System could now print money at will -- and they did. Take a look at the chart below and the growth in M3 money supply since 1971. This chart ends in 2006, but (in case your wondering) today’s figure is ~ $12.5 Trillion.




As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars that were created from nothing. These dollars are then used by foreign central banks to purchase US assets (corporations, land, properties, etc) or debt instruments from the Fed, or they amass these excess dollars to keep inflation tame within their borders, as many have their own currencies pegged to the exchange rate of the US Dollar.

It is currently estimated that foreign governments (OPEC Nations, China, Japan, India, Great Britain, Korea, Russia, etc) have amassed ~ $4 Trillion of US dollar holdings. China alone is sitting on ~ $1 Trillion (Pretty scary stuff).

Over the last several years, foreign Central banks have started to become leery with the huge debt levels, massive trade deficits and unsustainable fiscal policy of the US and they are quietly working to diversify their dollar holdings.

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, has become far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking domestic inflation), therefore several countries have started a new trend of depegging. Recently, Vietnam, Qatar and Kuwait have all depegged while a host of others (Russia, and other OPEC Nations) are questioning whether or not they should do the same… When this currency de-peg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase commensurately (e.g. Oil, consumer goods, etc)

Lastly, governments such as IRAN no longer want to accept dollars for oil. This was also the case with IRAQ back in Saddam Hussein’s day, but we all know what happened there. Anyway, the point is: There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar. If that happens on a larger scale, the artificial foundation for the World’s Reserve currency will be removed and all hell could break loose.

Bernanke: Rather than try to shore up foreign confidence in the dollar, Helicopter Ben Bernanke has made matters worse by officially sacrificing the dollar to save our faltering, sub-prime like, US banking/financial systems… By lowering rates at a time when the dollar is already at its weakest point in history, there is no other explanation to his actions.

Bottom line: Demand for the World’s Reserve Currency (dollar) has been kept artificially high for many years through oil pricing agreements and US inflation was held in check by importing cheaper goods. These were both net benefits for the US in times past, but are quickly moving towards being detriments.


Closing:

The US was once an economic powerhouse who earned the right to own/maintain the World’s Reserve currency, but we’ve squandered this luxury through massive debt loads, poor foreign policy decisions, excessive monetary printing, outsourcing our industrial base, making too many future promises and by living way beyond our means.

Foreign Governments are now growing tired of subsidizing our opulent lifestyles, and the recent fact that we put the world financial system in peril by offloading our toxic securitized garbage was (I believe) one of the final straws to break the dollar’s back. In another ~ 10 years, dollar hegemony will probably be a thing of the past. Our central foundation of US Economic Strength (dollar) is faltering and there is little we can do about it.

With that said, I think the Fed and our government officials are already aware of this and without any viable solutions to our current financial problems (baring raising interest rates and initiating a massive depression) they have made the best choice they can (cut rates and inflate).

I believe it has now become a matter of (unwritten) policy to try to hyper-inflate our financial system out of its current and future insolvency crisis. In their attempt to inflate, the world will experience significant dollar devaluations which will (over time) allow the United States to 1) eliminate much of its foreign debt and 2) pay for future (currently un-funded) obligations through devalued payouts.

As our standard of living drops more in-line with the rest of the world due to loss of purchasing power and a massive economic slowdown, it will (over time) become much cheaper to employ American workers again and this will slowly bring jobs back into our borders. Eventually, 20-30 years from now, our country will become competitive in the world again and we will do more than just sell each other cheaply made foreign goods--we will actually manufacture them again. BUT, we will (most likely) no longer own the World's Reserve Currency nor will we be the World's main economic power.

Ultimately, I believe massive currency devaluation and a much lower US standard of living is our country's only way out of this financial predicament...

The only wildcard I can think of is Oil. How in the world do we survive without cheap oil?
Guess we'll need to work out some new strategic plans and geopolitical strategies -- and I'll bet they lead to:

WAR!

Regards

Randy

Dutch withdraw spy from Iran because of 'impending US attack'

I have been discussing issues related to IRAN for quite some time now - and this Blog has even been shut down (for unknown reasons, by unknown entities) in very short order after previous Iran posts... Let's hope this one is doesn't cause a shutdown.

Anyway, many are predicting Iran will be attacked soon. Even John Bolton, the former American ambassador to the United Nations, has stated Israel may attack Iran after the November presidential election but before George W Bush's successor is sworn in - that way, whoever gets elected is stuck dealing with the situation.

Here are a few of my archived articles - discussing reasons why Iran may be attacked:

IRAN has Bush over a Barrel

Dollar: Faltering Foundation of US Economic Strength

Israelis 'rehearse Iran attack'

OPEC and the Dollar Peg

Iran’s Oil Bourse Set to Open this Sunday

Reason For Today's Post (hat tip Justin)

Telegraph.co.uk: The Dutch intelligence service has pulled an agent out of an "ultra-secret operation" spying on Iran's military industry because spymasters in Netherlands believe a United States air attack was imminent.

According to reports in the newspaper De Telegraaf, the country's intelligence service, the AIVD, has stopped an espionage operation aimed at infiltration and sabotage of the weapons industry in Iran.

"The operation, described as extremely successful, was halted recently in connection with plans for an impending US air attack on Iran," said the report.

"Targets would also be bombed which were connected with the Dutch espionage action."

"Well placed" sources told the paper that a top agent had been recalled recently "because the US was thought to be making a decision within weeks to attack Iran with unmanned aircraft".

"Information from the AIVD operation has in recent years been shared with the American CIA secret service."

Brig Gen Seyyed Massoud Jazayeri, deputy chief of the Iranian armed forces, warned at the weekend that military attacks against Iran would trigger a Third World War.

"The exorbitant demands of the US leaders and the global Zionism which have created the current situation in Iraq, Afghanistan, Sudan and Caucasus are gradually directing the world to the edge of the cliff," he said.

The US has refused to rule out a military attack against Iran if its government continues to enrich uranium as part of its civilian nuclear programme, which the West suspects has the clandestine objective of developing atomic weapons.

Iran has warned it would close the strategic Strait of Hormuz, the entrance to the Gulf and a major oil shipping route, if it is attacked.

On Friday, the Israel newspaper Ma'ariv reported that Israel has stepped up preparations for a contingency plan to attack Iran, should diplomatic efforts, via the United Nations, fail to derail Tehran's suspected nuclear weapons programme.


Other indicators/issues pointing to the potential for attack

Video Below: Fox News: Next Gulf War?

Kuwait, in preparing for confrontation with IRAN, has activated its emergency war plan and is performing exercise drills while a US and British Armada head to the region - believed to be the largest deployment since 1991.





Video Below: Max Keiser - The U.S. recession, dollar and why Bush wants to bomb



Video Below: USA and ISRAEL will attack IRAN before Presidential Election

Afshin Rattansi talks to State Duma Deputy in Moscow about McCain's ties to Georgia, Obama's defeat after a Ukranian Civil War or another George W Bush war - against Iran, and before the U.S. Presidential Elections



Closing Thoughts:

Has anyone else thought it possible that recent strength in the dollar coupled with a massive commodities smackdown (including oil) was an orchestrated play to get inflation/oil under control - allowing an attack to take place. I feel TPTB know prices will soar if/when a new middle east campaign is initiated and it couldn't be done with (previous) out of control prices... Certainly makes sense to me...

Randy

The U.S. recession, the dollar, oil and IRAN

From Paris, Max Keiser, journalist and broadcaster speaks to Afshin Rattansi in Tehran.

Mr. Keiser absolutely nails the real issue that no one in America is talking about!

Could it be that the news we receive through our corporate owned media system is being controlled (not allowed to talk about this subject)? Hmmm...

IRAN has Bush over a Barrel

If you follow this blog regularly, you know I've been talking about IRAN for a couple of years now, and I've been predicting that we'll probably start dropping bombs before the end of Bush's tenure in office.

Why do I feel this way? Well, it's complicated, but I'll try to keep the explanation simple:

The US Dollar has been the World's reserve currency since the end of WWII. This reserve status was seriously threatened in 1971, when Nixon removed the Dollar/Gold peg and changed the dollar from a "commodity" to a "Fiat" currency.

The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974 restored waning confidence in the dollar by mandating that OPEC sell its oil for US Dollars ONLY. Any country who needed oil now needed to earn or borrow dollars to pay for their oil -- creating a huge worldwide demand for the US dollar and any excess dollars eventually got recycled back to the US.



For many years, this excess dollar recycling created a boon for America and these Petrodollars were used by our banking system to create new credit/debt -- helping our economy to grow.

If there were no good reasons for other countries to buy all those American dollars, the dollar would decline in value until the US economy could no longer afford to import goods from abroad.

Additionally, this excess foreign savings that America has grown used to would also dry up—putting us in quite the predicament.

The deal with OPEC however, means other countries have no choice but to buy all those excess American dollars, which props up the value of the dollar and allows the American "import economy" to go on year after year.

Effectively, America's main export is US dollars, and it is absolutely imperative to preserve a captive market for those dollars among oil-consuming countries -- the continued viability of the US economy depends on it. Americans today can still afford to consume because the economy is inundated with cheap imports, but a continued falling dollar will significantly raise the prices of imported goods and our cost of living.

For three decades, America has reaped the benefits of trading our printed dollars (created from nothing) for oil, but as our trade deficits continued to grow beyond comprehension and foreign policy blunders created new enemies, things started to change.

IRAN's Oil Bourse and refusal to take US Dollars for Oil

For decades, most worldwide oil trading took place on the New York Mercantile Exchange (NYMEX) and the London-based International Petroleum Exchange (IPE). This monopoly has recently come under threat.

In Feb 2008, IRAN opened its own oil Bourse (oil trading platform -- similar to NYMEX & IPE) and then refused to accept dollars for their Oil. (Note: Russia has taken similar steps recently and their new Bourse now trades oil for the ruble).

Theses new monetary threats are seriously jeopardizing the artificial "dollar-for-oil" prop and if the threat is not eliminated soon, the status of the US dollar as the world's reserve currency could be called to question.



Recap: Oil replaced gold in the mid 70's as the underlying peg for the USD and until Iran's recent actions all oil transactions around the globe had to be made in USD's. For three decades, oil provided the foundation for the World's reserve currency, but that foundation is starting to crack...


Shifting gears a bit

Though I disagree with Time author Robert Baer's assertion (that Bush can't attack IRAN) made in the article below, Mr. Baer has several very good points that I think everyone needs to think about.

How Iran Has Bush Over a Barrel

If wasn't clear before it should be now: the Bush Administration can't afford to attack Iran. With gas already at $4 a gallon and rising almost every day, Iran figuratively and literally has the United States over a barrel. As much as the Administration is tempted, it is not about to test Iran's promise to "explode" the Middle East if it is attacked.

The Iranians haven't been shy about making clear what's at stake. If the U.S. or Israel so much as drops a bomb on one of its reactors or its military training camps, Iran will shut down Gulf oil exports by launching a barrage of Chinese Silkworm missiles on tankers in the Strait of Hormuz and Arab oil facilities. In the worst case scenario, seventeen million barrels of oil would come off world markets.

One oil speculator told me that oil would hit $200 a barrel within minutes. But Iran's official news agency, Fars, puts it at $300 a barrel. I asked him if Iran is right, what does that mean?

"Four-dollar-a-gallon of gasoline only reflects $100 oil because the refiners' margins are squeezed," he said. "At $300, you have $12 a gallon of gasoline and riots in Newark, Los Angeles, Harlem, Oakland, Cleveland, Detroit, Dallas."

In either case, whether at $200 or $300, Bush does not want to be the President who leaves the White House on a mule-drawn cart. But Iran's blackmail is not just about oil. The Iranians truly believe they have us hostage in Iraq — our supply lines, the acquiescence of the Shi'a in the occupation. It would all change in an instant, though, especially if we were to borrow Iraq to attack Iran. The way Fars put it: "In Iraq, fighters would rise up in solidarity with each other and begin ... making the Tet Offensive in 1968 Vietnam."

If this all sounds very alarming, Iran meant it to, and it seems to be working. On Tuesday Bush was talking about the prospect of new sanctions rather than attacking.

Which leaves Israel. Are the Israelis, who have a lot more on their minds than the price of gas in the United States, going to launch a pre-emptive attack? One hard and fast rule in the Middle East is never rule out Israel's readiness to turn the table over. But an Israeli hawk on Iran, with close ties to Israel's Ministry of Defense, told me to forget about it. "There's not a chance Israel will do anything. Maybe there's a window after the American elections and the new President but even that's doubtful. Washington does not have the stomach for another war."

Israel cannot attack or contain Iran on its own; it needs the full military might of the United States behind it. So in the meantime Israel can only huff and puff, hoping new sanctions on Iran will do the trick.

Closing:

I certainly hope Bush/Cheney aren't stupid enough to wage war with IRAN, but the recent resignation of CENTCOM Commander Admiral William Fallon -- over Iran policy -- really makes one wonder what the heck they are up to.

Once again, take a good look at the Strait of Hormuz below and realize that nearly 40% of the worlds oil passes through it and right by IRAN. What would happen to the price and supply of oil IF war were to happen?

Regards

Randy

Your Petrodollars at work

While most countries are suffering from high oil prices, they are also fuelling one of the biggest transfers of wealth in history. For the oil and gas producing state of Qatar, the cost of filling up a car has not changed at all. Al Jazeera's correspondent, Dan Nolan, reports on the changing face of the country due to higher prices for oil and gas on the world market.

Qatar rides the oil boom

The Non-Energy Crisis--Lindsey Williams

Excellent, Fantastic, almost unbelievable late-2006 presentation that I urge everyone to watch.

In summary: Lindsey was a an ordained Baptist minister in Alaska during the energy crisis of the 70's and was present in several "Top Level meetings" when the largest oil field ever discovered in North America was celebrated (Gull Island Oil Field)-- only to become "Classified" the next day and never tapped/put to use.... Why? To control oil supplies and establish a dollar pricing agreement w/OPEC -- so they would recycle those dollars, and buy our national debt. He who controls oil and oil pricing, controls the world.

Iraq (World's 2nd largest oil reserves) was a setup because they wouldn't accept US Dollar standard and Iran (3rd largest reserves)will be next.

There are multiple parts to this series and I highly suggest you watch them all, but I've posted up the main ones so you can get a taste.

Part 1
Part 2
Part 3


Non-Energy Crisis Part 4




Non-Energy Crisis Part 5




Non-Energy Crisis Part 6




Non-Energy Crisis Part 7




Non-Energy Crisis Part 8

OPEC and the Dollar Peg

As I've pointed out in the past, the 1974 US-Saudi Arabian Joint Commission on Economic Cooperation established the Dollar as the sole Monetary Instrument for the purchase of oil through OPEC and this action reaffirmed the US Dollar as the World's reserve currency after the years of currency turmoil brought about by Nixon yanking the gold-dollar peg in 1971.

This agreement has allowed the US Dollar to flourish for many years, as countries who needed oil had to earn or borrow dollars to buy oil and trillions of these Petrodollars were eventually recycled through New York and London banks -- allowing for the creation of new credit, holding dollar interest rates lower than they would have been otherwise, and helping to expand our credit/debt bubble economy.

I have also pointed out that: (with the exception of IRAN and mainly due to inflation pressures internal to their domestic economies: 1) Vietnam removed their dollar peg; 2) IRAN (an OPEC Nation) no longer accepts US Dollars for oil and opened their own Oil Bourse this year; 3) Kuwait (an OPEC Nation) has pulled their dollar peg; 3) Venezuela (an OPEC Nation) has been very vocal about moving to price oil in other currencies.

Well, the OPEC rhetoric is heating up:

U.A.E., Qatar May Drop Dollar Pegs Within Months

May 26 (Bloomberg) -- The United Arab Emirates and Qatar could abandon their currency pegs to the U.S. dollar in favor of a basket of currencies within months, and Saudi Arabia may follow the move late next year, The National said, citing a Merrill Lynch & Co. report.

Gulf states have been under pressure to drop their dollar pegs after inflation hit record levels. Kuwait dropped its currency's peg to the dollar last May, but others have all kept their links, citing the need to keep currencies fixed until they form a monetary union in 2010, and the limited inflationary impact of the weak dollar.

The heat is on, so today Henry Paulson, US Treasury Secretary and leader of the US Plunge Protection Team, met with Saudi's Finance minister to reiterate his typical B.S. propaganda about supporting a "Strong Dollar" and publicly stated that any dollar-peg transition would be a "sovereign" decision... Yea right! I wonder what is stated behind closed doors?

Paulson says strong dollar in US interest, Saudi peg 'sovereign decision' UPDATE

JEDDAH Saudi Arabia - US Treasury Secretary Henry Paulson reiterated his support for a strong dollar today after meeting with Saudi Arabia's finance minister, but he also said the decision on whether to maintain the Saudi currency's dollar peg is entirely up to that country's government.

Asked about increasing talk that Saudi Arabia and other Persian Gulf countries might decide to remove their currency pegs to the dollar, given the effects of its plunge, Paulson signalled the US would not try to deter them.

'That is a sovereign decision,' Paulson said, adding, 'the dollar peg I think has served this country and this region well.'

On the same question, Saudi Arabia's finance minister Ibrahim al-Assaf said 'We have no intention of de-pegging or revaluation.'

Well folks, as I see it, it's only a matter of time. We have very few barganing chips left and our geopolitical goodwill is completely shot. When the dollar peg is eventually removed and then when oil is priced against a "basket" of currencies vs just the dollar, we'll be praying for the God-send of $4 gal gas.

Hold on to your hats!

Randy

US Economic Outlook 2008-11+

All is not what it seems, and our US economic troubles are far from over!

Note: If it's hard to see/read the briefing below, please click on this link and view the updated briefing in full-screen

| View | Upload your own

Best regards

Randy

Iran -- New Military Rhetoric

US Rhetoric is increasing over: 1) Iran's military involvement in IRAQ and 2) their Nuclear ambition.

However, the bigger (unspoken) issues are the IRAN-PAKISTAN-INDA GAS PIPELINE and the US Dollar (USD):

America continues to lose clout/controlling power in the region 1) as these countries work to create their own interdependent energy region, and 2) as IRAN eliminates all US dollar holdings and then refuses to accept new dollars in all of its foreign energy transactions.

As stated previously, oil replaced gold in the mid 70's as the peg for the USD and until Iran's recent actions (note: Saddam/IRAQ previously did the same for a short while) all oil transactions around the globe had to be made in USD's. For three decades now, oil has provided the underlying foundation for the World's reserve currency, but the USD foundation is starting to crack...

Dollar: Faltering Foundation of US Economic Strength

Iran’s Oil Bourse Set to Open this Sunday

OPEC May Drop Dollar for Euro

The End of Dollar Hegemony

News of interest today

Irans yen for the euro

Iran, the worlds fourth largest oil producer, has reportedly shifted from the US dollar to euro and yen as currencies in which it will trade its crude produce.

This is seen as a major blow to the US dollar as a reserve currency.

Irans move may be determined partly because of its ongoing political stand-off with the US. However, that need not be the only consideration to have prompted Iran to shift to the euro and yen.

Many oil exporting nations, as indeed other emerging economies accumulating dollar reserves, have been worrying about the structural weaknesses in the US economy and the prospect of the dollars long-term decline.

A survey by the US treasury department measured foreign holdings of US securities as of June 30, 2007, to be $9,772 billion. This should easily cross $10 trillion this year, which is about 75% of the US GDP. Of this, $3,130 billion is held in US equities, $6,007 billion in US long-term debt securities, and $635 billion in US short-term debt securities.

Mind you, the outstanding foreign holdings in US securities are growing on an average at over 25% in recent years.

Emerging economies are beginning to feel uncomfortable about putting so much in US dollar-denominated assets year after year. Oil exporting countries themselves have about half a trillion dollars worth of US securities today. By designating future oil trading in euro and yen, Iran is clearly trying to diversify its assets by denominating them in currencies other than the dollar.

If other West Asian oil exporters were to do the same, the US or any other net oil importer, will be forced to buy euro and yen to purchase oil from the international market. The power of the US dollar as a reserve currency will certainly fall, to that extent. Indeed, nations holding US dollar assets will have to evolve new strategies to protect the value of their forex reserves as the axis of global economic power shifts rapidly. No one, including Americas arch rivals in the geo-strategic play, would want the dollar to suffer a precipitous decline as it would erode everyones asset value. But they must all prepare for a gradual decline, for sure.

(Note--for more info on Iran, Oil and the US Dollar see my other posts: IRANS Oil Bourse to Open, US Warns IRAN)


Consumer spending up mainly because of sharp price increases

Don't be fooled by a larger-than-expected increase in consumer spending. People aren't buying more — they're just paying more for what they buy.

That is raising doubts about whether the 130 million stimulus payments the government began sending out this week will be enough to lift consumers' sagging spirits.

The Commerce Department reported Thursday that consumer spending was up 0.4 percent, double the increase economists had forecast. However, once inflation was removed, spending edged up a much slower 0.1 percent.

The March reading was the fourth straight lackluster performance and did nothing to alleviate worries that consumer spending, which accounts for two-thirds of total economic activity, remains under severe strains, reflecting an economy beset by multiple problems.

Rising food costs, soaring energy prices and falling employment have pushed consumer confidence to its lowest levels in five years. Incomes in March rose a weak 0.3, but after removing inflation, after-tax incomes were flat.

The Bush administration is counting on its $168 billion stimulus program to give the economy enough of a lift to keep the country from slipping into a full-blown recession, but private economists are worried the boost could well be fleeting.

"Consumers are facing bad news on all fronts," said Nigel Gault, chief U.S. economist at Global Insight. "Any burst of spending based on the stimulus payments is likely to prove short-lived."

Sal Guatieri, senior economist at BMO Capital Markets, said economic growth could still turn negative this quarter even with the rebates. He cited a recent Associated Press-Ipsos poll that found only 19 percent of people plan to spend their rebates, with others surveyed preferring instead to use the $600 to $1,200 checks for the typical family to pay off bills or boost savings.


Home Depot Takes Wrecking Ball To Stores

The economy has been hurting since the subprime mortgages began their tumble toward foreclosure, taking anything housing related, especially home goods, along for the bumpy ride.

On Thursday, Home Depot announced that it was shutting down 15 of its underperforming flagship stores. The mercy killings are supposed to wrap up in the next few months with 1330 employees being axed or reassigned. Wall Street rallied after the tough love announcement.

In a bleeding real estate market and with new management at the helm, the Atlanta-based company has pulled back on expansion plans and is excising vestigial parts.

These tough calls weren't in the game plan a year and a half ago. In September 2007, it had been reported that Blake said he had no plans to make any broad-based job cuts or reduce the number of its core retail stores in the face of a persistent housing slump that wasn't expected to improve anytime soon.


Sun Micro turns in loss of $34 million

Sun Microsystems Inc. on Thursday said it swung to a fiscal third-quarter loss and that it will cut up to 2,500 jobs as the computer server and software company said "significant challenges" in the U.S. market contributed to its sales slipping from a year ago.

On a conference call to discuss the results Sun Chief Executive Jonathan Schwartz said the company was hampered by weakness in the U.S. economy that "presented Sun with significant challenges" and overwhelmed progress that Sun made in developing nations.


Auto Sales Remain Weak; Chrysler Posts 23% Drop

The U.S. auto industry's struggles continued in April as General Motors Corp. (GM) and Ford Motor Co. (F) and Chrysler LLC posted double-digit drops in U.S. light-vehicle sales despite having two extra selling days than a year earlier.

GM, hobbled by a strike at a major axle supplier, posted a 16% sales drop while Ford sales slid 12%. Chrysler reported a 23% decline. Japan's Toyota Motor Corp. (TM), thanks to Easter falling in March this year, managed to snap a four- month streak of weaker sales and post a 3.4% rise.

The gas-price spike combined with persistent economic turbulence had set the stage for April to be yet another tough month in what is expected to be the industry's toughest year in at least a decade.


Fed Discount-Window Lending to Banks Rises 8% to $11.6 Billion

May 1 (Bloomberg) -- The Federal Reserve's cash loans to commercial banks rose 8 percent in the past week, reflecting borrowers' continuing need for funds.

Loans to commercial banks through the traditional lending facility increased $857 million in the week ended yesterday to a daily average of $11.6 billion.

As of April 30, $17.8 billion of overnight loans through the primary-dealer program were outstanding with Wall Street firms, while commercial banks had $12 billion of discount-window loans, the Fed reported.

The Fed also reported that the M2 money supply rose by $27.9 billion in the week ended April 21. That left M2 growing at an annual rate of 6.7 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.
During the latest reporting week, M1 rose by $19.4 billion. Over the past 52 weeks, M1 declined 0.1 percent. The Fed no longer publishes figures for M3.


Airlines slow down flights to save on fuel

Drivers have long known that slowing down on the highway means getting more miles to the gallon. Now airlines are trying it, too — adding a few minutes to flights to save millions on fuel.

Southwest Airlines started flying slower about two months ago, and projects it will save $42 million in fuel this year by extending each flight by one to three minutes.

On one Northwest Airlines flight from Paris to Minneapolis earlier this week alone, flying slower saved 162 gallons of fuel, saving the airline $535. It added eight minutes to the flight, extending it to eight hours, 58 minutes.

Across the board, airlines are feeling the pain of higher energy prices. For jet fuel delivered at New York Harbor, the spot price — airlines pay it when they need more fuel than they've already locked down in a contract — has jumped 73 percent in the past year, to $3.54 a gallon, according to government data.

Airlines are trying other measures as well to deal with higher fuel costs, including raising fares, adding fuel surcharges to tickets and charging extra for a second checked bag rather than a third.

It's a tough time for the airline industry. Several smaller airlines have filed for bankruptcy protection in recent weeks, many citing high fuel costs. Fuel costs have also resulted in sharp first-quarter losses by some airlines.


Have a good evening

Randy

US warns Iran -- $10 Gas?

Back in February 08, I wrote: Iran’s Oil Bourse Set to Open this Sunday which explained how Iran's new Bourse was provoking future military action by posing a huge long-term threat to both the US Dollar & continued American global hegemony.

I warned that rhetoric w/regard to Iran would probably soon ratchet up again; a catalyst to military action would likely be found; and that bombs might be falling from the sky before November 08, as the Bush administration would not take lightly this deliberate slap in the face of US global economic power; nor did they trust leaving the problem for the the next regime.


Times Online today: US warns Iran of retaliation over Iraq action

America's top military officer has ratcheted up the pressure on Iran by issuing an unusual public warning that the Pentagon is planning for “potential military courses of action”. .”

Admiral Mike Mullen, chairman of the joint chiefs of staff, blamed the Iranian government and Quds force of the Iranian Revolutionary Guard for its “increasingly lethal and malign influence” in Iraq. He said conflict with Iran would be “extremely stressing” for America’s overstretched forces, but added: “It would be a mistake to think that we are out of combat capability.

Mullen said he was increasingly concerned about Iran’s growing involvement in supplying munitions and training to rebel Shi’ite militias and “killing American and coalition soldiers in Iraq”.

Speaking at a Pentagon news conference late on Friday, he said recent operations in the southern port city of Basra had revealed “just how much and how far Iran is reaching into Iraq to foment instability”. A Pentagon source said the admiral’s frankness was “extremely significant” and could pave the way for some form of attack on Iran. However, Mullen said: “The solution right now still lies in using other levers of national power, including diplomatic, financial and international pressure.”

Mullen’s tough rhetoric came shortly after General David Petraeus, the US commander in Iraq responsible for the troop surge, briefed Congress about the “nefarious activities” of the Quds force in stirring violence in Iraq. There were a total of 923 civilian deaths in Iraq last month, the highest number since August 2007.

“We should all watch Iranian actions closely in the weeks and months ahead, as they will show the kind of relationship that Iran wishes to have with its neighbour,” Petraeus said.

Petraeus was nominated last week to take over as commander of all US forces in the Middle East from Admiral William Fallon, who resigned in March after becoming an outspoken critic of American policy towards Iran.

My Thoughts:

As a USAF veteran, let me assure you that my following comments are not un-patriotic, but I can NOT buy into ANY of this administration's B.S. propaganda.

The whole middle east issue (Iraq, Iran, Afghanistan, you pick who may be next) is all about controlling Oil, maintaining US dollar hegemony and supporting massive contracts for companies like Haliburton -- to make Dick Cheney's rich friends richer.

Our troops are dying in a futile attempt to (1) save our dying currency (caused by excessive Gvt spending/debt and a Federal Reserve Banking system that has created one too many popping bubbles -- which has ultimately led to the present crashing financial/banking system that will require a hyperinflationary event to save it from a full-blown collapse) and (2) to control dwindling worldwide oil supplies.

Food for thought: The world can currently extract and bring to market ~ 87 Million Barrels of Oil per day (Mbpd) and we consume ~ 86Mbpd -- 40% of which comes from the Persian Gulf market and must traverse through the very narrow Strait of Hormuz (see picture below)... Note where Iran sits on this narrow Channel...

If we DO start dropping bombs on Iran, they will likely mine the Strait and/or sink a supertanker or two with missiles/etc -- locking up 40% of the world's oil supply. You think gas/oil prices are painful today? Better start preparing for $200+ barrel oil and $10+ gallon gas (if you can actually find it anywhere)

Regards

Randy

StopIranwar.com


Which City do we want to lose?

Getting used to high oil/gas prices yet?

I hope so, because it's only going to get worse from here. Currently, I'm paying ~ $3.45 a gallon for the cheap stuff (~ $55 to fill up my gas sipping Accord), but I expect we'll easily see $4 a gallon nation wide as summer approaches.

The falling dollar can be blamed for much of this price rise, but increasing worldwide energy demand, combined with supply/delivery pressures (Nigeria, Iran, etc)is making the pain worse.

These higher oil prices are already starting to, and will continue to ripple across the spectrum -- showing up as price increases in everything you buy -- a double whammy for your wallet/pocketbook.

Oil prices to head even higher says Opec chief

The secretary-general of Opec said yesterday that oil prices could rise even higher than the present record level of $117 a barrel.

Speaking at the start of the biannual conference between oil-producing and consumer countries in Rome, Abdullah al-Badri said that factors other than supply and demand, particularly the weakness of the US dollar, were pushing oil prices higher.

Many analysts expect oil to rise above $120 a barrel by the summer.

Government ministers will meet energy companies, charities and consumer groups to discuss the issue of energy prices at a fuel poverty summit on Wednesday, hosted by Ofgem.

Allan Asher, the chief executive of energywatch, a consumer watchdog, criticised the record of the Government and energy companies. “Relying on more voluntary social programmes from energy suppliers is tantamount to sticking your head as far into the sand as it will go,” he said.

“Government has to be bold enough to admit its fuel poverty strategy has been broken on a vicious cycle of price rises. Price rises on such a shocking scale would be catastrophic for consumers; 25 per cent on energy bills means another million households consigned to the misery of fuel poverty.”

Chakib Khelil, the president of Opec, said yesterday that he saw no need to raise oil production to counter high oil prices, dealing a further blow to big oil-consuming countries such as Britain and the United States. Gordon Brown and President Bush have called on Opec, which produces 40 per cent of the world’s oil, to increase its output, but Opec kept its daily output quota at 29.67 million barrels at its last meeting last month.

Last month, China imported almost 150 per cent of what it had imported the previous month. The country is building its fuel reserves for the Olympic Games later this year. Moreover, its spring planting season is under way, which is usually a time of high consumption.

Crude Oil Sets New Record

Oil set a new all-time record today: hit $112 bucks a barrel on US inventory decline

"The price surge came after a US government report showed a sharp drop in oil inventories and by investors seeking refuge from a falling dollar which fell against the euro and the yen on views the US Federal Reserve could cut interest rates by a 50 basis points this month."


My thoughts:

This will only get worse over the long haul : As we continue to lower interest rates, print more money and monetize hundreds of billions of collapsing financial system debt, the dollar will continue it's slide into the abyss, forcing OPEC/others to eventually pull their dollar peg (here and here) while Iran and others completely refuse to accept US dollars for their Oil (here).

If this unwind goes smoothly AND if foreigners don't dump their > $4 trillion in dollar holdings in the process, we shouldn't be too suprised to see >$200 barrel oil and ~ $8 gallon gas in less than 5 years time (Final End-Game)

Better start thinking about it!

Regards
Randy

Opec blames oil prices on floundering US dollar

OPEC is stating what none of our US "Strong Dollar" advocates (hint: Paulson and Bernanke) will not: It's all about the dollar stupid!

If the Dollar weren't so weak, Oil wouldn't be priced so high... So, stop cutting rates, slow down the presses and refrain from bailing out any more of the unscrupulous, greedy financial sector, and the dollar will gain strength--allowing oil prices to come down...


Opec blames oil prices on floundering US currency


THE president of Opec has predicted that the price of oil could stay as high as 110 a barrel for the rest of the year, spurred by investors seeking a hedge against the weakening US dollar.

Chakib Khelil, president of the global oil cartel, who is also the Algerian Energy Minister, said: “There are big pressures on Opec — and some consuming nations would like to present Opec as being behind current high prices.

“But the truth is that the current prices are linked to US economic problems as well as to the value of the dollar.”




‘Weak dollar behind rising crude prices’


Saudi Arabia would like to see oil prices stabilise between $70-80 a barrel as much higher prices could precipitate the emergence of other viable sources of energy, a well-known US oil analyst said yesterday.

Jean Francois Seznec, a Visiting Associate Professor at Georgetown University’s Centre for Contemporary Arab Studies, said the weak US dollar has been the main cause of the increase in crude oil prices more than $100 and blamed the present US Administration for the decline in the value of the greenback.

“I think the Saudis see a danger in the price of oil being at $100 and above a barrel,” Seznec said at a Gulf reform conference in Abu Dhabi yesterday.

“The danger is that it creates enough incentives for developing all kinds of alternate sources of energy investments to take place, which will not happen overnight. Still, the Saudis will like to see the price of oil lower, ranging between $70-$80 a barrel.

“But if the value of the dollar keeps falling, they have to make up for it… it’s a vicious circle,” he added.

Iran’s Oil Bourse Set to Open this Sunday

It looks like the long awaited opening of the Iranian Oil bourse is finally here. This crucial issue has far reaching implications and could become be a grave risk to continued American global hegemony, but as far as I know, our mainstream media has completely ignored the topic.

Petrodollar Hegemony

Today, most oil trading takes place on the New York Mercantile Exchange (NYMEX) and the London-based International Petroleum Exchange (IPE). Since the 1970s, OPEC countries have all agreed to sell oil for US dollars only. This means every country that wants to buy oil must first acquire enough US dollars to buy what it needs--creating a huge worldwide demand for the US dollar and any excess dollars eventually get recycled back to the US.

Year after year, America imports much more than it exports and it must pay out that difference (its current accounts deficit) in printed dollars. In 2006 that deficit was > $850 Billion; 2007 was > $700B; this year, we will see similar figures.

From 1999 though the end of 2006, the United States financed a string of large current account deficits by borrowing $4.4 trillion from other countries—a sum amounting to 85 percent of total net borrowing worldwide (in other words: we sucked up 85% of the worlds excess savings).

Now, if there were no good reasons for other countries to buy all those American dollars, the dollar would decline in value until the US economy could no longer afford to import goods from abroad. Additionally, this excess foreign savings that America has grown used to would also dry up—putting us in quite the predicament.

The deal with OPEC however, means other countries have no choice but to buy all those excess American dollars, which props up the value of the dollar and allows the American "import economy" to go on year after year.

Effectively, America's main export is US dollars, and it is absolutely imperative to preserve a captive market for those dollars among oil-consuming countries--the continued viability of the US economy depends on it. Americans today can still afford to consume because the economy is inundated with cheap imports, but a continued falling dollar (already at its lowest levels in history and bound to drop much further due to Fed & PPT policy of printing money to bail out our banking/financial sectors) will significantly raise the prices of imported goods and our cost of living.


How important is it that oil continues to be denominated in dollars?

The answer to this question could come as early as this week, since the long-awaited Iranian Oil Bourse is scheduled to open Sunday. According to Iran's Finance Minister Davoud Danesh-Jafari, “All preparations have been made to launch the bourse; it will open during the 10-day Dawn (the ceremonies marking the victory of the 1979 Islamic Revolution in Iran) The bourse is considered a direct threat to the continued global dominance of the dollar because it will require that Iranian “oil, petrochemicals and gas” be traded in “non-dollar currencies”. (Press TV, Iran)

The petrodollar system is no different than the gold standard. Today's currency is simply underwritten by the one vital source of energy upon which every industrialized society depends---oil. If the dollar is de-linked from oil; it will no longer serve as the de-facto international currency and the US will be forced to reduce its massive trade deficits, rebuild its manufacturing capacity, and become an export nation again. The only alternative is to create a network of client regimes that repress the collective aspirations of their people so they can faithfully follow directives from Washington.

As to whether the Bush administration would start a war to defend dollar hegemony; that's a question that should be asked of Saddam Hussein. Iraq was invaded just six months after Saddam converted to the euro. The message is clear; the Empire will defend its currency.

Similarly, Iran switched from the dollar in 2007 and has insisted that Japan pay its enormous energy bills in yen. The “conversion” has infuriated the Bush administration and made Iran the target of US belligerence ever since. In fact, even though 16 US Intelligence agencies issued a report (NIE) saying that Iran was not developing nuclear weapons; and even though the UN's nuclear watchdog, the IAEA, found that Iran was in compliance with its obligations under the Nuclear Nonproliferation (NPT) Treaty; a preemptive US-led attack on Iran still appears likely.

And, although the western media now minimizes the prospects of another war in the region; Israel is taking the precautions that suggest that the idea is not so far-fetched. “Israel calls for shelter rooms to be set up in a bid to prepare the public for yet another war, this time, one of raining missiles.” (Press TV, Iran)

Iran's Oil Bourse Will Start Operations Feb. 17, IRNA Reports:

The Iranian Rial will be used for all transactions on the Tehran Oil Bourse, Gholamhossein Nozari said today, according to IRNA.

Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, was originally expected to start its own oil-trading market in 2005.


Iran’s Oil Bourse Set to Open Sunday

Iranian Oil minister Gholamhossein Nozari has confirmed to Iranian news outlets that the long awaited oil bourse will begin trading in oil related products on Sunday February 17th. Just what “oil related products” means is not yet clear because few details have been released to the public.

What we do know is that the bourse (oil exchange) will be dealing in strictly Rial, the Iranian currency. The guess is right now that the bourse, which is to be located on the gulf island of Kish, will open by trading in “oil products” and within a short amount of time begin dealing in crude. This comes at a time when Iran’s oil output is reaching levels not seen in Iran since 1979.

The fear in the United States in some economic circles is that the opening of this bourse could lead to a further decline of the U.S. dollar. The U.S. dollar is currently the international currency in the trading of crude oil, with all oil exchanges being located in the Western world, but the Iranian oil bourse would seek to change this fact. As long as the U.S. dollar is the only international currency that can be used in purchasing oil the dollar will remain relatively stable because it will be in demand to purchase oil, if for no other reason. Therefore, countries such as Saudi Arabia are forced to accept the dollar for the sale of their crude and countries such as China and India are forced to keep the dollar on hand to purchase oil. Since the dollar has now fallen below the value of the Euro the opening of the Iranian Oil Bourse would remove one of the last remaining incentives for nations to hold onto the United States dollar. Some even go as far as to speculate this looming opening of the oil bourse being a reason for the harsh rhetoric Washington has used in the recent past towards Iran.

So, what can we expect as the final end-game?

As I’ve stated before in Dollar: Faltering Foundation of US Economic Strength, troubles for the dollar are bubbling up everywhere. Aside from the fact that our own fed has sacrificed our currency (in an attempt to save the banking/financial system), numerous nations have already de-pegged their currencies from the dollar (w/more planning to follow suit). Additionally, OPEC (as of late) has been talking about pricing oil in Euros.

This new action by IRAN, though lacking enough support to change things overnight, is a huge, long-term threat to the dollar, and is a deliberate slap in the face of US global economic power.

Personally, I don’t think the current administration will allow this problem to be passed on to the next. Rhetoric w/regard to Iran’s nuclear ambition will probably soon ratchet up again; a catalyst to action will likely be found, and bombs may be falling from the sky before November 08. However, don’t ever expect to hear (from the mainstream) that this bourse and its threat to the dollar were the real reason as to why.

Randy

OPEC May Drop Dollar for Euro

As I've stated previously, for over 3 decades now, U.S. Oil pricing agreements with OPEC have provided THE foundation for the US dollar's elite status in the world and oil replaced gold (after being dropped by Nixon in 1971) as the backing for the World’s Reserve Currency.

We Americans, however, were never satisfied with just having a good thing, as we wanted our cake and needed to eat it too, so we racked up enormous/un-payable debts to pay for lots of guns and butter, sold toxic securitized AAA rated garbage to our best friends, family and business partners, squandered international goodwill through inept/arrogant foreign policy, and as of late, we’ve thrown all caution and common sense into the wind and are now vigorously trying to hyperinflate our way out of this current deflationary banking/financial crisis.

Well it was great while it lasted, but the gig is nearly up.

OPEC Rattles the Dollar

The possibility that OPEC would make an active decision to price oil barrels in a currency other than the dollar has been bandied about, but never spoken of by anyone with any real power. That changed today, after OPEC Secretary-General Abdullah al-Badri was quoted in the Middle East Economic Digest, saying “maybe we can price the oil in the euro.”

The weakened dollar has eroded the purchasing power of the oil-rich nations at a time when consumers in those countries are also dealing with growing inflation risks, in part because several prominent nations, such as the UAE and Qatar, maintain currency pegs to the U.S. dollar. Inflation has been rising in those countries, but these countries have been lowering interest rates in order to keep pace with U.S. policy, even though they have very different fundamentals.

Eventually, those pegs are likely to be abandoned. “The days of the peg are numbered as these nations can’t continue to cut rates to 3% with inflation 4 times that rate,” says Ashraf Laidi, head of currency strategy at CMC Markets. “They will need to revalue the peg and change it to a basket of currencies.”

When this 1974 OPEC dollar pricing agreement is finally abandoned, the US Dollar's foundation as World Reserve will be yanked out from beneath it.

We in the U.S. better start preparing for a much lower standard of living because it's coming.

Randy