I'm more curious about what SBJ thinks about what's going on. He has made it no secret that he's divesting out of the stock market and that he expects the dollar's value to continue to fall. I've been doing some reading on the topic and things seem to be a bit more threatening and vulnerable than I first thought.
Here's my first glance, very early take on the situation. I hope those knowledgeable here can correct me on my mistakes.
The dollar's been overvalued since 1971 when Nixon removed any form of Gold backing. The US dollar than became the defacto gold "standard" and has been, and is now the 'reserve currency'. What that means is that instead of foreign countries backing their money up with gold, they back it up with American dollars.
Ok, so this is where things get a little complicated and sketchy, so if there's anybody out there who understands this better, please correct any mistakes I make.
Here we go. I will assume that people know the fundamental laws of supply and demand, because with everything in economics that's all it really comes down to. Anyway, the starting point: US dollars buy oil. Up until now, if you want to purchase oil from the oil suppliers/companies you had them some American dollars and will get the lifeblood of your country.
So, WHY the oil-supplying countries trade only in American dollars is a historical point that I'm sure has a lot to do with politics and all of that. Incidentally Iraq switched to selling its oil for Euros instead of the dollar, and well, we all know what happened there. Anyway, so dollars buy oil. Oil is in high demand, therefore dollars will be in high demand. So now what foreign countries do is sell their cheaply made goods and supplies to the US for American money. This is why things are so cheap in the US (I got new Reebok bball shoes for $10 here). One thing to note for later is that a large majority of the population is living far beyond their needs and building their lives on a mountain of debt. All the rage in the past decade has been refinancing mortgages in the real-estate boom (or should I say bubble?).
Ok, so US prints money to pay off foreign suppliers for their goods. Despite there being a lot of USD out there, it remains strong because of the strong demand for it. Ok, so now the dollars are in the foreign countries, and these countries now want to buy oil with it, so they go to Saudi Arabia or other oil exporting countries to purchase some. So now a large part of the dollars are in these oil countries. Well, we all know the oil countries aren't being starved for money, in fact they have a lot to spare, so what do they do with this extra surplus? Invest it! And they invest it right back into Americ the "safe" bet.
In 2001 I believe, Arabia had $700 billion dollars invested in the American economy. In 2002, they pulled out $200b of that, and that's probably gone up a lot more since then. Investments in America come in a variety of forms, but a lot of the investments are done in US treasuries and bonds.
Alright, so now we have this perpetuating cycle where the US prints money, foreign countries sell it for cheap goods. Then purchase oil with it. And then the dollars are subsequently invested BACK into the American economy keeping it strong and allowing it to move further into debt.
Now, what if confidence in the American economy wavers? This is exactly what has happened in the past year. US treasuries are no longer seen as a 'safe' bet and so foreign investors are less likely to place their money in the US. Now that poses a big problem to the government because they will not be able to print out new money without selling bonds.
So what do they do? Raise interest rates! This will make the bonds more attractive to foreign investors. But remember that debt that the average American is lying upon? That's where it comes back to bite them in the ass. Interest rates have been so low the past couple of years, and so much new borrowing has been done that if interest rates are raised, even a small amount, havoc will be done to the general public.
So you see the dilemma here. Foreign investors certainly do, and will continue to scale back their investments in the US. To compensate this the USD is now in a controlled slide for a variety of reasons. 1: The real value of the debt plunges as the value of the dollar plunges, since it's denominated in USD. 2: Exports will increase since they will be cheaper to purchase.
So right away we have a intentional effort by Mr. Greenspan et al to lower the value of the American dollar. For how long? For how much? I don't know, and I haven't read anything to give any indication that anybody else does either. Personally, I don't think the dollar will ever go back up since as soon as it loses its value, people will move their money elsewhere (Euro, gold, etc).
This is while things are under control. A much more volatile scenario occurs if things start to move on their own.
Again, this is my amateur take on the situation. I'm sure it's probably riddled with holes and inconsistencies, so if anybody call fill them in for me, I would very much appreciate it.
Here's my first glance, very early take on the situation. I hope those knowledgeable here can correct me on my mistakes.
The dollar's been overvalued since 1971 when Nixon removed any form of Gold backing. The US dollar than became the defacto gold "standard" and has been, and is now the 'reserve currency'. What that means is that instead of foreign countries backing their money up with gold, they back it up with American dollars.
Ok, so this is where things get a little complicated and sketchy, so if there's anybody out there who understands this better, please correct any mistakes I make.
Here we go. I will assume that people know the fundamental laws of supply and demand, because with everything in economics that's all it really comes down to. Anyway, the starting point: US dollars buy oil. Up until now, if you want to purchase oil from the oil suppliers/companies you had them some American dollars and will get the lifeblood of your country.
So, WHY the oil-supplying countries trade only in American dollars is a historical point that I'm sure has a lot to do with politics and all of that. Incidentally Iraq switched to selling its oil for Euros instead of the dollar, and well, we all know what happened there. Anyway, so dollars buy oil. Oil is in high demand, therefore dollars will be in high demand. So now what foreign countries do is sell their cheaply made goods and supplies to the US for American money. This is why things are so cheap in the US (I got new Reebok bball shoes for $10 here). One thing to note for later is that a large majority of the population is living far beyond their needs and building their lives on a mountain of debt. All the rage in the past decade has been refinancing mortgages in the real-estate boom (or should I say bubble?).
Ok, so US prints money to pay off foreign suppliers for their goods. Despite there being a lot of USD out there, it remains strong because of the strong demand for it. Ok, so now the dollars are in the foreign countries, and these countries now want to buy oil with it, so they go to Saudi Arabia or other oil exporting countries to purchase some. So now a large part of the dollars are in these oil countries. Well, we all know the oil countries aren't being starved for money, in fact they have a lot to spare, so what do they do with this extra surplus? Invest it! And they invest it right back into Americ the "safe" bet.
In 2001 I believe, Arabia had $700 billion dollars invested in the American economy. In 2002, they pulled out $200b of that, and that's probably gone up a lot more since then. Investments in America come in a variety of forms, but a lot of the investments are done in US treasuries and bonds.
Alright, so now we have this perpetuating cycle where the US prints money, foreign countries sell it for cheap goods. Then purchase oil with it. And then the dollars are subsequently invested BACK into the American economy keeping it strong and allowing it to move further into debt.
Now, what if confidence in the American economy wavers? This is exactly what has happened in the past year. US treasuries are no longer seen as a 'safe' bet and so foreign investors are less likely to place their money in the US. Now that poses a big problem to the government because they will not be able to print out new money without selling bonds.
So what do they do? Raise interest rates! This will make the bonds more attractive to foreign investors. But remember that debt that the average American is lying upon? That's where it comes back to bite them in the ass. Interest rates have been so low the past couple of years, and so much new borrowing has been done that if interest rates are raised, even a small amount, havoc will be done to the general public.
So you see the dilemma here. Foreign investors certainly do, and will continue to scale back their investments in the US. To compensate this the USD is now in a controlled slide for a variety of reasons. 1: The real value of the debt plunges as the value of the dollar plunges, since it's denominated in USD. 2: Exports will increase since they will be cheaper to purchase.
So right away we have a intentional effort by Mr. Greenspan et al to lower the value of the American dollar. For how long? For how much? I don't know, and I haven't read anything to give any indication that anybody else does either. Personally, I don't think the dollar will ever go back up since as soon as it loses its value, people will move their money elsewhere (Euro, gold, etc).
This is while things are under control. A much more volatile scenario occurs if things start to move on their own.
Again, this is my amateur take on the situation. I'm sure it's probably riddled with holes and inconsistencies, so if anybody call fill them in for me, I would very much appreciate it.
