Kunstler: Boiled in Oil Without a $ to Spare

[coolhand]

Re: Kunstler: Boiled in Oil Without a $ to Spare

EJ-

I agree with most of what you said, with a few exceptions/additional questions I'd pose:

You noted that "The petrodollar system allows the US to depreciate the dollar and export inflation. The resulting rise in domestic inflation among oil exporters strains the system."

It's not just oil exporters that feel inflation exported by the US. It's any exporter (China) as you know, & it's anyone that must use dollars to buy imported oil. Their oil gets more expensive obviously, when priced in USD. I don't know when the tipping point is, but at some tipping point, it will be more advantageous for China & others to buy oil in something other than USD than it is disadvantageous to lose their trade relationship with the US. I suspect this is a function of oil price & the oil intensity of the other economies. We're not there yet, but a positive, 19-mth high Chinese PMI print yesterday while Chinese PMI export orders fell suggests we may be much closer to that tipping point than we once were. They can eat their own cooking, particularly if they can get the food they need from Africa & South America instead of the US.


You also said: "Will not happen. The Europeans value their long political, economic, and security alliance with the U.S."

My question is this: If the Europeans so value their long political, economic & security alliance with the US, then why did they structure the Euro with 30% of the reserves in gold bullion, the USD's mortal enemy (per Volcker, et al), and then sign the Washington Agreement on Gold in 1999 effectively kicking off a short squeeze in bullion that would serve to bolster the value of their gold reserves to the point that the Euro now has 70% of its reserves in bullion, & perhaps more importantly, represent a direct & explicit attack on the USD. Furthermore, they re-upped the WAG in 2004, except the UK didn't sign it that time...which maybe gives a better read on who our real friends are?

It seems to me that if they valued their relationship with the US as much as you assert, they would NOT have effectively created a superior, competing reserve currency by virtue of backing the reserves with the USD's mortal enemy. They would've used the USD to back the Euro, & then they would be in the same boat as the UK (who opted out of the Euro) & Japan (whose reserves are largely UST-backed.)

Interestingly, the two countries listed above that went with the USD (UK & Japan) are the only two countries that are commonly listed as "more screwed" than the Eurozone according to even the most bearish Euro critics. And the kick-off of domestic USD inflation in energy & gold correlated pretty much right away with the kick-off of the Euro...seems like structuring the Euro as they did, when they did, was a very explicit statement from the EU that "We have had enough with the USD & being beholden to US monetary policies."

Is it possible that the very old money in Europe doesn't like the US as much as we think? I think it is entirely possible that they sat by & watched us get rich financing both sides of two European wars that destroyed their continent, & in between those two wars, refused to allow the gold standard to work as it should've by sterilizing our gold inflows from Europe in the 1920's to pre-empt the inflation it should've set off in the US had we allowed the gold exchange standard to work, thereby being the same "currency manipulator" then that we accuse China of now?

Then, after the war, we dictated to the Europeans how the new monetary system would work b/c we had all the gold, most of the (standing) industrial production, (effectively) all the oil & all the men (8 of 10 Germans were killed by Russians, but you'd never know that based on US versions of events.) We overruled Keynes numerous instances in structuring the Bretton Woods system when, in hindsight, his plans would've worked better in every case, and we did so b/c it wasn't as advantageous to us.

I'm an American, so I love the fact that our ancestors did those things that played to our advantage the past 65 years. But knowing them, & objectively looking at how the EU has acted in the past 20 years:

--creating the Euro & putting a significant % of reserves in gold, NOT dollars, & thereby firing the first shot in what has become a currency hot-war);
--along with recent EU Parliament evaluations of gold-backed bonds as means to lower EU borrowing costs;

...suggests that the Europeans perhaps don't place the same degree of value on their relationship with the American dollar & monetary policies as you might think. They had a chance to make the USD & Fed policy a concrete part of a brand new system & further tie themselves to the US as a region 13 years ago. They passed on the opportunity, EMPHATICALLY, by backing their new currency with our currency's sworn enemy.


(As a side note, I think this is why the Euro is ultimately much better off than the US pundits say. In extremis, the EU could print Euros & bid for physical gold bullion, which would STRENGTHEN their currency, lower their borrowing costs, lower their oil costs & WEAKEN the USD as any such bid for bullion in the open markets would skyrocket the price of bullion, strengthening the reserve backing of the Euro & significantly hurting the USD. This reasoning (hat tip to Victor the Cleaner & FOFOA), both suggest to me that the Eurozone has much more leverage with the Fed than is generally appreciated by US investors, & perhaps why the Euro, despite a cacophony of bad economic news relative the US, continues to strengthen v. the USD.)

[BadJuju]

Re: Kunstler: Boiled in Oil Without a $ to Spare

You also said: "Will not happen. The Europeans value their long political, economic, and security alliance with the U.S."

My question is this: If the Europeans so value their long political, economic & security alliance with the US, then why did they structure the Euro with 30% of the reserves in gold bullion, the USD's mortal enemy (per Volcker, et al), and then sign the Washington Agreement on Gold in 1999 effectively kicking off a short squeeze in bullion that would serve to bolster the value of their gold reserves to the point that the Euro now has 70% of its reserves in bullion, & perhaps more importantly, represent a direct & explicit attack on the USD. Furthermore, they re-upped the WAG in 2004, except the UK didn't sign it that time...which maybe gives a better read on who our real friends are?)

One thing you may have discounted is that the US actually holds a lot of European gold reserves. In fact, half of Germany's gold reserves are held at the Federal Reserve Bank of New York. If the goal was to undermine the USA, then it might have served them better to actually hold the reserves themselves. If they launched such an obvious attack on the USD as you suggest, I can only imagine the response the US would make back to them.

[coolhand]

Re: Kunstler: Boiled in Oil Without a $ to Spare

One thing you may have discounted is that the US actually holds a lot of European gold reserves. In fact, half of Germany's gold reserves are held at the Federal Reserve Bank of New York. If the goal was to undermine the USA, then it might have served them better to actually hold the reserves themselves. If they launched such an obvious attack on the USD as you suggest, I can only imagine the response the US would make back to them.

Sure, that is true. But then again, there has been quite a vocal movement afoot in the mainstream media of various European countries (including Germany) demanding to know the location of & in some cases, return of, their gold from foreign vaults, such as that in the US. Interestingly, these stories received no coverage amongst the serious business media in the US, to say nothing of mainstream media obviously.

My point is, once again, if the Europeans hold their relationship with us in such high esteem, why is there any agitation for the return of their gold at all?

I'm not saying they will necessarily pre-emptively launch such an attack, even though one could make the argument that US interests may have been using sovereign CDS to attack the Eurozone themselves, although that is pure speculation on my part. I am saying that in extremis, they could solve their debt crisis overnight by doing the above. That would shift the crisis squarely onto the US' lap, as gold would instantly replace the USD as the global reserve, kicking off hyperinflation of oil as well as certain medications, engineered components, etc., in the US. Judging by the way we are going after $100+ oil reserves in the US, it's almost like we already know this is the outcome of the game...no?

As far as US responses, what would we do? Bomb Europe? Refuse to buy their watches, cars, wine, purses? Please, the Chinese & Russians & Middle Easterners will happily take all those goods off their hands for the right price.

IMO, I absolutely think EJ is on the right track with his "Fortress America" thesis...but it's not out of desire, it's out of necessity, IMO...and it will still require us to do something about our monetary system, b/c not only will the rest of the world have no use for it & therefore move away from it even more rapidly than they have the past 10 years (forcing ever greater amounts of QE), but the domestic oil supplies that we are counting on to grant us our freedom are much higher cost than we can afford to float $50T in total credit market debt on...which will also force ever greater amounts of QE.

This implies either way - a dramatically lower standard of living for most of the US, rising costs of necessities, & rising gold prices...but not necessarily any catastrophe...