US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders)

[Spartacus]

if this rationalization below is too intellectual to be believed by "the masses"[*], how else could CBs sell the decline - what justification could they use, in fact, to acquire MORE US dollar reserves?

"the Chinese/British/European assets we can lay claim to are reduced because of the US dollar decline,

BUT

there has been no reduction in the US dollar denominated assets that our US dollars can buy - we still own the same amount of the US as we did yesterday "

I have the feeling that we all on this board are simply assuming the foreign CBs would do the simplest, most straightforward thing the foreign CBs could do - stampede out of dollars - IMHO we should consider the alternatives.

(all else remains constant - no severe inflation, no monetary derivatives collapse, etc ...)
[*] would the CBs even care what "the masses" think? That is to say, would they need any spin or justification at all to accumulate even more US dollars?

[jk]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

the last thing the cb's care about is "the masses."

i think the mostly likely scenario is NOT that the cb's sell a lot of dollar assets in the sense of reducing their gross dollar holdings from present levels. i think that cb's with positive current accounts will accumulate dollars more slowly, reducing the proportion of dollars while increasing the number of dollars. the exceptions to this might be the russian cb or petro exporter cbs - they might at some point sell. but the chinese and japanese are more likely to just scale down. also as the dollar's value declines, that will further reduce the proportional value of their dollar holdings without decreasing their nominal dollars. last year, for example, the decline in the value of their dollar holdings was greater than the accumulation of new dollar reserves, so that the real and the proportional value of their dollar exposure was in fact reduced.

[Tet]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders)

I have never seen so much d0llar bashing in my life, where were these guys when Uncle Buck was falling from 120 on the index to 80 just five years ago? Not a word, not a pip from the MSM when there was real money to be made betting against the d0llar. I'd call this a bottom for the Buck and a very good entry point. How does the Buck get any weaker? Where does additional d0llar creation come from? IMF can't drum up any borrowers. Only so many Narco D0llar's you can create from Afghanistan and Columbia. I don't see the possibility of another war with any countries that can't fight back. My view would be that additional Oil Bourses in Russia, China and Iran would make the Buck stronger not weaker. All the talk about Free Trade deals with Latin America are dying. D0llar heads higher.

[jk]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

I have never seen so much d0llar bashing in my life, where were these guys when Uncle Buck was falling from 120 on the index to 80 just five years ago? Not a word, not a pip from the MSM when there was real money to be made betting against the d0llar. I'd call this a bottom for the Buck and a very good entry point. How does the Buck get any weaker? Where does additional d0llar creation come from? IMF can't drum up any borrowers. Only so many Narco D0llar's you can create from Afghanistan and Columbia. I don't see the possibility of another war with any countries that can't fight back. My view would be that additional Oil Bourses in Russia, China and Iran would make the Buck stronger not weaker. All the talk about Free Trade deals with Latin America are dying. D0llar heads higher.

there are people or institutions on both sides of every trade.

most of the people whom i read have been skeptical of our monetary policies since well before 2000. greenspan was labelled a bubble blower since at least '96 when he backed off from his "irrational exuberance" stance. and the equity bubble was always based in too much monetary ease.

as to where the additional dollars come from- wherever they've been coming from. there is no lack of liquidity in the markets and credit and money-like instruments are burgeoning.

a recession would reduce the trade deficit but lower short rates would remove a prop for the currency and i think that if we have a recession we might see a bond market "reverse conundrum" - dropping short rates but rising long rates - as foreign holders sell duration as the currency drops.

oil bourses trading in rubles or euros or, heaven knows, maybe gold dinars after 2010 when the gulf states supposedly will have a currency union, will reduce demand for dollars in energy transaction accounts.

i think there may be a bounce in the dollar in our immediate future - that appears to be the set-up according to the cot reports on open interest in the futures. but dollars are in oversupply in foreign cb coffers.

how long will the world continue to send barrels of oil, flat screen tv's and cars [to pick 3 examples] in return for electronic credits but nothing of substance? nixon closed the gold window after degaulle wanted to cash in the dollars accumulating in paris. someday foreign cbs are going to want something to show for the dollars they hold. or they're going to want to hold fewer dollars. as i said above, i think the asian cbs have no interest in causing a dollar crisis. they need to export to the u.s. market to maintain employment and development in their own countries. but as they strive to strengthen asian domestic markets as well as expanding exports to europe, latin america and the middle east, they can afford to slowly taper their dollar support operations.

i don't think your post actually addresses these issues, but perhaps you'd like to make more explicit whatever might lie between the lines.

but again, it's disagreements like these that make markets. and i am happy to see someone taking the other side of this debate. you're right that there is for the most part a homogeneity of opinion on this board, and it is always worthwhile to hear the counter-arguments. welcome.

[Tet]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

i think there may be a bounce in the dollar in our immediate future - that appears to be the set-up according to the cot reports on open interest in the futures. but dollars are in oversupply in foreign cb coffers.

Seasonality would indicate the last few years have had strong 1st qtr rises in the d0llar.

how long will the world continue to send barrels of oil, flat screen tv's and cars [to pick 3 examples] in return for electronic credits but nothing of substance?

Not much longer, the question here truly is does that give us a stronger d0llar or a weaker d0llar? My view is stronger. D0llar will be forced to compete with other currencies.

nixon closed the gold window after degaulle wanted to cash in the dollars accumulating in paris. someday foreign cbs are going to want something to show for the dollars they hold. or they're going to want to hold fewer dollars. as i said above, i think the asian cbs have no interest in causing a dollar crisis.

It is in no ones best interest to have a weaker d0llar except for the Federal Reserve who is able to tax the rest of the world with a weaker d0llar through inflation. Truly the Foreign CB's are doing what's required to create a stronger d0llar. IMF loans have gone from about $80 billion just a few years ago to about $12 billion today thanks to China and Russia helping other countries to pay off these d0llar demand based debts.

they need to export to the u.s. market to maintain employment and development in their own countries. but as they strive to strengthen asian domestic markets as well as expanding exports to europe, latin america and the middle east, they can afford to slowly taper their dollar support operations.

More attention should be paid to what China says regarding just who is the holder of all these d0llars in China. The quotes I've read from actual Chinese Central Bankers is it's not China holding all the d0llar's in China, but US companies doing business in China creating the excess reserves. Why does Bernie and Paulson want China to revalue? Certainly that doesn't help US exports, if a 30% drop in the value of the d0llar the last five years hasn't helped already another devaluation in comparison to the Yuan won't help either. What export capacity is left in the US? Where would the trained labor come to create more exports? Bernie and Paulson are doing what they can to allow US companies to repatriate the hundreds of billions of d0llars US companies hold in China at favorable rates. Ask yourself why Ford Motor wants to go private? How many billions do you think Ford today has stashed away in China?

i don't think your post actually addresses these issues, but perhaps you'd like to make more explicit whatever might lie between the lines.

Hopefully I've clarified this a bit.

but again, it's disagreements like these that make markets. and i am happy to see someone taking the other side of this debate. you're right that there is for the most part a homogeneity of opinion on this board, and it is always worthwhile to hear the counter-arguments. welcome.

My comments weren't directed at the forum, I just joined, but have made some good investments in the past from following i-tulip.com. I'm a contrarian, so when I start hearing the talking heads start to bash the d0llar on the radio and TV it tells me the move is over or almost over. I know for myself it's been very profitable to do the opposite.

One needs to realize here that we are engaged in a World War of economics, the enemies of the Federal Reserve have no desires to create another Germany post WWI out of the US by hyper-inflating the currency, the war is truly against the bank. TWT

[jk]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

Not much longer, the question here truly is does [the trade deficit] give us a stronger d0llar or a weaker d0llar? My view is stronger. D0llar will be forced to compete with other currencies.

the major props for the dollar in the last 2 yrs have been rising short rates and the dollar repatriation tax break in '05. do you think the u.s. economy can stand higher short rates to support the dollar? or do you mean "compete" in some other sense?

It is in no ones best interest to have a weaker d0llar except for the Federal Reserve who is able to tax the rest of the world with a weaker d0llar through inflation.

under-reported inflation is also in the interest of the federal government in general in terms of its abitity to deal with deficits and unfunded mandates for social security, medicare and medicaid. it is also very much in the interest of the highly indebted consumer, provided some of that inflation can show up in paychecks.

Truly the Foreign CB's are doing what's required to create a stronger d0llar.

no argument there. the asian cbs have been supporting the dollar via their purchases of u.s. debt instruments- tbonds and, more recently, gse bonds.

IMF loans have gone from about $80 billion just a few years ago to about $12 billion today thanks to China and Russia helping other countries to pay off these d0llar demand based debts.

i don't understand this point. assuming, as you say, that the chinese and russians have offered some kind of aid to imf-indebted countries, i don't see how this has supported the dollar. further, you're talking about $70 billion over "a few years" while we're running trade deficits of almost $70billion a month.

More attention should be paid to what China says regarding just who is the holder of all these d0llars in China. The quotes I've read from actual Chinese Central Bankers is it's not China holding all the d0llar's in China, but US companies doing business in China creating the excess reserves.

my understanding is that the chinese cb, the pboc, holds about $1trillion in reserves of which about 70% is in dollars. that's $700 billion.

i also don't understand the significance of china-based u.s. companies holding dollars. i suppose you could argue that those dollars don't represent a net liability for the u.s., so that the deficit flows are overstated. but the pboc has managed to accumulate those $700billion somehow, and that still overhangs the market.

Why does Bernie and Paulson want China to revalue? Certainly that doesn't help US exports, if a 30% drop in the value of the d0llar the last five years hasn't helped already another devaluation in comparison to the Yuan won't help either. What export capacity is left in the US? Where would the trained labor come to create more exports? Bernie and Paulson are doing what they can to allow US companies to repatriate the hundreds of billions of d0llars US companies hold in China at favorable rates. Ask yourself why Ford Motor wants to go private? How many billions do you think Ford today has stashed away in China?

the main impediment to the repatriation of dollars held overseas by u.s. companies is u.s. corporate taxes. that's why there was that repatriation-tax holiday in '05.

an increase in the value of yuan relative to the buck doesn't do anything to help u.s. companies repatriate money held overseas. [if you think it does, please explain.] it won't help the trade deficit either, i agree. what it is, is politics. it's a sop to those like senator schumer who want to ressurect smoot-hawley. it's a sop to ignorant u.s. domestic voters.

My comments weren't directed at the forum, I just joined, but have made some good investments in the past from following i-tulip.com. I'm a contrarian, so when I start hearing the talking heads start to bash the d0llar on the radio and TV it tells me the move is over or almost over. I know for myself it's been very profitable to do the opposite.

i think the real question is why the dollar hasn't fallen further and faster. and the real answer is that it is being supported by foreign cbs. but reserves are increasingly shifting to countries with less interest in supporting it. china and japan don't want a weak dollar to cut into their exports. but to the extent that china and japan are now using more of those dollars to buy oil, the reserves flow to the likes of iran, venezuela and russia - countries which are less interested in holding or supporting the currency.

One needs to realize here that we are engaged in a World War of economics, the enemies of the Federal Reserve have no desires to create another Germany post WWI out of the US by hyper-inflating the currency, the war is truly against the bank. TWT

i don't understand what you think is going on. please explain who the actors are, what their concerns are, and how "they" are acting against "the bank" - by which i assume you mean the fed.

[Tet]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

the major props for the dollar in the last 2 yrs have been rising short rates and the dollar repatriation tax break in '05. do you think the u.s. economy can stand higher short rates to support the dollar? or do you mean "compete" in some other sense?

I mean compete in another sense. Prior to 2003 all cross border trade between China and Russia involved the d0llar. Today that cross border trade no longer does and is growing exponentially. Russia and China both offered South Korea to have their cross border trade not involve the d0llar as well. If the US wants to compete with this, the US will have to make it's currency more attractive, why would China pay $60 a barrel for oil when they can make a more favorable trade using either the Ruble or the Yuan? When you consider a large portion of the price of oil is manipulated through either Wall Street or London they price can very easily go lower having nothing to do with interest rates. Oil in the 70's was sold by contract, today that is no longer the case and it is almost entirely sold through Wall Street or London. Gazpom is a major threat to Wall Street and London because Gazpom sells by contract.

under-reported inflation is also in the interest of the federal government in general in terms of its abitity to deal with deficits and unfunded mandates for social security, medicare and medicaid. it is also very much in the interest of the highly indebted consumer, provided some of that inflation can show up in paychecks.

I don't disagree that the Fed under reports what consumers consider to be inflation, which are the rising prices. I'm just pointing out that's not what the Fed itself considers inflation to be, rising wages is what the Fed considers to be inflationary.

i don't understand this point. assuming, as you say, that the chinese and russians have offered some kind of aid to imf-indebted countries, i don't see how this has supported the dollar. further, you're talking about $70 billion over "a few years" while we're running trade deficits of almost $70billion a month.

These are d0llar based debts that the indebted country needs to make d0llar based transactions to pay for. Indebted countries will part with their natural resources for d0llars, countries not indebted will accept alternate currencies for their natural resources. I think it was two years ago Russia and China went to South America and made $40 billion in investments and at the beginnning of 2006 both Argentina and Brazil pay off their IMF debts. Only Turkey is left as the largest holder of IMF debt. The ripple effect of IMF debt is very large.

my understanding is that the chinese cb, the pboc, holds about $1trillion in reserves of which about 70% is in dollars. that's $700 billion.

i also don't understand the significance of china-based u.s. companies holding dollars. i suppose you could argue that those dollars don't represent a net liability for the u.s., so that the deficit flows are overstated. but the pboc has managed to accumulate those $700billion somehow, and that still overhangs the market.

Deficit flow is very overstated according to what the Chinese CB officials state, they say it's almost even but they do run a slight deficit with the US. So if this is the case, who is producing the deficit?

the main impediment to the repatriation of dollars held overseas by u.s. companies is u.s. corporate taxes. that's why there was that repatriation-tax holiday in '05.

an increase in the value of yuan relative to the buck doesn't do anything to help u.s. companies repatriate money held overseas. [if you think it does, please explain.]

US companies operating in China must convert their d0llars to Yuan to meet payroll, rent, purchase materials and run their business. If the Yuan bought more d0llars then these companies could repatriate at favorable rates.

it won't help the trade deficit either, i agree. what it is, is politics. it's a sop to those like senator schumer who want to ressurect smoot-hawley. it's a sop to ignorant u.s. domestic voters.

Hard to export burgers and haircuts.

i think the real question is why the dollar hasn't fallen further and faster. and the real answer is that it is being supported by foreign cbs. but reserves are increasingly shifting to countries with less interest in supporting it. china and japan don't want a weak dollar to cut into their exports. but to the extent that china and japan are now using more of those dollars to buy oil, the reserves flow to the likes of iran, venezuela and russia - countries which are less interested in holding or supporting the currency.

I think you might be getting caught up in terminology, Iran shifts their d0llars from US based banks that could seaze those assets to Euro banks that still hold those assets in d0llars, they get refered to as Euro D0llars.
Venezuela is the same story, they just shift their D0llar assets to banks that aren't controlled by the US in order to avoid having those assets taken away.

When Russia talks of diversifying they aren't going to do so by selling D0llar reserves, they mean when the Baltic pipeline to Germany is completed the gas will sell in Euros. When exports take place with China those exports aren't transacted in d0llars. When Gazpom ships LNG by tanker that shipment is transacted in whatever currency that contract calls for. Poland, Ukraine and Georgia all require Russian NG to sell in d0llars that transit through their countries to Europe. That is why Poland, Ukraine and Georgia are so important to the US coalition. Russia is simply getting their natural resources out of the country by other means selling in alternate currencies is how they will diversify their reserves.

i don't understand what you think is going on. please explain who the actors are, what their concerns are, and how "they" are acting against "the bank" - by which i assume you mean the fed.

You've made it very clear yourself what their concerns are, the world is tired of selling their natural resources and labor and getting nothing in exchange except green pieces of paper. Since the Fed is the creator of green pieces of paper, the Fed is who the rest of the world is fighting.

[Tet]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders)

[*] would the CBs even care what "the masses" think? That is to say, would they need any spin or justification at all to accumulate even more US dollars?

One needs to consider what CB's need to accumulate d0llars for. The main reason a CB accumulates d0llars is to purchase crude, the d0llar buys 29% more crude today than it did in August. Crude just broke below a major support line of $60 with the next support at $55. D0llar buying more crude in effect gives you a stronger d0llar. Why would a CB part with d0llars here if the d0llar is getting stronger for the main reason you hold d0llars?
http://quotes.ino.com/chart/?s=NYMEX_CL.G07&v=dmax

D0llar itself today just broke through it's 50-day moving average, this is a major line of resistance as well as a major line of support. Uncle Buck is about 2% higher today than it was a month ago. D0llar historically when it brakes above it's moving average does so for 6 to 8 weeks.
http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax

http://stockcharts.com/h-sc/ui?s=%24usd

Looks like everything is going to plan for the CB's of the world. Thanks to lower crude prices Russia is no longer accumulating so many d0llars. Not much Russia can purchase with d0llars anyway and now that the Ruble is free floating they have plenty of d0llars to defend their currency. Next up Russia announces their Oil Bourse and things really get interesting.

[EJ]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

One needs to consider what CB's need to accumulate d0llars for. The main reason a CB accumulates d0llars is to purchase crude, the d0llar buys 29% more crude today than it did in August. Crude just broke below a major support line of $60 with the next support at $55. D0llar buying more crude in effect gives you a stronger d0llar. Why would a CB part with d0llars here if the d0llar is getting stronger for the main reason you hold d0llars?
http://quotes.ino.com/chart/?s=NYMEX_CL.G07&v=dmax

D0llar itself today just broke through it's 50-day moving average, this is a major line of resistance as well as a major line of support. Uncle Buck is about 2% higher today than it was a month ago. D0llar historically when it brakes above it's moving average does so for 6 to 8 weeks.
http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax

http://stockcharts.com/h-sc/ui?s=%24usd

Looks like everything is going to plan for the CB's of the world. Thanks to lower crude prices Russia is no longer accumulating so many d0llars. Not much Russia can purchase with d0llars anyway and now that the Ruble is free floating they have plenty of d0llars to defend their currency. Next up Russia announces their Oil Bourse and things really get interesting.

Tet, thanks for joining us. The quality of your contributions is appreciated.

I don't usually butt into forum discussions started by members, but you've brought up a point that was raised when our editor Jane Burns recently interviewed Dean Baker, co-director of the Center for Economic and Policy Research. I challenged his statement that Japan was still a net purchaser of long term US debt. He pointed me to the Treasury Dept.'s online report at http://www.ustreas.gov/tic/snetus.txt

We put it into graphical form. Below are all net foreign central bank purchases of long term US debt greater than $250 million for the months of August, September, and October 2006.

The result was a surprise to me. As you can see, of the $92 billion of net purchases of long term US debt in September 2006, for example, only $12 billion came from Asia while $70 billion came from Europe, and of the $70 billion from Europe, $51 billion came from the UK. (Don't blame us for lumping the UK into the same bucket as Europe; blame the US Treasury Department. They issue the report.) In other words, more than half the global total was purchased by the UK.

The usual argument for why foreign central banks purchase as much US debt as they do is the depth and transparency of the US treasury bond market. But doesn't that apply as much to Germany as to the 100 times smaller economy of the Channel Islands? If so, then why does Germany purchased on net less US debt than the Channel Islands?

If you review the data in detail, the picture that emerges is not countries making US debt purchase decisions based on economics but more due to geopolitical considerations. I doubt it's a coincidence that the USA's strongest ally in Iraq is also its largest purchaser of long term US debt.

The key point is that as the geopolitics change, so does the ability of the US to finance its deficits through foreign borrowing. This is why I like and we offer Stratfor, to track the geopolitics.

An analysis of all public and private, institutional and indvidual, purchases of all dollar denominated assets, including stocks and corporate bonds, from the Flow of Funds report is equally revealing.

By the way, noticed you use a "0" as in d0llar instead of an "o" as in dollar. Expressing a similar sentiment, we refer to the US dollar here as the bonar.

[Tet]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders)

Don't blame us for lumping the UK into the same bucket as Europe; blame the US Treasury Department. They issue the report.) In other words, more than half the global total was purchased by the UK.

The usual argument for why foreign central banks purchase as much US debt as they do is the depth and transparency of the US treasury bond market. But doesn't that apply as much to Germany as to the 100 times smaller economy of the Channel Islands? If so, then why does Germany purchased on net less US debt than the Channel Islands?

The rest of the world is becoming Chartalists, or what was once known as Social Credit. Money created without debt. It's no surprise to me that the UK is such a large holder of US debt and no surprise that those that don't want us to know about this try to hide the number by including the UK in Europe. I would think the reality still is that the US is still a part of the UK. You can only until recently purchase oil on two Bourses in the world, London and Wall Street. Both of these Bourses require fittingly enough for the oil to be purchased using TURD$ and you can only buy TURD$ with a d0llar. Understandably the UK because of this accumulates an excess of d0llars that they purchase Treasury Notes with. When you consider the Bank of England is one of the owners of the Federal Reserve why wouldn't they? It certainly didn't surprise me that Sir Alan Greenspan received his Knighthood from the Queen.

The question is who is the buyer out of the Caribbean? Maybe it's the buyer of last resort himself, the Federal Reserve. That would be speculation on my part, but who possibly is buying so much US debt out of the Caribbean? We find ourselves living in interesting times and depending on how you view this old Chinese Proverb either as a curse or a blessing determines your world view. I view it as a blessing.

bonar : n. 1. a debt instrument backed by the full faith and credit of the latest corrupt US political regime; 2. a share in USA, Inc., a technically bankrupt Enronesque nation whose monetary institutions have been alternately managed by crooks and fools; 3. the currency issued by the United States of America, formerly know as the US dollar. See "US dollar."

LMAO, thanks for that.

[Pilot Fish]

Re: UK Purchases

I'm under the impression that much of the purchasing of US debt out of the UK is actually from the Middle East oil producing countries using London as an intermediary.

[EJ]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

The rest of the world is becoming Chartalists, or what was once known as Social Credit. Money created without debt. It's no surprise to me that the UK is such a large holder of US debt and no surprise that those that don't want us to know about this try to hide the number by including the UK in Europe. I would think the reality still is that the US is still a part of the UK. You can only until recently purchase oil on two Bourses in the world, London and Wall Street. Both of these Bourses require fittingly enough for the oil to be purchased using TURD$ and you can only buy TURD$ with a d0llar. Understandably the UK because of this accumulates an excess of d0llars that they purchase Treasury Notes with. When you consider the Bank of England is one of the owners of the Federal Reserve why wouldn't they? It certainly didn't surprise me that Sir Alan Greenspan received his Knighthood from the Queen.

The question is who is the buyer out of the Caribbean? Maybe it's the buyer of last resort himself, the Federal Reserve. That would be speculation on my part, but who possibly is buying so much US debt out of the Caribbean? We find ourselves living in interesting times and depending on how you view this old Chinese Proverb either as a curse or a blessing determines your world view. I view it as a blessing.

[/size]
LMAO, thanks for that.

Maybe "surprised" wasn't the right word. Given all the hysteria around China's purchases of US debt, you'd think they were buying all of it. In addition to the mystery Caribbean buyer(s), I assume at least some are oil producing countries. Note that these are conspicuously absent as a group from the treasury report. I'd like to see a line item in the Treasury Dept. report for "Oil Producing Countries" broken out by Saudi Arabia, etc. Maybe I'll write them a letter and see what they say.

Asia Times often does a good job on this topic. I have received emails from angry readers complaining to me the Asia Times is "anti-US." One could interpret their editorial policies that way. But from the standpoint of many Asian countries today, US policy is looking increasingly anti-Asian, making Asia Times more pro-Asia that anti-US. But this is a semantic argument.

Here's the beginning of a piece on the topic of this thread by Richard Benson, who is another of my regular reads at Asia Times. Bonars, TURD$, and Lucky Bucks...

Oil for dollars, and dollars for US deficit
By Richard Benson

The Asians remain shocked and in disbelief. Just when Japan, China, Taiwan and Hong Kong had accumulated enough dollars to buy oil to keep them warm for many winters, it's all over. In broad daylight, the Americans and the Organization of Petroleum Exporting Countries (OPEC) cheered as the price of oil popped up from US$30 a barrel to more than $50.

Indeed, this jump in the price of oil increases the world's daily oil consumption bill of 84 million barrels a day to $4.2 billion, from $2.5 billion (or $1.5 trillion a year from $900 billion). The world now has to shell out an additional $600 billion a year of "lucky bucks" to oil-producing countries just to stay in motion.

The bigger shock, however, is in the devaluation of dollar holdings of US Treasury debt. The rise in oil prices guarantees that the value of the US dollar will be pushed down even further, and stay down. Now that China is the No 2 oil importer and Japan is No 3 - with the rest of Asia very thirsty for oil as well - you can understand why the Asians must find a way to protect themselves.

The US strategy for using oil to finance its deficit is, of course, brilliant. America's elected officials knew that at some point those independent foreign central banks would start getting edgy about buying more dollars to pay for the United States' war and deficits. The $650 billion trade deficit is breathing down the dollar's neck. So which central banks can the US continue to use as the fall guys to buy the dollar? Why not the Persian Gulf oil states - but where would they get the dollars to buy US Treasuries? Well, with the Chinese piling up dollars and growing like crazy, at some point the oil market had to tighten. It was only a matter of time before the Chinese would start bidding up the price of oil. The Asians, therefore, are hung out to dry when the price of oil rises because they have to spend more of their dollars on oil.

As the price of oil goes up, extra money floods into the Gulf kingdoms. With the US secretary of defense putting troops all over the ground in the Middle East, and those nimble aircraft carriers nearby and ready to deliver the "shock and awe of sudden democracy" to the Gulf monarchs, it's a sure bet that America's OPEC buddies will stash their newly found Asian lucky bucks into good old American Treasury notes.

[Spartacus]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

It's sporadic, but there has been a lot of MSM talk about it. Remember there was a big surge around the time Buffett put on his big US$ hedge.

were these guys when Uncle Buck was falling from 120 on the index to 80 just five years ago? Not a.

Part of my own problem is that I've switched off so much MSM that I'm really in danger of being out of touch.

[bart]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

...
I'd like to see a line item in the Treasury Dept. report for "Oil Producing Countries" broken out by Saudi Arabia, etc.
...

There actually is one right now, although its not broken out by country. It's on the mfh page at http://www.ustreas.gov/tic/mfh.txt .. and being possessed of a chart compulsion, here's the picture:




I'd also love to know who all is in that Caribbean group... but other than the huge spike for two months in 2005, it hasn't been a significant factor.

[bart]

Re: US $ fall - how could it be "spun/pitched" by other central banks (aka bagholders

Today that cross border trade no longer does and is growing exponentially. Russia and China both offered South Korea to have their cross border trade not involve the d0llar as well.

I've seen many comments and intimations of this, and it makes sense... but do you have any references or URLs or hard data?

Deficit flow is very overstated according to what the Chinese CB officials state, they say it's almost even but they do run a slight deficit with the US. So if this is the case, who is producing the deficit?

This strikes me as either posturing or a Sun Tsu approach on their part, but it's also certain that there's a deficit with the Euro area and others too.


Here's something from La Caixa bank you may not have seen:

I think you might be getting caught up in terminology, Iran shifts their d0llars from US based banks that could seaze those assets to Euro banks that still hold those assets in d0llars, they get refered to as Euro D0llars.
Venezuela is the same story, they just shift their D0llar assets to banks that aren't controlled by the US in order to avoid having those assets taken away.

Its also very telling that the only item that is part of M3 that was truly discontinued was reporting of Eurodollars.
A few months ago, I actually adjusted my M3 Eurodollar component to help account for those issues and oil prices too... and my gut hunch is that the adjustment is low and that M3 is even higher than I show it.