Friday, September 02, 2005

Katrina Is An Economic Turning Point For The USA, And Therefore The Globe

This headline is a quote from the post below, I thought I'd elaborate on it. According to Matt Simmons and others, Saudi Arabia is the key producer of crude oil, and when Saudi oil production peaks, then the world peaks. The USA has the same role, but for dollars, as Saudi arabia has for oil. The world's economies have been growing on the supply of cheap credit that the USA is able to continually issue. Other countries issue bonds such as our treasury bills, but USA debt is the big one. US dollars are also the world's reserve currency and at present the only currency that international trades in oil can be made. So, oil and dollars are closely linked, in an inverse relationship. As the price of oil goes inexorably up, the value of dollars goes down.

The supply of dollars is about to peak, much as the oil supply is about to peak. There is little the US goverment (specifically the Federal Reserve Bank) can do about it. The Fed will not be able to flood the globe with cheap credit for ever. Lower rates, raise rates, issue more bonds, fewer bonds - it does not matter. Hyperinflation is fast approaching, and this is the depletion of money. Hyperinflation of the dollar is no different from the Saudis not be able to flood the globe with cheap oil for ever. Note that although the USA can issue more bonds we don't have the domestic captital to buy them. We depend on other countries to do that.

The best source of info on the US dollar crisis is FinancialSense.com.

And how will Katrina affect the US economy in such a drastic way? The US economy is not sound, by any means. The US stock market is overloaded with real estate debt. With no manufacturing base, and not self sufficient in energy or capital, we don't even have the resources we had in the Great Depression. September and October are generally the months when the stock market has major corrections and crashes. The combination of insurance losses and energy supply disruptions could easily tip the balance of the market and send us falling into recession. With a recession, will there be any way to avoid a real estate collapse? If we do hold on, then I can't believe there will be any economic growth. The best we can hope for economically will be economic stagnation, while inflation gradually gathers steam. If America's economic growth (entirely real estate driven) falters, then global economic growth stops also.

1 comment:

Robert Nelson said...

"As the price of oil goes inexorably up, the value of dollars goes down."

I'm not sure this is true. So long as oil is only sold in dollars, higher oil prices could increase dollar demand. The problem still remains, however, that a faltering US economy presumably keeps the Fed creating more dollars than are in demand.

Still, the core of your message is spot on. And I LOVE financialsense.com Jim Puplava is a gem!