Submitted by Andrew Smolski of OilPrice.com
Jesters, Economics, and American Dollar Supremacy
The debt debate has been going on all summer, a 2 months and running theatrical experience of court jesters parading about while the United States economy teeters on the edge. On both sides of the aisle have been ridiculous solutions that are showing the world daily, America is willing to sacrifice its citizens for the profits of the corporations. The problem is, why will the rest of the world continue to support American multi-nationals, when they have their own. As dollar supremacy begins to wane, and oil prices rise as the dollar’s value descends, maybe it is time to talk about the horrendous policy decisions of these politicians in hopes it opens up a way to point us in the correct direction. Otherwise, when August 2nd comes and the deal is passed anyway, cause it has all just been a “watch this hand” moment, we might find ourselves not understanding why the Social Security check seems meager compared to before.
The dollar has been the world reserve currency since before I was born, this has given the American economy and government a wide range of capabilities economically that most/all other countries do not enjoy. Whenever a crisis happens, even the housing market/derivative crisis caused by US domestic policy, people will run to US Treasury bonds which pushes the dollar value up against other currencies such as the Euro. However, the world has been growing weary of this tactic and also of the fact that they hold these Treasury bonds, and the Treasury then ignores them along with the Fed to push policies such as QE2. QE2 devalues the dollar, which in turn devalues the bonds, and along the way pushes up the price of oil. It is false stimulus, stimulating stock points in an imaginary economy and not creating jobs and products in a real trading economy. Not only are none of these plans doing what needs to be done, create jobs in a consumer economy and wealth again in the middle class, but it is reducing faith in the dollar. As dollar supremacy goes, who knows what will be the status of a country that has hollowed out its manufacturing industry.
So, QE2 raised prices on oil and food putting the squeeze on the very consumers which then degraded further consumer confidence. The debt debate also reduces confidence of rating industries, who are now stating that they could reduce the grade of US Treasury bonds to AA. That would be a first in history for the US, although it should be taken into account that these were the same rating industries who were giving excellent ratings to derivatives which crashed the global economy. Ron Paul had an idea to deal with the debt ceiling and also to prolong the debate, the Federal Reserve could just delete the Treasury debt it holds. This is because the holding of this debt is the same as the government paying itself, and most of these numbers in the end are just inputs into computers. Instead, both sides will continue debating in comedic fashion as if they are going to repair the economy with this debate. The debate if not resolved will crash the world economy again, that is about it. More importantly it will aid the arguments put forth by Iran and China that the world should use a basket of currencies for oil. See, as stated prior, oil prices and dollar value have an inverse relationship. As, the dollar descends oil prices rise and vice-versa, but it is an indirect inverted relationship.
Middle East economies have been discussing the basket currency idea, with Kuwait actually implementing the idea. Paulson had to discuss with Qatar about not doing so, even though these economies do not need nor want a descending currency when they are growing without issue. Even with the Euro Zone debt debate, it seems to relate back to US banks and the Treasury wanting to make sure they are paid what they loaned, regardless of the fact that they were selling derivatives and betting against them at the same time. Luckily for the US, the Euro Zone is with us, but this is not the case with many of countries of the world. China is not and China’s recommendation was for an SDR system, which was created by the IMF as an international reserve asset. It would be something like a supra-sovereign currency. The US may be the biggest economy and also the most technology advanced military, but the economy looks as if it is built on sand and the world has tired of wars. Business and trade are the new forms of battle, and we may still have Saudi Arabia with us, but emerging economies want oil as well. It looks as if we may have surrounded the world with missiles in the biggest waste of money the world has ever seen, as our position geopolitically downgrades due to a loss of faith by the markets (read investors). All this shows the slowly degrading confidence in the US being the “pivot point” for the world economy.
The power of the dollar in relation to oil can be shown by the graph below, and thinking about when QE2 was enacted along with Middle Eastern revolts and the Libyan war. In 2009 people were still rushing to buy US Treasury bonds, the Euro Zone crisis had begun, and therefore the dollar was remaining strong. Also, Bernanke had not foolishly gone pissing off the worlds people by doing QE2. So, oil was relatively stable and priced quite low in comparison to today. As QE2 waned away, and the dollar was losing value due to the loss of value in US Treasury bonds oil began to sky rocket, mixed with the US intervention in Libya and other disruptive forces in the Middle Eastern region. The dollar plays a strong role, not the only role. Speculators are typically blamed, but speculators only can manipulate if events coalesce which produces a change in sentiment from large scale investors in the market. That coalescing happened and oil more so than gold is like the secondary world reserve currency, and as the safety of the dollar and Treasury bonds deteriorate, oil
becomes a higher demand product. So, it is not technically due to the dollar peg, but due to confidence, this is what in a form supports Hayek’s radical relativist position on economics. This position was, formulas do not take into consideration all the variables all the time, because of a false belief in a rationality of economics. It is less of a science and more of a discipline as stated by Max-Neef, although they are odd to be stated in the same essay. That discipline has been infiltrated by ideologues who are blaming all sides and only a few economists like Mike Whitney, Dean Baker, and Paul Craig Roberts have called out Bernanke on his QE2 policy. The New York Times did, when it was almost done, which is like the housing bubble, who cares if you call it afterwards.
Then what is domestic economic policy going to be? There has been no debate about that, check out my article The Need For Real Domestic Alternative Energy Policy, or also America: Why Aren’t You Protesting, both discussing A.) the debate should be focused on jobs and reinvigorating a consumer economy and B.) political discourse has been corroded by a corporatization of American politics. Instead, what we have is the biggest theatrical experience in politics. The world is shocked at the stupidity, here in México both La Reforma and La Jornada have editorials saying it is playing with fire or that they have lost the ability to sustain their economies properly. One, and perhaps the most important, no one wants a US default, it is a default on the largest debt the world has ever had. Two, the US can keep accumulating debt as long as the world maintains confidence in the dollar and in the government of the US to enact correct policies. That would be that they need to stop being clowns using a debate to cut social services and start talking about the economy instead of screwing over the middle and lower class of the country. Three, oil prices will continue to rise, because of the loss of confidence in the dollar and US Treasury bonds, because demand will rise for oil as a reserve currency for the world until a new system arises. If they can not even treat something as simple as a debt ceiling debate with seriousness, then maybe the world is right for reducing confidence. Welcome to the world of high priced oil and stupid American domestic economic policy.
By. Andrew Smolski