[Boerseun]

Not sure whether this is the right forum, but here goes...

In the 1930's the US refused to accept payment for goods and services from other countries with currency. They demanded gold. This was in the wake of the global depression sparked off with the 1929 Wall Street collapse. This resulted in the US ending up with more than 80% of the world's gold in their vaults. Now hang on a minute...

Since the 1970's, the international oil trade was done in US dollars. Countries had to stock up on dollar reserves in order to purchase oil on the two international oil bourses, in New York and London. These countries' vaults are brimming with US currency, only to supply their domestic oil demand. This was all well and good, and sort of made the US currency the de facto world currency. It also made sense for the US, because it expanded the US' influence further, into the very heart of other countries' economies. This all changed in the early 2000's with the creation of...

The Euro.

Baghdad decided early on after the acceptance of the Euro in the EU to create its own oil bourse, where trading is to be done exclusively in Euros. This makes sense, seeing as most of Baghdad's sales are to the EU. Baghdad went ahead with this planning, and eventually (amidst great objection from the US and Britain) did open its doors for oil trading. Two months later, the US invaded. I am by no means saying these happenings are related - but just keep it in mind. Teheran is planning the same thing - to set up an international trading oil bourse in Teheran to trade exclusively in Euros. The US is eyeballing Teheran.

Any case, I digress. I have read that countries around the world are more interested in trading oil in Euros currently, because Europe seems to be less prone to military action, with the resulting stabilising influence on the currency. So, countries are standing in line to sell their dollars back to the US, who, ultimately, must honour the value of the dollar and accept it. It is, after all, their currency. But there's a little problem here. It seems as if the US can only honour five percent of the money put into circulation since the '70s, or petrodollars, as they are more commonly known. In other words, as countries proceed in trading oil in Euros rather than dollars, the American market will become bogged down with useless currency. The dollar will start losing value and ultimately collapse. Matter of fact, the dollar have already lost more than 30% against the Euro since its inception. But think about this for a minute: The Dollar is the de facto World Currency. And there is 95% more dollars in supply than can be backed by the US. In other words, once the oil trade is shifted significantly from Dollar trade to preferred Euro trade, the World Economy will collapse. The 1930's depression (which in a big way contributed to WWII) would look like a Sunday picnic in comparison.

Could this maybe explain the US' current foreign policy? Could this maybe explain why the US is so insistent on oil trade in dollars? Is the US' international interventions of late not based on protecting the oil supply, but rather to suppress the Euro trade in oil, and in doing so attempting to prevent global economic collapse? Or simply to hide the fact that the system put in place since the 1970's is inherently flawed?

Come what may - the mere fact that the US cannot back 95% of its currency will eventually result in a global meltdown.

I know - I have made some sweeping statements here, and will try and find the links. But I'm sure the US government is stressing a little right now.

The reason I've put this in History is simply because I believe however this pans out, we are seeing history in the making...

Thoughts?

[InfiniteNow]

I will gladly pay you Tuesday, for a hamburger today.


Other economies will surely progress, as the US debt can be purchased by other countries, thus giving them an advantage. This is indeed a very interesting set of circumstances to follow.


I ran out of 20s, can I pay you in polution credits instead?

[Boerseun]

The first time I read about the US not being able to back its currency was an article in the NY Times, around 2003/4. The guy said that he reckons as people start losing faith in currency, they will once again start looking to gold as a safe haven. Back then, gold was trading at around $400/ounce. He predicted that as the sale of dollars back to the States increase, gold should double within two years. Well, it's now two years later, and gold is trading at more than $700/ounce!

Could this be the first signs of the global meltdown to come? The dollar losing more than 30% to the the Euro, and gold almost doubling, and still rising?

Think about this! Scary stuff, indeed...

And, oh yes - if you have any spare cash lying around, invest in GOLD!.

[Boerseun]

So... more than a year after the previous post, and things are panning out exactly as the NY Times article said. Gold is now way over $800 per ounce, the dollar is much weaker, etc.

The question, then:

Anybody followed my brilliant advice and bought gold? I need commission on that...

Also, whatcha gonna do when 95% of your money turns out to be no more than paper?

[InfiniteNow]

Boerseun said:

Also, whatcha gonna do when 95% of your money turns out to be no more than paper?

Feel a lot closer to the poor folks in Zimbabwe most likely.


Using US dollars for monopoly...

[Queso]

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The dollar will start losing value and ultimately collapse. Matter of fact, the dollar have already lost more than 30% against the Euro since its inception. But think about this for a minute: The Dollar is the de facto World Currency. And there is 95% more dollars in supply than can be backed by the US. In other words, once the oil trade is shifted significantly from Dollar trade to preferred Euro trade, the World Economy will collapse. The 1930's depression (which in a big way contributed to WWII) would look like a Sunday picnic in comparison.

How will the world economy collapse when you switch oil trade from dollars to euros?

what does oil have to do with everyone's paper dollars?

and as the dollar continues to fall...what are all these worker bees going to do with their savings? will it really be worthless someday?
that would be insanely hilariously devastating.

[Queso]

could someone elaborate on their free time ? just bumpin'

[Buffy]

orbsycli said:

How will the world economy collapse when you switch oil trade from dollars to euros?

Iran and Venezuela--who hate the US--argue, somewhat convincingly actually, that this will only cause the US economy to collapse.

The basic issue is that when OPEC decides to denominate in Euros while the dollar continues to fall in relation to them, that the cost of oil in the US will skyrocket, thus causing tremendous inflation without growth in the economy to balance it. When this happens, all the foreign governments who we have borrowed from in dollar-denominated securities will dump those securities, causing the value of the dollar to fall even further.

It could be a horrible mess for the US!

OTOH, there's an old saying: when you owe the bank $100, the bank owns you, but if you owe the bank $1,000,000, then you own the bank. That is, if you default on your loan, the bank is in *major* trouble. So the counter argument is that the Chinese and Arabs and so on who have invested in the US and in dollars *can't afford* to let the dollar drop, so they will do everything they can to help prop up the dollar and keep their investments from becoming worthless overnight...at least in the short run!

So:

orbsycli said:

...what are all these worker bees going to do with their savings? will it really be worthless someday?

Yah. Make the current situation in Zimbabwe look like a cake walk...

orbsycli said:

that would be insanely hilariously devastating.

...or not, depending on where your money is!

There's a reason they call it the Dismal Science,
Buffy

[Boerseun]

Well, currency is based on trust. And in the global use of dollars, countries establish the value of the dollar based on the "trust" that the dollar value will be honoured by the US. In theory, that is. But, for example, the South African government has a few billion dollars, and doesn't care wether the US backs it - all it wants is the surety that it can buy oil with it. But now if the mid-East don't want dollars for their oil, but Euros, rather, then the South African government has no other option but to exchange those dollars on the open money markets for Euros. But keep in mind that the South African government won't be the only one to do so. There will be such an oversupply of dollars, that the dollar will collapse in value, whilst the Euro will skyrocket. Problem is, of course, that the oil market being what it is, all countries have vast US dollar supplies and very few Euros. This will have to change in the face of a trade switch from dollars to Euros.

...which means that the American currency is backed not so much by tangible assets (the 5% the government can back), as much as by the international "perception" and trust in the currency (the 95% that cannot be backed, according to the NY Times).

One good spinoff from a currency losing lotsa value in a short time, is that debt gets wiped out. So it sucks to have people owe you bucks, but it rocks to owe the bank a million bucks from a loan that was worth something a year ago, but still owe them a million bucks (plus interest) a year later, when a loaf of bread now sells for a million. Okay, extreme example, but you get the idea. Okay - it's only a good idea if it's you owing the money. If you're the bank, it sucks some serious tripe.

Oh, yes - and investments, etc., will effectively become worthless. Unless managed by some crazy high-risk gambler dude who can realise thousands of per cent returns on portfolios, constantly, over a long period of time, just to keep up to speed with the falling currency. Unless, of course, those portfolios are invested abroad, and tallied not in dollars, but in the foreign country's currency.

Also, China will be a bit pissed off to find that the bonds they own are practically useless.

Fun and laughs all around if the world decide to switch to Euro oil trade...

[Michaelangelica]

Fascinating thoughts.

It used to annoy me that USA tourists would not bother to get their dollars converted into local currency. They just arrogantly expected you to take their dollars.
When I was feeling especially mean-spirited I would take their dollars for Aust$ equivalent making a tidy 20-30% extra profit on the deal. They didn't even care.

I just read a few days ago about Saudi Arabia thinking about not trading in US$s.

Also the Chinese currency is weighed (& controlled?) with a basket of currencies including the US$ so it effectively has been depreciated (?) with the fall in the US$

It is annoying here when you are importing (used to 10-15 years ago) from SE Asia and have to trade in US$ not the local currency. Although when I imported from France or England I was always quoted in francs or pounds.

See also the recent thread on "Sub-prime crisis How bad is it?"
It seems to me there is a great thriller, or at least a conspiracy theory, in the making, about 'Arab word Vs the USA' .

"We live in interesting times" as the Chinese curse goes,

[Michaelangelica]

A friend just sent me this Australian article
The party's over and Liberals will soon be history - Opinion - smh.com.au
Although I'm not sure how being a psychologist makes you a good economist.
Perhaps, What you believe will happen, does, as in Cinderella?

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Linked to this, but compounding it in frightening ways, is the imminent demise of the United States economy.
In fact the whisper, the subplot in economist circles, was that this election was one to lose. That whoever inherited Australia in 2007 inherited a coming economic collapse in globalised trade that would suck Australia and much of the rest of the world down with it. For two years now the best predictions have been that the subprime meltdown would act as merely the detonator of a much larger explosive charge created long ago by US consumer debt, concealed by Chinese and Arab investment in keeping that great hungry maw that is America sucking in what it could not begin to pay for. The avalanche-like fall of US house prices will be closely followed by the same in linked economies worldwide, and presage a harsh and very different world than the one we have lived in. In short, the party is over. We are a civilisation in collapse

[Qfwfq]

Did none of you notice the recent news (past month or two) about the Chinese gov't minister talking about the need to diversify the country's investments? First thing I thought was, you'd think he'd bloody well do so before saying it too loud...

My savings are in Euro!

[Buffy]

Qfwfq said:

Did none of you notice the recent news (past month or two) about the Chinese gov't minister talking about the need to diversify the country's investments?

I can guarantee you that no one in the current administration's Treasury Department was listening!

Henry Paulson, US Sec said:

"I would just say that I think I've been very consistent on a strong dollar...

...he said after the dollar had dropped 9% in the past year...

LA, LA, LA, I CAN'T HEAR YOU! LA, LA, LA!
Buffy

[Zythryn]

Boerseun said:

Back then[2003-2004], gold was trading at around $400/ounce. He predicted that as the sale of dollars back to the States increase, gold should double within two years. Well, it's now two years later, and gold is trading at more than $700/ounce!

Could this be the first signs of the global meltdown to come? The dollar losing more than 30% to the the Euro, and gold almost doubling, and still rising?

First, yes, I believe we are living in a time where there will be massive economic upheavals.
Second, this guy is silly.
Funny how we always look back and latch only the predictions that were correct, instead of all the predictions that were wrong.
Go back to Mid 1977, gold was almost down to $50/once. By the end of 1979 we were up to $750/once, 1400%!
Yes, gold is going up in value rather rapidly, not it isn't (in and of itself) going to lead to economic meltdown.
Now, if it becomes clear we have reached peak oil (e.g. OPEC says it will raise production and it can't, and no one else can fill the shortfall), or if drinkable water becomes so scarce we have wars over it, or China sells all the US debt they have but no one wants it, then we may have a meltdown. But not solely because of gold's price (IMO).

[Boerseun]

Zythryn said:

Second, this guy is silly.

I can quite understand your need to believe that I'm silly. You might have assets tied up in markets vulnerable to the future crunch. But saying I'm silly won't prop up your portfolio's defenses. Rather, I think you're misunderstanding my premise...

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Funny how we always look back and latch only the predictions that were correct, instead of all the predictions that were wrong.

Why would you want to latch onto wrong predictions? Hindsight might be 20/20, but the only way to validate/invalidate a theory, is through analysing the results of tests and predictions, that can only be done in hindsight. When you're presented with the results of an experiment, the experiment has obviously taken place in the past. How else? In ignoring the predictions of the future economic crunch because it might be to your disadvantage if it were to happen, do you propose we ignore the flow of time, too? Er...
The more evidence comes in that supports the view expressed in the NY Times article referred to in the first post, the more likely it becomes that the theory holds. No theory is absolute, though - hence the name.

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Go back to Mid 1977, gold was almost down to $50/once. By the end of 1979 we were up to $750/once, 1400%!

Exactly. Gold doesn't determine where the other indicators go - gold is a follower, and the gold price is a good indicator of what investors think of the rest of the market. If the markets are dodgy, gold rises in reaction to the dodginess. Gold blew through the roof in the '70s, because of the oil crisis. Guess where gold is going now?

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Yes, gold is going up in value rather rapidly, not it isn't (in and of itself) going to lead to economic meltdown.

Listen, and listen carefully: Gold is not a leader, gold is a follower. If the gold price rise and rise consistently, it's a sure indicator that investors are losing trust in the rest of the market, said market including anything from oil to actual usable commodities. Gold has been steadily rising over the last few years. What can it mean? Was a new and revolutionary use for gold been discovered in the last few years? No. Gold is essentially useless (except for a few specialty uses - and, of course human vanity) BUT gold is a safe haven in times of economic upheaving. What does that tell you about the current state of world economic affairs, if gold has been steadily rising over the last few years?

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Now, if it becomes clear we have reached peak oil (e.g. OPEC says it will raise production and it can't, and no one else can fill the shortfall),

The problem with investors, of course, is that they'll take their money and run long before the actual event. Peak Oil doesn't have to occur before they'll take their money - a good fright will trigger mass sales in a world living under the expectation of Peak Oil. We'll see some bad economic crashes and shakes long before the oil runs out. Investors are funny animals.

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...or if drinkable water becomes so scarce we have wars over it, or China sells all the US debt they have but no one wants it, then we may have a meltdown. But not solely because of gold's price (IMO).

Like I said, Gold follows, not leads. The gold price won't trigger anything, because gold's price is established in reaction to the general stance of the marketplace. So, if the gold price is in steep decline, that's a good sign - people have enough trust in the market to invest in things other than that ancient bearer of economic value, gold. If the gold price is in a consistent rising phase, the opposite applies. It's merely an indicator of the market at the time.
...and your second point about China trying to sell US debt will happen once the world changes from oil trade in dollar to oil trade in Euro, because then there'll be an oversupply of dollars and the dollar value will come crashing down, basically destroying the value of what the US owes China. The US & China, and every other government, institution or individual who have any assets bound in dollars, will suffer. But not because of the prce of gold. I think you should read my prior posts a little more carefully.