By TheBigPicture | 21 September 2007
Saudi Arabia, who usually mimics every FOMC move, has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, according to a UK Telegraph article (Fears of dollar collapse as Saudis take fright, SEPTEMBER 2007), is signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg. This could potentially cause a cascading chain reaction across the Middle East— setting off a stampede out of the dollar and towards either a basket of currency, or more likely the Euro.
Last month, this same author was expressing concern that the "Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation."
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and [probably] tipping the economy into [severe] recession. It is estimated that China holds over $900bn in a mix of US bonds. (August 2007)
Before you dismiss the author of both of these pieces as a Dollar Bear, recognize what he has said in the past about the Greenback:
- "Disregard all hysteria. The ailing Greenback will not collapse this year, not in ten years, not in twenty years, not in half a century. There is no credible currency against which it can collapse. (Unless you count gold). None of the world's rival power blocs have the economic and demographic depth to challenge American dominance." (JULY 2007)
Above, we discussed the potential impact of the ongoing weakening of the US dollar.
Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.
This is simply a measure of how much cash the Fed is injecting into the system.
The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:
Click Here, or on the image, to see a larger, undistorted image.
Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.
This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.
As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?" I am not sure what is was (and we've discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless.
- [ Normxxx Here: How about the lack of those repos having any visible effect on the intended markets? ]
Why? One way to think about it is supply and demand. Print A LOT more dollars and each one is worth a little less.
Or, consider it this way: Extracting Oil or Gold from the earth ain't easy. We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car— all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
But just crank up the printing press: Its cheap and easy. Why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value— or, instead, we will insist on more of your crappy little pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
- [ Normxxx Here: But especially those things already in international trade, e.g., just about all manufactured and processed things. ]
Normxxx
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2 comments:
"For gold, the process is not all that dissimilar. "
How much does it cost in USD to get an oz of Gold out of the ground these days?
All I can give you is a S.W.A.G. (a Scientific Wild Assed Guess). And remember this would just be an average— the actual value varies wildly from mine to mine, so it isn't even meaningful (mines are shut down when they can no longer produce profitably, but opened up again when the price goes sufficiently higher than cost for some appropriate time; but there are shutdown and startup costs, so this does not occur at every minor movement).
I would guess the cost would average north of $400 per troy oz.— but remember what I just said— as miners open less and less productive mines, their average cost of production goes up. But I would guess that well over half the producing mines would cease operation if the price drops below $350.
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