SUBPRIME LOANS, THE US DOLLAR and THE OIL PRICE
Until 1971, a US dollar was changeable for a set amount of gold.
When Richard Nixon removed this link, an increased amount of US dollars could be printed, as required by the government of the day.
Such printing occurred in the highly inflationary Seventies, to pay for the war in Vietnam and for the costs of the oil shocks.
By 1979-80, the actions of the American government led to a flight from the dollar, associated with such turbulent events as the Soviet invasion of Afghanistan, the Iran hostage crisis and the Iraq-Iran war. Around the world, many investors, in panic mode fled away from paper money to assets such as precious metals. Gold shot from $200 to $850 per ounce and silver also climbed.
Will history repeat itself?
The price of oil has been steadily rising on demand and with the threat of some flare up with hostilities in the Middle East. Is President Bush intending to have a confrontation with Iran as well?
The American government is again printing money to pay for a highly unpopular and expensive war and all sorts of global trouble spots are likely flashpoints. A major terrorist attack is also possible.
The United States also has now a huge trade deficit which is being financed by the Japanese and the Chinese by buying US treasuries. The giant dollar holdings of these governments are at risk if a currency crisis were to eventuate.
The daily news is only extending the involvement of a varying range of financial institutions, across the globe, in the subprime loan debacle. Many are expecting the Federal Reserve in the US to be forced to drop interest rates and thereby imperil further the value of the US dollar.
The date for a cut in US interest rates is likely to be September 18. The worsening mortgage crisis is making this an almost certainty.
It is speculated by many, that this may to be the trigger for a rapid, downward rating of the US dollar against other currencies and also gold and silver. Stock markets across the globe have partly recovered but there are still rumours of banks and hedge funds sitting on masses of dodgy loans they can't sell
And what if your income is tied to the US dollar?
The world's oil producers have that problem. As the US dollar falls in value against other currencies, the purchasing power of their oil revenues falls in REAL TERMS. (Most of the imports into the Middle East are from Europe, and therefore in Euros.)
The cleverest thing to do would be to raise the price of oil in US dollar terms to preserve your purchasing power. Thus the world oil prices tend to move UP if the US dollar falls. Currencies rising in value against the US dollar tend to protect their economies and consumers against the rising oil price.
The fallout from the subprime mess in America is spreading worldwide.
This is not only going to affect people with mortgages and other debt, but the costs of travel and goods that need to be transported. The Future of the US Dollar is a likely gauge as to the Future price of Petrol at the pump
September 14, 2007
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