[Markos101]

It's best I quote James K. Galbraith of the Austin Oil Peak Colloquium, the full interview for which may be found at:

http://www.globalpublicmedia.com/INTERV ... GALBRAITH/

Galbraith also addresses other economic issues as a result of peak oil. He is a Professor of Economics at the University of Texas.

Somebody's going to have to cut their consumption. It seems to me likely, that that somebody won't, in the present state of the World economy, be us. At least not to the most substantial extent.

That is to say, oil is priced in dollars. And it's very possible, that the price of oil in dollars can be held reasonably constant, meaning that the American consumer may not notice this situation or be impacted by it very substantially for quite some time to come.

How will the diminished quantity of oil then be rationed? By a fall in price of everybody else's currencies. By the currenices of many other countries, in particular developing countries, which will then find the dollar price of their oil, much higher. And will not be able to consume.

This is again a situation which you can see a constitency for in the United States but it's not a wise global public policy because it implies a major blockage to the process of economic development in this world. And it implies that a great part of the rest of the world will undergo hardships which will increase the separation between them and us, and therefore the potential for conflict.

So when peak occurs, the US consumer might not notice it - but look out for a devaluing of other world currencies against the dollar as a sign of decline in world oil supply. That should be the economic signifier.

[MonteQuest]

It's best I quote James K. Galbraith of the Austin Oil Peak Colloquium, the full interview for which may be found at:

http://www.globalpublicmedia.com/INTERV ... GALBRAITH/

Galbraith also addresses other economic issues as a result of peak oil. He is a Professor of Economics at the University of Texas.

Somebody's going to have to cut their consumption. It seems to me likely, that that somebody won't, in the present state of the World economy, be us. At least not to the most substantial extent.

That is to say, oil is priced in dollars. And it's very possible, that the price of oil in dollars can be held reasonably constant, meaning that the American consumer may not notice this situation or be impacted by it very substantially for quite some time to come.

How will the diminished quantity of oil then be rationed? By a fall in price of everybody else's currencies. By the currenices of many other countries, in particular developing countries, which will then find the dollar price of their oil, much higher. And will not be able to consume.

This is again a situation which you can see a constitency for in the United States but it's not a wise global public policy because it implies a major blockage to the process of economic development in this world. And it implies that a great part of the rest of the world will undergo hardships which will increase the separation between them and us, and therefore the potential for conflict.

So when peak occurs, the US consumer might not notice it - but look out for a devaluing of other world currencies against the dollar as a sign of decline in world oil supply. That should be the economic signifier.

Markos, Is he saying because of our petro dollar/trade deficit advantage, this will cause other currencies pegged to the dollar to decline? Not following the mechanism.

[Markos101]

Hi MonteQuest,

He's saying this because the dollar is the reserve currency, and this will happen as long as people accept dollars as the reserve currency and hold reserves of dollars.

Mark

[Leanan]

What if they switch to the euro before peak?

[lowem]

He's saying this because the dollar is the reserve currency, and this will happen as long as people accept dollars as the reserve currency and hold reserves of dollars.

Hmm. What happens when the oil-producing countries switch to, say, the Euro? Including Russia? With the central banks getting into the act as well. Will USA invade all of them? They have enough trouble holding Iraq as it is.

[lowem]

What if they switch to the euro before peak?

There have also been some rumblings about a "virtual" oil price link with the euro, which means that the transition may already be happening. I have no idea where's the URL by now, though.

[nailud]

This doesn't make any sense to me. As long as the US keeps printing dollars like they're going out of style, which they are going to have to do to cover all their debt, the value of the dollar relative to every commodity should continue to decline. This is exactly what has been happening all this year.

[JohnDenver]

Markos, Is he saying because of our petro dollar/trade deficit advantage, this will cause other currencies pegged to the dollar to decline? Not following the mechanism.

You need to watch the movie until the end, people!
Galbraith himself doesn't understand the mechanism either. He admits as much when asked about it in the Q&A session later. He says the "mechanism is a little cloudy" or something like that. Basically, it's just some silly pipedream of his, where the US keeps their crude price constant and sticks everybody else in the world with the price increases. Isn't that nice. Maybe it will rain candycanes too. The idea is totally braindead, and he himself admits that, but he started his presentation with it anyway. Go figure. I guess your brain rots after you get tenure.

[Markos101]

If the oil producers do switch to the Euro, the US will be in serious trouble as it will have to begin producing goods and services in order to supply to Euro-bearing countries.

It wouldn't be a simple case of printing dollars and converting to Euros, as you would steadily build up interest payments in dollars whilst reducing the dollar money supply.

I'm sure there are other reasons - anyone care to explain the preservation of the trade deficit through dollars being the reserve currency, and also how Japan is enjoying the ride?

Mark

[MonteQuest]

If the oil producers do switch to the Euro, the US will be in serious trouble as it will have to begin producing goods and services in order to supply to Euro-bearing countries.

It wouldn't be a simple case of printing dollars and converting to Euros, as you would steadily build up interest payments in dollars whilst reducing the dollar money supply.

I'm sure there are other reasons - anyone care to explain the preservation of the trade deficit through dollars being the reserve currency, and also how Japan is enjoying the ride?

Mark

As I have posted on other erlier threads, current account deficits greater than 5% of GDP leave an economy vulnerable to sharp currency depreciations. Countries exports must target the US to accumulate dollars to purchase oil. They take these dollars and buy US securities with them, funding our huge deficit. We take the credit and buy foreign goods=BIG trade imbalance.The arguments for continued euro strength definitely outweigh the arguments for a reversal. The weakness of the dollar is structural and unless there is a significant shift in foreign sentiment towards US assets, the weakness of the dollar is expected to persist into 2005. Here are things to watch for with regard to this trend continuing:

Oil prices rise and corporate profits go down, especially with the airlines(US Airways just went bankrupt) and chemical commodity companies. Vehicle inventories are up already. The SUV’s aren’t selling. Watch the Twin Towers; trade and national deficits. If the US economy recovers more, imports will rise worsening the trade deficit. The trade deficit is a side effect of the American propensity to spend today, rather than save for tomorrow. We have a huge housing bubble crisis awaiting us here. People have availed themselves of the low interest rates, refinanced and taken many lump sum cash payments, and it turn are spending them on foreign goods, hence the increase in the CAD.

At the moment, it is unlikely we will attract any private foreign investors to service our debt. At the present time we are being covered by the central banks, consolidating all that debt in the company of foreign governments. 80% of the world’s savings goes to finance our debt at this moment. This is not a good position for the US. If the world suddenly switched to the euro for oil, investors would move out of the dollar denominated assets, dumping dollars and securities on the market. This would cause an unheard of crash in the dollar and take the rest of the world’s currencies with it. The problem for America is that when Asia starts to spend their dollar currency reserves, they are not going to spend much on American products and services as Markos pointed out; we just don’t have the resources they value. However, as the dollars get spent, it will push up the price in dollars of all basic goods and raw materials that all developed countries need. Holdings of US Treasury Bonds and Agency securities will be sold but the nagging question is, “to whom will they sell”? Right now, the Asians are the buyers! US savings rate is 1.3 %. We have zero rebound ability. Finally, if we have another terrorist attack, the dollar will tank against the euro resulting in higher inflation and interest rates. Right now, we are in the eye of the Perfect Storm.

[MonteQuest]

He's saying this because the dollar is the reserve currency, and this will happen as long as people accept dollars as the reserve currency and hold reserves of dollars.

Hmm. What happens when the oil-producing countries switch to, say, the Euro? Including Russia? With the central banks getting into the act as well. Will USA invade all of them? They have enough trouble holding Iraq as it is.

That is the million dollar question. Iran has switched many assets to the euro and is poised to move more. North Korea, while not an OPEC country has switched to the euro. They are by no coincidence, the remaining two, of the infamous (axis of evil). I can't imagine the US taking huge military action against them, but look at our posturing now. I never thought the US would invade a sovereign nation like Iraq. This will get ugly.

[JohnDenver]

also how Japan is enjoying the ride?

The big Asian exporters (Japan, South Korea, China, Taiwan) are one of the primary reasons why the $ isn't falling, and won't fall. A weak dollar means a strong yen etc., and that's very toxic for an exporter. If the $ crashes, the Asian exporters will be forced into a serious bout of competitive devaluation, a la the Great Depression, and that is a nightmare situation they all want to avoid. Everybody loses in a price war. Japan's been spending incredible amounts of money defending the $ for years and years (although they claimed recently to have kicked the habit). China and Hong Kong are pegged to the $. They don't want to see it go haywire.

[MonteQuest]

also how Japan is enjoying the ride?

The big Asian exporters (Japan, South Korea, China, Taiwan) are one of the primary reasons why the $ isn't falling, and won't fall. A weak dollar means a strong yen etc., and that's very toxic for an exporter. If the $ crashes, the Asian exporters will be forced into a serious bout of competitive devaluation, a la the Great Depression, and that is a nightmare situation they all want to avoid. Everybody loses in a price war. Japan's been spending incredible amounts of money defending the $ for years and years (although they claimed recently to have kicked the habit). China and Hong Kong are pegged to the $. They don't want to see it go haywire.

Isn't falling? Guess these charts are off then. The price of capital has become too great. The FED can't do anything about it. Look at our anemic growth under huge tax, cuts, low interest rates, and huge deficits.

http://www.x-rates.com/d/USD/EUR/graph120.html

http://www.fxcm.com/currency_forecast/e ... +Ed+text+3

[JohnDenver]

Isn't falling? Guess these charts are off then.

http://www.x-rates.com/d/USD/EUR/graph120.html

There's no fall there. The chart starts at a little under 1.221 and ends a little under 1.221.
Anyway, I should have made myself a little clearer. By "fall", I meant the sort of catastrophic fall you keep referring to.

[MonteQuest]

Isn't falling? Guess these charts are off then.

http://www.x-rates.com/d/USD/EUR/graph120.html

There's no fall there. The chart starts at a little under 1.221 and ends a little under 1.221.
Anyway, I should have made myself a little clearer. By "fall", I meant the sort of catastrophic fall you keep referring to.

I see 1.18 to 1.22. You used the words "not falling". Ok, semantics. the euro is gaining on the dollar. It may look slight to an observer, but when the trade deficit jumped 20% in the month of June to 55.8 billion and for July 50.1, this is a huge slide. You have to look at a given period of time.

[Falconoffury]

Won't a lowering dollar value allow us create more jobs here in the US? Won't we need more jobs to create all the stuff that we used to import? Won't higher interest rates help people who have money saved? It seems like this situation will help some people, but I have a fairly limited economic knowledge.

[mgibbons19]

If it goes slowly enough, then that's exactly what would happen. If it goes quickly it still might happen, just more chaotically.

One potential outcome of this whole mess could be a relocalization of economies. Less efficient overall (except for the wasted transport), but more extraction and manufacturing jobs near to home.

[Markos101]

Why do you say less efficient? If I want to eat cornflakes today (notwithstanding cornflakes likely wouldn't be deemed necessary in relocalisation), the ingredients have probably been trucked many many miles and either shipped or flown over the Atlantic via freight from Canada.

International trade is ruthlessly inefficient, it works because transport is so cheap with cheap oil. In terms of energy, it's a total waste.

Mark

[mgibbons19]

That's why I parenthesized 'except for the wasted transport'. Simply following the idea that a specialized global world with cheap transport, the best butter makers make lots of butter, and the best gunmakers make lots of guns. ie free trade makes for higher efficiency = more people get more, better stuff.

Now, with the cost of shipping set to go up, it's going to be very costly to get my favorite coffee from the shores of lake superior (who themselves get it from sumatra). So, I can drink Folgiers, which is roasted much closer to home.

So I'm playing with a free market equation where quality/quantity balance out against local production.

Now of course, there are many products where local producers do make better things - implying that somehow we can have both. But notice this is going on in a global mass production setting. You can pay more for the local product which is the one thing that craftsman makes (I'm thinking bike frames, micro brew, craft roasters...).

But in a less globalized world everything has to be created nearby, and we just won't have access to the best resources, and best craftsmen, to make our specialty products. I can think of great small roasters, but none of them exist in my town. I can think of great frame builders, but none of them in my town. Thankfully there's a decent microbrew, but because of their costs, I still buy cheap macrobrew.

This is getting rambly - the point is that cheap transport is the key to greater efficiency in free trade that we currently enjoy. Change the values of the oil calories, and the balance switches around some.

[MonteQuest]

Won't a lowering dollar value allow us create more jobs here in the US? Won't we need more jobs to create all the stuff that we used to import? Won't higher interest rates help people who have money saved? It seems like this situation will help some people, but I have a fairly limited economic knowledge.

As the value of a dollar goes down, the FED must increase the money supply. as the purchasing power of the dollar is less. In order to replace import demand with US production, we would have to start making things that other countries want and we want as well, like TV's, DVD players, cheap clothes, sundries, etc. To do that, we would have to work for foreign wage levels. In China, where we get most of that stuff, the average factory wage is $5/hr. How many Americans would work for that? How many could afford to?

As the interest rates go up, sure, people with savings make more money on their investments, but the savings rate is now down to .6%. People in america don't save, we spend. No rebound ability. No buffer. And the people with variable rate mortgages(65% of all new) will see a rise in their mortgage payments, many of which won't be met, resulting in foreclosure.

In the big money, foreign investors will move out of the dollar denominated assets towards the euro and other attractive currencies. As these dollars get dumped on the market, inflation will rise as the dollar plummets more. The US will not be able to find anyone to service its debt, or to pay back its foreign loans.

In the past, a change in monetary policy(stimulus/correction) could correct these things, but it is becoming increasingly clear that this is no longer the case. With the rise in oil prices, the debate may be over forever. It is just a matter of time before there is a major self-correction and collapse.