“Petro-Currencies” Replace Petro-Dollar

Petro-Dollars (courtesy Google Images)

Every so often, I propose a theory that’s new (to me, at least).  When I do, my initial presentation of that theory is often clumsy and incomplete.  This isn’t surprising.   If the theory offers a new insight, it takes time to learn how to explain it clearly.   However, over time, if the theory comes to seem valid, my presentations of that theory become more refined and easily understood. 

Today, I present another theory with language that’s at least clumsy (some might say, “half-baked”).   I don’t like to present texts that seem clumsy even to me, but I have to do so to not only to try explain the theory to my readers, but also to explain it to myself.  More, I must make the presentation because I know that some of my readers will make comments that will help me to better understand if the theory is probably true or probably false and thereby help me to make clearer presentations in the future.

In essence, I can’t seem to take this theory any further without help from my readers.

For today’s theory du jour, I propose that while the former global monetary system from A.D. 1971 to A.D. 2001 was based on the singular “Petro-Dollar,” in the past two years it’s been replaced by a new system based on several “petro-currencies”.  The fiat dollar is no longer the only currency that can purchase petroleum, but with the reemergence of the US as an oil exporting nation, the fiat dollar has gained some value as one of several “petro-currencies”. 

The emergence of the several “petro-currencies” might explain the last 20-month decline in the price of gold.

 

Those Who Won’t Learn From History . . . .

A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical bank run in the Depression of A.D. 1893.. (Photo credit: Wikipedia)

In the 1890s, the American silver mining industry suffered from a major problem:  overproduction.

The silver glut caused such steep price declines that silver was sometimes selling for less than the cost of production.  The silver industry faced bankruptcy.

Therefore, the silver mining industry persuaded Congress to pass legislation to compel the U.S. Treasury to buy silver each month with the intent of coining that silver into millions of additional silver dollars.

It was presumed by silver mining industry that by creating an artificial demand for silver, the price of silver would increase and the mining companies would become profitable and spared bankruptcy.

Congress agreed (or was bribed to agree) with that presumption and enacted the Sherman Silver Purchase Act of A.D. 1890.  This Act mandated that the US Treasury purchase 4.5 million ounces of silver each month to be coined into silver dollars.

 

For Whom the Currency War Tolls

Hanami celebrations under the cherry blossoms in Ueno Park, Tokyo (Photo credit: Wikipedia)

According to the South China Morning Post (“Japan stimulus will start currency war, say Chinese economists”),

“The Bank of Japan will double its monetary base to 270 trillion yen (HK$22.1 trillion) by March 2015.”

 

Doubling their monetary base?!  In just 2 years?!  That’s an average of 50% increase per year!  Ohh, the beasts!  The damn Japs are inflating the yen and starting another currency war!!  Ohh-Em-Gee!!!

 

Gold Fundamentals

Reverse of the American Buffalo gold coins (Photo credit: Wikipedia)

After eleven years of up, up, up, gold has been down, sideways, or down since it peaked at $1,900 in August of A.D. 2011.  Last week, we saw several consecutive days of gold falling between $10 and $24 per day.  On Thursday, gold fell below $1,550 and left many wondering how low gold can go.  Confidence in gold was badly shaken.

Société Générale S.A. is a French multinational bank headquartered in Paris.  It’s France’s second largest bank and the no. 8 bank in the European zone.   So it didn’t help to restore confidence in gold when Kitco News posted an article entitled “Societe Generale Sees Gold Under $1,400 By Year-End”

$1,400 gold!  Two weeks ago, I would’ve dismissed such predictions as silly.  But, last week, I began to wonder if maybe $1,400 gold was possible.

According to that article,

 

Fractional-Reserve Banks are Inherently Risky

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the money multiplier calculates. (Photo credit: Wikipedia)

A few of us have foreign bank accounts.  Many of us wish we had foreign bank accounts.  No one would want the inconvenience of a distant, foreign bank account unless they didn’t trust their domestic banks or government.

In virtually every case, the primary motive for seeking a foreign bank account is our distrust in domestic banks.  Because we fear the loss of our wealth to domestic inflation, high taxes or perhaps confiscation by our own government, we seek to deposit our funds in the “safety” of foreign banks.

However, the “Cyprus Crisis” has taught us that foreign banks may be even more dangerous than domestic bank accounts. As a result, we should rethink our desire to open or maintain an account in a foreign bank.

For example, TheEconomicCollapse.com published an article entitled “Words Of Warning: Get Your Money Out Of European Banks”:

“If you still have money in European banks, you need to get it out.  This is particularly true if you have money in southern European banks.  One thing has become abundantly clear: at least some Cyprus depositors are going to lose a substantial amount of money.  Personally, I never dreamed that they would go after private bank accounts in Europe, but now that this precedent has been set it should be apparent to everyone that no bank account will ever be 100% safe ever again.

“Without trust, a banking system simply cannot function, [however] trust in the European banking system has been shattered and that people need to get their money out of those banks as rapidly as they can.”

 

 

Adam Smith: The Origin and Use of Money

Profile of Adam Smith (Photo credit: Wikipedia)

Adam Smith (1723 – 1790) was a Scottish moral philosopher and a pioneer of political economics who’s best known for writing An Inquiry into the Nature and Causes of the Wealth of Nations (A.D. 1776). This book (usually abbreviated as “The Wealth of Nations”) is considered the first modern work of economics. Smith is cited as the father of modern economics and is still among the most influential thinkers in the field of economics today.

Chapter IV of Book I of The Wealth of Nations is entitled “Of the Origin and Use of Money”.  In that chapter, Smith explains that,

 

“[I]t is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.  Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”

However, there’s a problem with this system of barter. Suppose one man has more of a certain commodity than he can use, and another man has less.  The former would be glad to dispose of his excess; the later would be glad to buy it.  But if the latter has nothing to trade that the former needs, no exchange can be made between them.

 

Egypt Is Dying

Egyptian V (Photo credit: yamaha_gangsta)

According to the story of Exodus, Egypt suffered ten “plagues” before Pharaoh finally agreed to release the Hebrews from bondage.  Those plagues included waters becoming blood, frogs, lice, flies, diseased livestock, boils, hail, locusts, darkness, and finally, the deaths of all firstborn Egyptian children.   

That list of plagues surprises in the sense that it did not expressly include famine. The Egyptians were harassed, annoyed, and troubled—but they weren’t generally starved unto death.

However, recent events suggest that Egypt may be about to suffer an “Eleventh Plague”—famine.

Over the past 20 years or more, the US has used the fiat dollar’s status as the “world reserve currency” to export American inflation to foreign countries.  As a result, the prices of food and other commodities have been rising globally to keep up with the depreciating dollar.  As the dollar inflates (grows less valuable), foreign food prices rise, and foreign people find themselves less able to purchase food.  They begin to starve.

 

“Currency Wars” Against Whom?

Inflation & Gold (Photo credit: Paolo Camera)

When you have a “war,” it is presumably waged against a particular “enemy”.  If the governments of the world are about to engage in “currency wars,” who, pray tell, are their enemies?

Premise:  By inflating its currency and thereby lowering its currency’s value, a nation fosters its “competitiveness” in foreign markets—but simultaneously robs its domestic creditors of their savings and robs  its own working people of their standard of living. 

•  Inflation makes the fiat dollar “cheaper” and thereby benefits two primary groups:

 

Five Key Investment Criteria

Reverse of the American Buffalo gold coins (Photo credit: Wikipedia)

The Financial Trend Forecaster recently published an article entitled “The Five Key Investment Criteria”. The article was intended to help people decide which kinds of investments (stocks, bonds, commodities)—or even specific investments (GM, IBM or ABG)—should or should not be included in their portfolios.

The article explained,

“Safety is a major concern for two reasons:”

Safety is a “major concern” because we live in “interesting times” when our economy is fragile and prone to greater recession and/or depression.  Most investments—especially paper stocks and paper bonds—are vulnerable to losing value (purchasing power) until our economy truly begins to make a genuine “recovery”.

 

Is Now The Time to Buy a New Home?

houses for sale sign (Photo credit: Images_of_Money)

Bloomberg recently reported (“Treasury Scarcity to Grow as Fed Buys 90% of New Bonds”) that, “The average interest rate on 30-year mortgages is a record low 3.31 percent.”

Record-low interest rates on mortgages certainly provide an incentive to buy new homes.  But we not only enjoy record-low interest rates, the prices of the homes have fallen by 30% or more since A.D. 2008.  Thus, today’s homebuyers enjoy both low home prices and low interest rates.  Compared to A.D. 2008, today’s home mortgages are a steal.  Hard to resist that sort of temptation.

But then, that’s the point, isn’t it?  Today’s record-low interest rates are intended to tempt us to borrow currency from the banks.

Why the temptation?  Because the economy is slow and tending to recession or worse.  Therefore, much of the public is anxious about retaining their jobs and their ability to repay whatever they borrow.  Lacking confidence in the economy and their capacity to repay loans, many people are reluctant to borrow.  Therefore, the interest rates are at record lows to tempt people to risk going into long-term debt to purchase a new home.