Friday, September 4, 2009

US$ and the American Debt Machine

The precious metals markets are telling us something.

I was long the US$ for a short term trade. No more.

Then I read Dr. Doom Roubini out this morning with these comments:

“If markets were to believe, and I’m not saying it’s likely, that inflation is going to be the route that the U.S. is going to take to resolve this problem, then you could have a crash of the value of the dollar,” Roubini said in an
interview today in Cernobbio, Italy. “The value of the dollar over time has to
fall on a trade-weighted basis, but not necessarily relative to euro and yen.”

Roubini said he didn’t see a risk of a dollar crash in the “‘short
term.” The value of the U.S. currency relative to currencies such as the yen or
the euro “cannot change too much compared to current levels because if the
dollar were to weaken a lot and the euro strengthen a lot, that’s going to warp
any chance for the European economy to recover, same argument as to the yen,” he

“Most of the adjustment of the dollar in the future has to occur
relative to China, relative to emerging Asia and relative to some of the other
commodity exporters in the world, whether these are advanced economies or
emerging markets,” he said.

Foreign creditors need assurances that the U.S. will address its
deficit, Roubini said.

“Unless in the medium term these issues of fiscal sustainability are
addressed, and unless we mop up that excess liquidity from the financial system,
eventually the financial markets and the foreign creditors of the United States
might get more concerned about the sustainability of the U.S. fiscal deficit and
about the U.S. being tempted to use the inflation tax as a way of resolving its
private and public debt problems."

The rally in U.S. Treasuries is not likely to go further without support from the US$. Why would foreign investors continue to pour money into a very leaky rain barrel?  


Total net imports of petroleum products continues to decline apace. The decline is approaching 20% from the peak month to most recent month.

That this is occuring while the emerging markets are now buying more cars than the U.S. would seem to me to mean that those oil imports are not coming back - ever.

I still believe that the most likely outcome from this will be a slow, grinding contraction to play out over the next decade - but if the rate of decline in oil imports stays at 8% plus per year over the next 3 years... well, it won't be that slow and grinding... we would get whipped around pretty good. Either way, I do not see an easy way to soak up all of the unemployed in to the labor force withuot a significant pay cut for everyone.

The 2 topics covered here - the US$ risk (Inflation) and very high unemployment for a long time (Deflation) SEEM to be mutually exclusive events.  And perhaps they are at any one moment in time... but both could come to pass in rather short order when it comes down to it.

Back soon.



Donal Lang said...

I'd agree with your and Roubini's comments, but the analysis has some interesting consequences:
The value of the dollar must be held up by Europe, Asia and the Middle East because of all the dollars 'out there'in reserves and investments. But the commodity markets will move on without the US and its dollar, leaving it behind in an economic backwater as trade shifts to Asian currencies.

Reagrding oil imports, to me the scary part is that, despite the biggest importer cutting imports by 20%, and Europe and Japan being in recession too, the price is still around $70! That means all that slack has been taken up by Asia. So how is it possible for the Western countries to ever recover?
As oil is the same price all over the World, then eventually labour rates will move to equilibrium too (the two fundamentals of the means of production). There are 3 basic ways that might happen; Asian wage rates increase, Western wage rates decrease, or Western currencies devalue. I think we'll see all three things happen over the next few years.

Anonymous said...

I'm wondering if the move in gold had to do with Hong Kong's statement that they want their gold back from London. I bet the London bankers were short the paper and had to scramble to buy it back.

westexas said...

The following is based on EIA data for the top 15 oil consumers worldwide (based on 2007 consumption).

What is interesting is the divergent response to the +20%/year rate of increase in annual oil prices that we saw from 1998 to 2008. US oil consumption in 2008 was back to the same level as 1999 (19.5 mbpd), so I thought I would compare the countries in the top 15 showing increasing consumption versus the countries in the top 15 showing declining consumption over the 1999 to 2008 time frame.

The countries showing flat to declining consumption from 1999 to 2008 were: US; Japan, Germany; France; UK and Italy. Their combined consumption fell slightly from 33.6 mbpd to 32.2 mbpd, an annual decline rate of -0.5%/year, and a volumetric decline of 1.4 mbpd. Note that these are all OECD countries.

The countries showing increasing consumption from 1999 to 2008 were: China; Russia; India; Brazil; Canada; South Korea; Saudi Arabia; Mexico and Iran. Their combined consumption increased from 19.8 mbpd to 27.0 mbpd, an annual rate of increase of +3.4%/year, and a volumetric increase of 7.2 mbpd. Most of the countries are non-OECD, and the only non-oil exporting OECD country in this group was South Korea, which only showed a small increase in consumption.

The 15 countries overall consumption was 53.4 mbpd in 1999 and 59.2 mbpd in 2008 (about 70% of total worldwide consumption).

If we extrapolated consumption by these two groups out for 10 years, to 2018, at the above rates, the Declining Group would be consuming 30.6 mbpd in 2018, and the Increasing Group would be consuming 37.9 mbpd in 2018. The combined total in 2018 would be 68.5 mbpd.

It's possible that we are to some extent like the drunk looking for his keys late at night under a streetlight, because the light was better there, although he had lost his keys down the street. It looks like virtually all the increase in consumption is in non-OECD countries, but our best consumption and inventory data are in the OECD countries.

Of course, our model and recent case histories suggest that we are going to see a long term accelerating rate of decline in worldwide net oil exports.

The Mad Scientist said...

Great data WT

Donal Lang said...

Interesting article, inflation or deflation: