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(I thought this might be a good post on this board)
Here's another way of looking at it:
what if you pick the most important commodity you can think of and price both the USD and the commodity in terms of gold. so that way you could compare the two charts in time and maybe see something we haven't seen before:
See below: WTIC USD priced on gold:
Oil has mostly kept with the price of gold except during the massive run up and shorting fall during late 2008. Excluding that oil has flat lined -- and I consider oil a very important commodity.
(As a side note, it doesn't seem like the run-up at the pump is greedy speculators but totally due to the weak dollar)
USD (in gold)... it peaked in late 2008 and ever since has been declining, like for the past two years.
Hey xero90....
What happened to class war in America?Liberty Dollar founder Bernard von NotHaus on Peter Schiff Show Friday April 1 »
Fed buying bonds, hyper-inflation on the way
By Thomas H. Greco
Below is a recent article from the National Inflation Association that describes 12 Warning Signs of U.S. Hyperinflation.
I think their analysis is correct but I’ll add here a few points that might make the entire matter easier to understand.
First, we must differentiate between monetary inflation and price inflation. Monetary inflation is the creation of money on an improper basis, notably the lending of money into circulation when banks purchase government bonds and other assets that do not bring additional goods and services into the market. Price inflation is the resultant increase in the general price level. Prices of individual goods and services can be affected by a number of different factors, but when prices increase virtually across the board, it is invariable the result of monetary mismanagement.
In the wake of monetary inflation, price inflation must inevitably follow. It may be delayed, but it cannot be avoided. In the case of a dominant power like the United States, the postponement may be extraordinarily long, but ultimately “the piper must be paid.” Price inflation can be postponed so long as some people, companies and countries have surplus income and these savers are willing to invest in government bonds.
In the case of the U.S. , China and other foreigners have been sending back their dollar earnings, not to buy American goods and assets, but to buy U.S. government bonds, in effect, financing the U.S. government deficits with money that already existed in the market. In other words, by selling bonds, the government is absorbing the savings, not just of foreigners, but also of domestic companies and individuals.
When aggregate savings are not sufficient to finance the deficits, the Fed and the commercial banks take up the slack by buying the government bonds, thus inflating the currency. The situation we see now is China and other countries who had been increasing their holdings of U.S. securities are now reducing their holdings. The same thing is happening domestically. That leaves the authorities with two choices: (1) offer higher interest rates on the bonds to entice investors to buy them, or (2) monetize the bonds by selling them to the central bank. The first option will have adverse effects on the budget, making the deficits even higher as interest costs rise. The second option (inflation of the currency) is the one currently being chosen, which must lead to price inflation very soon as that money gets spent by the government for weapons, bailouts, and all kinds of waste and payoffs, then trickles down through the economy. It is “legalized” counterfeit, and the counterfeiter is the one who gains from it. Those farther down on the earning/spending chain are badly hurt because the currency loses purchasing power at every step along the way.–t.h.g.
From the National Inflation Association, March 26, 2011
12 Warning Signs of U.S. Hyperinflation
One of the most frequently asked questions we receive at the National Inflation Association (NIA) is what warning signs will there be when hyperinflation is imminent. In our opinion, the majority of the warning signs that hyperinflation is imminent are already here today, but most Americans are failing to properly recognize them. NIA believes that there is a serious risk of hyperinflation breaking out as soon as the second half of this calendar year and that hyperinflation is almost guaranteed to occur by the end of this decade.
In our estimation, the most likely time frame for a full-fledged outbreak of hyperinflation is between the years 2013 and 2015. Americans who wait until 2013 to prepare, will most likely see the majority of their purchasing power wiped out. It is essential that all Americans begin preparing for hyperinflation immediately.
Here are NIA’s top 12 warning signs that hyperinflation is about to occur:
1) The Federal Reserve is Buying 70% of U.S. Treasuries. The Federal Reserve has been buying 70% of all new U.S. treasury debt. Up until this year, the U.S. has been successful at exporting most of its inflation to the rest of the world, which is hoarding huge amounts of U.S. dollar reserves due to the U.S. dollar’s status as the world’s reserve currency. In recent months, foreign central bank purchases of U.S. treasuries have declined from 50% down to 30%, and Federal Reserve purchases have increased from 10% up to 70%. This means U.S. government deficit spending is now directly leading to U.S. inflation that will destroy the standard of living for all Americans.
2) The Private Sector Has Stopped Purchasing U.S. Treasuries. The U.S. private sector was previously a buyer of 30% of U.S. government bonds sold. Today, the U.S. private sector has stopped buying U.S. treasuries and is dumping government debt. The Pimco Total Return Fund was recently the single largest private sector owner of U.S. government bonds, but has just reduced its U.S. treasury holdings down to zero. Although during the financial panic of 2008, investors purchased government bonds as a safe haven, during all future panics we believe precious metals will be the new safe haven.
3) China Moving Away from U.S. Dollar as Reserve Currency. The U.S. dollar became the world’s reserve currency because it was backed by gold and the U.S. had the world’s largest manufacturing base. Today, the U.S. dollar is no longer backed by gold and China has the world’s largest manufacturing base. There is no reason for the world to continue to transact products and commodities in U.S. dollars, when most of everything the world consumes is now produced in China. China has been taking steps to position the yuan to be the world’s new reserve currency.
The People’s Bank of China stated earlier this month, in a story that went largely unreported by the mainstream media, that it would respond to overseas demand for the yuan to be used as a reserve currency and allow the yuan to flow back into China more easily. China hopes to allow all exporters and importers to settle their cross border transactions in yuan by the end of 2011, as part of their plan to increase the yuan’s international role. NIA believes if China really wants to become the world’s next superpower and see to it that the U.S. simultaneously becomes the world’s next Zimbabwe, all China needs to do is use their $1.15 trillion in U.S. dollar reserves to accumulate gold and use that gold to back the yuan.
4) Japan to Begin Dumping U.S. Treasuries. Japan is the second largest holder of U.S. treasury securities with $885.9 billion in U.S. dollar reserves. Although China has reduced their U.S. treasury holdings for three straight months, Japan has increased their U.S. treasury holdings seven months in a row. Japan is the country that has been the most consistent at buying our debt for the past year, but that is about the change. Japan is likely going to have to spend $300 billion over the next year to rebuild parts of their country that were destroyed by the recent earthquake, tsunami, and nuclear disaster, and NIA believes their U.S. dollar reserves will be the most likely source of this funding. This will come at the worst possible time for the U.S., which needs Japan to increase their purchases of U.S. treasuries in order to fund our record budget deficits.
5) The Fed Funds Rate Remains Near Zero. The Federal Reserve has held the Fed Funds Rate at 0.00-0.25% since December 16th, 2008, a period of over 27 months. This is unprecedented and NIA believes the world is now flooded with excess liquidity of U.S. dollars.
When the nuclear reactors in Japan began overheating two weeks ago after their cooling systems failed due to a lack of electricity, TEPCO was forced to open relief valves to release radioactive steam into the air in order to avoid an explosion. The U.S. stock market is currently acting as a relief valve for all of the excess liquidity of U.S. dollars. The U.S. economy for all intents and purposes should currently be in a massive and extremely steep recession, but because of the Fed’s money printing, stock prices are rising because people don’t know what else to do with their dollars.
NIA believes gold, and especially silver, are much better hedges against inflation than U.S. equities, which is why for the past couple of years we have been predicting large declines in both the Dow/Gold and Gold/Silver ratios. These two ratios have been in free fall exactly like NIA projected.
The Dow/Gold ratio is the single most important chart all investors need to closely follow, but way too few actually do. The Dow Jones Industrial Average (DJIA) itself is meaningless because it averages together the dollar based movements of 30 U.S. stocks. With just the DJIA, it is impossible to determine whether stocks are rising due to improving fundamentals and real growing investor demand, or if prices are rising simply because the money supply is expanding.
The Dow/Gold ratio illustrates the cyclical nature of the battle between paper assets like stocks and real hard assets like gold. The Dow/Gold ratio trends upward when an economy sees real economic growth and begins to trend downward when the growth phase ends and everybody becomes concerned about preserving wealth. With interest rates at 0%, the U.S. economy is on life support and wealth preservation is the focus of most investors. NIA believes the Dow/Gold ratio will decline to 1 before the hyperinflationary crisis is over and until the Dow/Gold ratio does decline to 1, investors should keep buying precious metals.
6) Year-Over-Year CPI Growth Has Increased 92% in Three Months. In November of 2010, the Bureau of Labor and Statistics (BLS)’s consumer price index (CPI) grew by 1.1% over November of 2009. In February of 2011, the BLS’s CPI grew by 2.11% over February of 2010, above the Fed’s informal inflation target of 1.5% to 2%. An increase in year-over-year CPI growth from 1.1% in November of last year to 2.11% in February of this year means that the CPI’s growth rate increased by approximately 92% over a period of just three months. Imagine if the year-over-year CPI growth rate continues to increase by 92% every three months. In 9 to 12 months from now we could be looking at a price inflation rate of over 15%. Even if the BLS manages to artificially hold the CPI down around 5% or 6%, NIA believes the real rate of price inflation will still rise into the double-digits within the next year.
7) Mainstream Media Denying Fed’s Target Passed. You would think that year-over-year CPI growth rising from 1.1% to 2.11% over a period of three months for an increase of 92% would generate a lot of media attention, especially considering that it has now surpassed the Fed’s informal inflation target of 1.5% to 2%. Instead of acknowledging that inflation is beginning to spiral out of control and encouraging Americans to prepare for hyperinflation like NIA has been doing for years, the media decided to conveniently change the way it defines the Fed’s informal target.
The media is now claiming that the Fed’s informal inflation target of 1.5% to 2% is based off of year-over-year changes in the BLS’s core-CPI figures. Core-CPI, as most of you already know, is a meaningless number that excludes food and energy prices. Its sole purpose is to be used to mislead the public in situations like this. We guarantee that if core-CPI had just surpassed 2% and the normal CPI was still below 2%, the media would be focusing on the normal CPI number, claiming that it remains below the Fed’s target and therefore inflation is low and not a problem.
The fact of the matter is, food and energy are the two most important things Americans need to live and survive. If the BLS was going to exclude something from the CPI, you would think they would exclude goods that Americans don’t consume on a daily basis. The BLS claims food and energy prices are excluded because they are most volatile. However, by excluding food and energy, core-CPI numbers are primarily driven by rents. Considering that we just came out of the largest Real Estate bubble in world history, there is a glut of homes available to rent on the market. NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents.
Record U.S. Budget Deficit in February of $222.5 Billion. The U.S. government just reported a record budget deficit for the month of February of $222.5 billion. February’s budget deficit was more than the entire fiscal year of 2007. In fact, February’s deficit on an annualized basis was $2.67 trillion. NIA believes this is just a preview of future annual budget deficits, and we will see annual budget deficits surpass $2.67 trillion within the next several years.
9) High Budget Deficit as Percentage of Expenditures. The projected U.S. budget deficit for fiscal year 2011 of $1.645 trillion is 43% of total projected government expenditures in 2011 of $3.819 trillion. That is almost exactly the same level of Brazil’s budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1993 and it is higher than Bolivia’s budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1985. The only way a country can survive with such a large deficit as a percentage of expenditures and not have hyperinflation, is if foreigners are lending enough money to pay for the bulk of their deficit spending. Hyperinflation broke out in Brazil and Bolivia when foreigners stopped lending and central banks began monetizing the bulk of their deficit spending, and that is exactly what is taking place today in the U.S.
10) Obama Lies About Foreign Policy. President Obama campaigned as an anti-war President who would get our troops out of Iraq. NIA believes that many Libertarian voters actually voted for Obama in 2008 over John McCain because they felt Obama was more likely to end our wars that are adding greatly to our budget deficits and making the U.S. a lot less safe as a result. Obama may have reduced troop levels in Iraq, but he increased troops levels in Afghanistan, and is now sending troops into Libya for no reason.
The U.S. is now beginning to occupy Libya, when Libya didn’t do anything to the U.S. and they are no threat to the U.S. Obama has increased our overall overseas troop levels since becoming President and the U.S. is now spending $1 trillion annually on military expenses, which includes the costs to maintain over 700 military bases in 135 countries around the world. There is no way that we can continue on with our overseas military presence without seeing hyperinflation.
11) Obama Changes Definition of Balanced Budget. In the White House’s budget projections for the next 10 years, they don’t project that the U.S. will ever come close to achieving a real balanced budget. In fact, after projecting declining budget deficits up until the year 2015 (NIA believes we are unlikely to see any major dip in our budget deficits due to rising interest payments on our national debt), the White House projects our budget deficits to begin increasing again up until the year 2021. Obama recently signed an executive order to create the “National Commission on Fiscal Responsibility and Reform”, with a mission to “propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015?. Obama is redefining a balanced budget to exclude interest payments on our national debt, because he knows interest payments are about to explode and it will be impossible to truly balance the budget.
12) U.S. Faces Largest Ever Interest Payment Increases. With U.S. inflation beginning to spiral out of control, NIA believes it is 100% guaranteed that we will soon see a large spike in long-term bond yields. Not only that, but within the next couple of years, NIA believes the Federal Reserve will be forced to raise the Fed Funds Rate in a last-ditch effort to prevent hyperinflation. When both short and long-term interest rates start to rise, so will the interest payments on our national debt. With the public portion of our national debt now exceeding $10 trillion, we could see interest payments on our debt reach $500 billion within the next year or two, and over $1 trillion somewhere around mid-decade. When interest payments reach $1 trillion, they will likely be around 30% to 40% of government tax receipts, up from interest payments being only 9% of tax receipts today. No country has ever seen interest payments on their debt reach 40% of tax receipts without hyperinflation occurring in the years to come.
http://beyondmoney.net/2011/03/29/fed-buying-bonds-hyper-inflation-on-the-way/
Continues up
back to nov high..
UP and UP she goes....
Gold Standard
09 Nov, 2010 10:58:52 World Bank chief fires gold standard debate amid Fed money printing
Nov 09, 2010 (LBO) - World Bank chief Robert Zoellick has fired a debate on a return to gold as a monetary anchor with the United States engaging in new money printing, threatening to send food and other commodity prices higher.
Federal Reserve chief Ben Bernanke dubbed 'Bubble Ben' by his detractors who are critical of his 'anti-deflation' loose policies that fired a massive housing and commodity bubble and triggered a global economic crisis has raised fresh questions about the use of money. Monetary System Ahead of a summit by the Group of 20 nations Zoellick called for discussions on a "co-operative monetary system that reflects emerging economic conditions."
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," Zoellick wrote in UK-based Financial Times newspaper.
"Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." An ounce of gold has shot up over 1,400 US dollars on Monday. At the creation of Federal Reserve in 1913 gold was only 20 dollars an ounce.
After triggering the Great Depression through loose monetary policy in the 1920s, the Fed deprecated the dollar to 35 dollars an ounce in 1933, barely 20 years after its creation.
Without the Fed, gold has been about 20 dollars an ounce since 1792, and there was no sustained worldwide inflation. Under a gold standard global currencies had essentially been fixed. Any excess money printing by gold pegged central banks pushed up the price of gold, leading to reserve losses in the style of a balance of payments crisis, triggering automatic corrections.
Rise of Fed
The Fed's importance in the world monetary system began with the UK's Bank of England suspending gold convertibility in August 1914, effectively making the Sterling 'floating' paper money.
The UK failed to return to the gold standard but the US, by devaluing in 1933 strengthened its links to gold and ended up as the central bank with the largest holder of world gold reserves.
After World War II, the Fed began to systematically spread inflation throughout the world through the Bretton Woods system, a system of unstable pegs based on contradictory exchange and interest rate policies that encouraged money printing and devaluation.
Under the Bretton Woods individual country links to gold was broken, laying the foundation to the end of a gold standard.
In 1971-73 the Bretton Woods system collapsed with gold prices going above 80 dollars an ounce because the US was unable to keep its peg to gold at 35 dollars. The world then moved on to floating exchange rates based on paper money central banks.
The 1970s Great Inflation was checked by the Fed and UK after gold prices hit 800 dollars an ounce. The Fed raised interest rates above 18 percent under President Ronald Reagan and the Bank of England went for a tight quantity targeting framework under Margaret Thatcher.
Zoellick himself was in the US Treasury in the mid 1980s period of so-called 'Great Moderation.'
During the 2008 bubble, gold went above 1,000 dollars an ounce. There were food riots in poor countries as commodity prices went to new heights. The bubble subsequently collapsed as the underlying credit bubble imploded with collapsing banks.
Gold Spike
Gold topped 1,400 dollars an ounce yesterday. The Fed under pressure to 'do something' is set to print more than 600 billion rupees in fresh dollars in a 'quantity easing' exercise.
Reuters, a news agency, quoted an unnamed German government official as saying that "Zoellick was correct in worrying that currency values were becoming too vulnerable to the whims of governments."
Monetary debasement to achieve political objectives and higher spending is constrained by a gold standard, which serves as natural law to protect salaries of wage earners and savings of old people, from mis-appropriation by the state.
Germany, a country that has seen hyperinflation was the first developed nation to combat inflation during the 1970s and has been a driving force behind relatively prudent policies backing the Euro.
The German official was quoted as saying that it would be difficult to have a modern monetary policy tool based on a commodity "whose availability is dictated by natural conditions."
But classical economists have pointed out that gold has proved very much responsive to market conditions earlier and had served the world well until monetary debasement began under President Franklin Roosevelt in 1933.
LBO economics columnist fuss-budget says in the gold supply had grown about two percent a year in the past, except when new gold discoveries increased supply and created temporary inflation booms.
Rulers were therefore unable to manipulate the monetary system and debase it for short term political gain.
"But when productivity improvement pushed prices of goods down making gold seem dearer, increased incentives to mine increased supply according to market needs and re-balanced prices."
Bubble Ben Steve Hanke, from John Hopkins University in Baltimore, a member of the Reagan economic term which ended the 'Great Inflation' period said a recent interview with CNBC India last month that Fed will print money as long as unemployment is high.
The history of Fed is that the US central bank will not counter inflation as long as unemployment was high but will try to lie its way out of the problem, he said.
"The bottomline is they have already thrown in a huge monetary time bomb out there," Hanke said.
"Now with quantitative easing of course they are going to throw more time bombs out there. The problem is they tell us they know exactly how to defuse these time bombs.
The history of the Fed is they wait too long to defuse any kind of monetary time bomb if unemployment rates are high."
He says broad money is not growing, despite the expansion of the monetary base (Fed money made up of bank notes and deposits with the Fed) because of a confidence factor and not due to rates or availability of credit.
"The Fed can pump up with quantitative easing, the monetary base as much as they want it, they can make a monster out of the thing," Hanke said.
"But their credit growth is very slow in the economy because the banks and other financial services institutions don't have confidence to make a loan and borrowers don’t have the confidence to demand the loan."
Several US lawmakers have gone further than Zoellick and called for the outright abolition of the Federal Reserve. Several Republican lawmakers who are critical of the Fed's loose policy have been elected in recent mid-term elections.
Other US lawmakers on the Joint Economic Committee (JEC) of the US congress and senate have also raised concerns.
"I fear the risk [of much higher inflation down the road] from a new round of quantitative easing far exceeds the potential reward [of a small, short-term boost to growth]," US congressman Kevin Brady, a senior JEC member wrote to Bernanke on October 26.
"In discussions in my district in Texas and around the country, no entrepreneur has told me that high interest rates are deterring his or her firm from making investments or hiring new workers.
"Instead, it is the uncertainty over the impact of federal budget deficits, new mandates and regulations, barriers to commercial mortgage lending erected, in part, by the overreaction of bank regulators to stress in the commercial real estate market, and tax policies that deter new investment and job creation."
US economist John Taylor, an expert on central banking who devised the so-called 'Taylor Rule' has also called for a reduction in state intervention which spreads uncertainty.
Previous experiments with paper money in China (where it was invented), the US (Continental dollar), France (Assignat and earlier Mississippi Corporation) have ended with a return to gold.
The current episode is the longest period paper money has survived other than in China.
Sure does look like reverse Head and shoulders....
DB US Dollar Bullish Fund (Symbol:UUP)
http://investorshub.advfn.com/boards/board.aspx?board_id=13250
I hope not... Of course we can always raise taxes, offer more government benefits.. that always leads to cutting the debt... just kidding…
I think now the dollar stays strong.. Europe has more socialism then us... it looks it will hit them way harder...
Greece is getting scary, pay attention to europe. Economically speaking, they're 2-5 years ahead of us..
This guy thinks to fix US problem... Dollar must drop... Post from the TIP board... calls it "rebalancing and consolidation"
#msg-49509969
I think monday when my funds clear, Im goin to throw some cash at this one.
I'm pretty sure over the summer when the administration spends more of the stimulus money, the dollar is going to tank. And, charts of the US Dollar is signaling that its going to tank soon (hopefully not tommorrow tho! lol)
I think now would be a good time to build a starter position. Over the next few months I think you will see inflation starting a little bit.
Heres a few things to consider when buying into this fund and shorting the dollar.
- Election Year: Mid term election is in Novemeber. This is the ONLY reason I am a little hesitant to buy in right now. The demacrats will probbly artificially stimulate the economy over the summer by spending more of the stimulus money (only 1/3 of it has been spent right now). This would devalue the dollar more
- If conservatives win the election, they may be able to save the dollar, by cutting spending, and halting funding on the healthcare bill. This would increase the dollar value, making this fund a bad investment.
I am currently torn between this fund, but am leaning toward building a starter position. I would like to see the price drop closer to $26.00 before I put any money in. Any thoughts?
THink it's time now?
I've been thinking it for some time now... timing everything i guess..
With new 50% taxes on the rich, inflation is definately on the way. The dollar is going to tank, dollar bear fund and precious metals is the way to go.
The dollar is going to tank. Maybe not in the next couple of months, but about a year out or so. This one is a long term investment. I don't have much faith in what the government is doing, they are artificially propping up the economy, but it will not hold, I expect within a year from now the economy will collapse.
dollar has been strong making this one not so good... what is going to happen with all the gov spending?
I guess I was wrong... maybe after new government policy takes place.. then the dollar will dive.
I'm not sure if reversed or not?
O money spent should keep this on going up imo...
I think too far off... for this week... long yes.
Hi Giff - your thoughts on UDN for this week - it is around $28.28 - I was thinking it could get up to $32.00 by the end of the week. Am I to far off??
Thanks
China: US Dollars vs. Oil
by Bill Powers
Editor, Powers Energy Investor
October 8, 2009
One of the great lessons I’ve learned over the years is to pay more attention to what people do rather than what they say. For example, I always found it peculiar when the CEO of a subprime mortgage lender, home builder or technology company protested in the media that business was “improving” or “bottoming” while selling shares like mad. Politicians are just as bad about saying one thing and doing another. Conversely, I have always admired people who do what they say they will do.
The leaders in China have made it clear to the world that they are very nervous about the future of the US dollar (USD) and are diversifying their holdings away from America’s currency. Apparently many recent purchasers of US Treasuries do not believe Chinese leaders will do what they say they will do or they would not have rushed to buy Treasury notes in recent months at ridiculously low yields. In the not too distant future, China’s promise to diversify into hard assets, especially oil, is going to severely pressure the US dollar and therefore the value of US Treasury notes. In this article I will examine how China’s accelerating diversification away from the USD into hard assets, such as oil, is essential to protect the value of the country’s reserves and provide access to resources essential for further economic development.
With an estimated $1.5 trillion of US Treasuries, agency debt and US dollars on its books, the People’s Bank of China is faced with the dilemma of how to diversify out of US dollars in both its existing assets and those coming in via trade with the US. The country cannot simply convert its dollars back into renminbi since that will force down the value of the dollar and increase the value of the renminbi. The issue of what to do with the mounting pile of dollars arriving via China’s trade surplus has only become more pressing over the last ten years as evidenced by the below table:
US Trade Balance with China
(Millions $US)
Year Imports Exports Balance
1998 14,241 71,168 -56,927
1999 13,111 81,788 -68,677
2000 16,185 100,018 -83,833
2001 19,182 102,278 -83,096
2002 22,127 125,192 -103,065
2003 28,367 152,436 -124,069
2004 34,427 196,682 -162,255
2005 41,192 243,470 -202,278
2006 53,673 287,774 -234,101
2007 62,936 321,442 -258,506
2008 69,732 337,772 -268,040
*Source: US Census Bureau, Foreign Trade Division, Data
Dissemination Branch
I have known for a long time that China has had a large and growing trade surplus with the US but until I looked up the data for the above table, I had no idea how unsustainable its trade surplus had become.
While many China observers believe the country’s large foreign reserve holdings are a huge benefit to the country, history tells us this not always the case. According to Richard Duncan, author of the book The Dollar Crisis: Causes, Consequences, Cures, large trade surpluses or extraordinary capital inflows will lead to excessive credit creation, over-investment and an unsustainable surge in asset prices. Mr. Duncan also explains how accelerated economic activity as a result of trade surpluses nearly always ends in a severe recession, a systemic banking crisis, and drastically higher debt (page 23-24 “Dollar Crisis”). The two examples Mr. Duncan examines in detail in the book are Japan and Thailand. The experiences of Japan in the 1980’s and Thailand in the 1990’s are eerily similar to what China is experiencing currently. However, unlike Thailand and Japan, who invested their reserves in unnecessary additional production capacity and real estate baubles, China is actively taking steps to secure vital resources while mitigating the impact of the flood of US capital that has entered the country. Despite its efforts, China is going to eventually suffer the consequences of economic overheating.
Probably the most important commodity to China’s future economic development is oil. As China’s domestic production can no longer come close to supplying the country’s needs, overseas oil investments are becoming increasingly common for Chinese oil companies. No company is more active in this area than China’s largest oil company, China National Petroleum Corporation (CNPC). According to a Bloomberg article dated July 17, 2009, CNPC had overseas oil output of 229.44 million barrels of oil in the first six months of 2009 along with 374.27 million barrels of oil of domestic production during the same period. The article also stated that according to the official Xinhua News Agency, the company plans to double its annual oil and gas production to 2.9 billion barrels of equivalent within the next eight to ten years. I expect nearly all of this increase to come from overseas investments.
One way CNPC and other Chinese oil and gas companies secure foreign hydrocarbon assets is to form joint ventures with host countries that are in need of development capital and expertise. According to the Eurasia Group, China began investing in overseas oil assets in 1993 when the country first became an oil importer. The first few years the companies made only a few small investments but today the Chinese oil companies operate in over two dozen countries. The largest overseas hydrocarbon producing investment for CNPC is its 40% ownership in the Greater Nile Petroleum Operating Company (GNPOC).
GNPOC was founded in 1997 with the purpose of developing hydrocarbons in Sudan and is jointly owned by CNPC (40%), Petronas of Malaysia (30%), ONGC of India (25%) and Sudapet of Sudan (5%). CNPC is the operator of the project which currently produces approximately 300,000 barrels of oil per day (bopd) according to GNPOC’s website. Since forming in the late 1990’s, the company’s most important achievement is its development of the very prolific Muglad Basin in southern Sudan and the building of a 1,540 kilometer export pipeline to Port Sudan.
What is most remarkable about CNPC’s investment in Sudan is that it came during one of the world’s worst civil wars in modern history and with a historically unstable political regime. However, CNPC’s gamble in Sudan appears to have paid off handsomely. For CNPC’s approximately $5 billion investment in Sudan, it has gained access to billions of barrels of reserves and increased oil imports. Sudan, which exports between 50% and 80% of its crude oil production, accounts for 7 to 9% of China’s crude oil import needs. Given the success of CNPC’s investment in Sudan to date and the huge opportunities that remain, I expect the company to be active for many years in Sudan.
Another way CNPC secures foreign oil assets is through the outright purchase of exploration and production companies. The first large corporate transaction undertaken by CNPC was the 2005 purchase of Calgary-based PetroKazakhstan Inc. for $4.18 billion. At the time of purchase in August 2005, PetroKazakhstan was producing 150,000 barrels of equivalent per day (boed) and had proved and probable reserves of 535 million barrels of equivalent. While Kazakhstan is a very difficult place to operate, CNPC’s purchase price of less than $10 per barrel of proved and probable reserves to accompany PetroKazakhstan’s significant established production base has paid large dividends to date.
It should be noted that CNPC’s purchase came on the heels of China National Offshore Oil Company’s (CNOOC) failure to purchase US-based Unocal Corporation for approximately $18 billion, despite outbidding ChevronTexaco. I believe the political opposition to the purchase of Unocal, which had more than half of its production and reserves in Asia, was a turning point for how the Chinese viewed their ever-increasing mountain of US dollars. Up until the summer of 2005, it would have seemed reasonable to think that the Chinese government would be able to trade US dollars for US-based commodity producers. However, once the uproar over of a Chinese state-controlled oil company purchasing a US-based entity got underway, it quickly became clear to the Chinese that they could sell Homer Simpson dolls to the US but could not use the proceeds to purchase anything of strategic value. After the Unocal purchase busted, Chinese oil companies went on the warpath – doing everything in their power to secure oil and gas reserves.
In addition to the previously discussed PetroKazakhstan purchase, state-controlled Sinopec purchased Tanganyika Oil Company Ltd. for $2 billion in December 2008. At the time of purchase, Tanganyika was producing approximately 6,700 barrels of heavy oil from two concessions in Syria. More recently, in June Sinopec announced the purchase of Addax Petroleum for approximately $8 billion. Addax is active in West Africa, the Middle East and recently signed a concession to develop a field in the Kurdistan region of Iraq. Addax currently produces approximately 135,000 boed.
The above is just a sampling of the larger transactions Chinese oil companies have undertaken over the last sixteen years. As the world’s supply of non-OPEC reserves continues to dwindle, look for the pace of acquisitions to accelerate in coming years.
The final way China is trading it dollars for oil is through the expansion of its strategic petroleum reserve (SPR). According to a July 21, 2009 Energy Tribune article by Lee Geng and Michael Economides, China started its SPR program in 1993 however the country did not start building tank farms until 2003. The above ground facilities under construction are expected to hold 100 million barrels of crude when completed later this year, or approximately 16 days of consumption. According to the article, the SPR program is only in its first phase. The second phase calls for building a storage facility in the northwestern city of Chongqing with a capacity of 50 million barrels. Should the country decide to build a 90-day supply, similar to other countries that maintain SPRs, it would need to stockpile 700 million barrels.
It has become increasingly clear that China is going long oil and is carrying out its promise to reduce its exposure to the US dollar. Investors, especially American investors or those with significant exposure to the US dollar, should consider following the lead of the Chinese by increasing their exposure to oil related investments, since hiding in cash or US Treasuries is a recipe for disaster as the greenback circles the drain.
I think so...
I've got a small play right now which I kinda like, short dollar buy gold in equal amounts... (together I think this is a great play...)
although it depends greatly on what the government does... we shall see.. (although I could see there being a bear market rally in the dollar here so be careful)
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The PowerShares DB US Dollar Bearish Fund (Symbol: UDN) is based on the Deutsche Bank Short US Dollar Index (USDX®) Futures Index™ (DB Short USD Futures Index). The Index, which is managed by DB Commodity Services LLC, is a rules-based index composed solely of short USDX® futures contracts. The USDX® futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. You cannot invest directly in an index. Ordinary brokerage commissions apply. |
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