the value of the dollar and a ponzi scheme

[Athena]

I am hoping this thread stays close to the thread about oil, because oil has taken the place of gold in world economic systems, and now the power is shifting from the US, the first world supplier of oil, to the mid east.

 

In general we have not been working with a good understanding of the relationship between oil and the economy. We might know the world has traded oil in dollars, but this didn't mean anything to us. Because oil was traded in dollars, all the countries wanted dollars, and this gave the dollar a high value. Mexico is not the only country that enjoyed US dollars, but as far as I know, it is the first one to shed the dollar. If other countries follow, the value of the dollar will continue to fall, further decreasing the value of the dollar.

 

http://www.thepeople...sfully-sheds-th

 

Another part of the story is foreign oil countries used US banks because of the high interest rates they got, but no longer get. The banks used this money for loans. A lot of these loans went to third world countries, that were charged extremely high interest rates. This was like the housing fiasco, where bankers made housing loans to people who couldn't repay the loans. The third world countries couldn't repay the loans. That means, money left our banking system and didn't come back, and that hurt our economy.

 

Eventual the oil countries created their own banking system, so more money has left the US banking system. I could be wrong, but I suspect our banking system has become like a patsy scheme, covering up the missing money with housing loans. That fell through, so now we appear to be covering up the missing money with student loans. We have created a house of cards, because the banks do not have money they claim to have. They have loans that they hope will be repaid, plus interest, and they are making loans on the projected repayment of loans, plus interest, but they do not have money. Our gross national product is a measure of how many times a dollar changes hands, and today most of this exchange of money has nothing to do with real products. It is a make believe world of money changing hands. Unpaid loans and interest rates being like forged paper money, boosting our gross national product. How is this not a patsy scheme? If the rest of the world stops buying into our patsy scheme, we are in serious trouble. I think this was the meaning of 9/11. Those are the numbers we use in times of emergency and it was the World Trade Center that was hit.

 

Sometimes I like to be wrong, and this is one of them.

Edited May 13, 2011 by Athena

[Hal.]

Is a ' Patsy Scheme ' an economic term ?

[Athena]

Is a ' Patsy Scheme ' an economic term ?

 

You are right, I goofed. The term word I meant to use is "Ponzi scheme". However, my spell check doesn't like that word, and it does not seem to be in my dictionary. Patsy means someone easily imposed upon and is in my dictionary, and comes close to the meaning of a Ponzi scheme. I don't think either term is a legitimate economic term. However, I do think what I am trying to say is important and deserves more than your short comment.

 

!

Moderator Note

FTFY

Edited May 14, 2011 by swansont
add modnote

[Hal.]

Athena , I commend you on the original post , I read it carefully , as current economic issues are important to everybody . There were possible multiple meanings , so for clarification I thought it appropriate to ask the meaning of certain terms .

 

The short branch of discussion I hoped would clarify things is beneficial to make a loss of ignorance . Success !

[Marat]

Although credit does in a sense create a kind of 'fake wealth' because there is always more buying power available in society than there is 'real wealth' (gold, for example), to back it up, in fact this has been the case ever since Italian city-states in the Renaissance started relying on banks loaning money at interest to promote the revival of trade and commerce. The inflation of wealth by credit is a good thing, as evidenced by what happens when the confidence that sustains credit collapses in recessions and depressions. There was just as much 'real wealth' in the aftermath of the 1929 Market Crash as before, in the sense that there were still the same number of factories, machine-tools, coal mines, and skilled workers as before, but the Great Depression was the result ot the disappearance of the 'fake wealth' of credit -- that is, the willingness of people to loan money for business ventures on the expectation that these ventures would generate sufficient income to repay the loans. Market crashes occur when people start calling in the real assets to back up loans which have been given, that is, when they lose confidence in the 'fake wealth' of credit and become willing to accept only the 'real wealth' of tangible assets. Prosperity flourishes when people buy stocks on margin, banks loan more money than they actually have on deposit, governments print more money than they actually have in their treasuries, etc., because then we have more capacity to stimulate growth than our limited supply of surplus tangible assets.

[Athena]

Marat, thank you for the food for thought. Are you saying there is no limit to growth, as long as people treat make believe wealth as real wealth? It seems like much of the world is behaving as this were true, with the unfortunate effect of raising the interest on their loans so high, they are unable to repay the loans, and then default on the loans, reducing the make believe wealth.

 

It is not just a problem of imagined wealth, but that imagined wealth creates a false notion of the value of real property. Somehow reality hit the housing market and people are stuck with loan payments greater than the value of their real property, and millions of dollars of wealth just disappeared. Only if our economy turns around, will these people have any chance of selling their real property for they paid for it, and just how are we suppose to turn our economy around, when such a large portion of our wealth is false wealth? Doesn't this make the housing market like a ponzi scheme, because the value of the housing was good only as long everyone believed in imagined wealth. This is not sound economic development, and we are foolish to tolerate it.

 

Our wealth was built on oil. All industrial economies depend on oil. This isn't just about the energy that fuels cars, but the energy that fuels economic growth. The profits generated by oil, went into our banking system and back out in loans. A little bit of false wealth may be a good thing, but too much of it results in unsustainable economic growth and economic collapse. Our system is dependent on growth. What happens when there is no growth?

 

Actually a similar problem brought Rome down. Roman's economy depended on gold as ours depends on oil. When it exhausted the gold mine, it began cutting its coins with cheaper metals, and devalued them. At the same time the Roman coin was being devalued, the expenses of Rome built during a period of real wealth, continued to grow. Rome didn't just fall to barbarians, it could no longer afford adequate defense of its borders and its own citizens were ready for a big change. Now what? The dollar or coin is worth less so it takes more of them to cover expenses, and because the population is larger and expects more, there is a double whammy of needing to pay more for less, while the demand is increased. Imagine your way out of this.

 

Geeze, the feds and many others promised workers pension plays they can not cover. We are recognizing we have taken this game of imagined wealth too far, and I am really sweating what is going to happen next. My old body is very resistant to the idea of camping, because I can not afford housing, and if my death would mean my children will have good lives, I would gladly drop dead, but I have this notion, if I can't be part of coming up with a better plan for our future, what my children and their children face will face will not be good. Some how I have to be part of the breaking threw of denial that could mean a mass die off, and the end our civilization. Now are you going to continue relying on imagined wealth, or work on a plan for what we need to do?

 

Sometimes we can't see the trees for the forest. Let us get some distance from this problem. I am quoting from Youngquist "GeoDistinies".

 

"Mexico, with a population of some 80 million people, was also early to borrow from this pile of oil money in US banks. Mexico subsequently built up a debt of more than $100 billion which meant that each Mexican man, woman, and child owed a foreign debt of more than $1000 each. In a country where the annual income is about $700, clearly this debt is really not manageable, and the prospects that this debt would ever be paid were almost nil. But to prevent the debt from appearing as a loss on the balance sheets of US banks, the banks continued to loan out more money in order for Mexico to pay the interest on the debt. (I did the highlighting to break the denial of the danger of our imagined wealth. Note the deception! Also remember the savings and loan crisis and how the tax payers bail them out, when the reality of imagined wealth hit, long before we had to bail the banks out.)

The ultimate result, of course, was simply to make the debt larger. The Mexican peso gradually declined from an earlier value of 12 to the US dollar to more than 2500 to the dollar. A "new peso" was instituted, but in 1995, the situation collapsed again. The Mexican peso hit an all-time low in terms of its value against the US dollar, and Mexico was having to offer 35 percent interest on its bonds in order to sell them- a situation which could not possibly continue. A hastily (literally overnight) arrangement was made led by the United States in conjunction with some other nations and international monetary organizations whereby Mexico was given a $47 billion dollar commitment to maintain its credit and currency. This was stated as assistance to Mexico, but it should be noted that it also was for the benefit of international bankers to whom Mexico already owed substantial debts. Whether these maneuvers will achieve a successful end to the financial follies of the past remains to be seen. History is not encouraging. Interestingly enough, the only collateral which the lenders recognized for this arrangement was that of Mexico's oil revenues, a clear case in which oil was being used essentially as money."

 

Oil is finite. How long will the world benefit from oil money? How much of our wealth came from oil money, and what happens to it, now that we are importing oil and foreign oil countries have taken their oil money out of our banks? What are the bankers getting out of this and how are the peasants benefiting? What happens when the oil is exhausted? What happens if what happened to the value of the peso, continues to happen to the value of the dollar? Out of what hat will we pull the money to pay off the bankers, when there is nothing left for collateral? Oil is paying 50% to 80% of national cost in the mid east. All these nations have to figure out how to use today's oil income for the future economy, when the oil is exhausted. Don't tell me Japan, Twain do just fine without resources, tell me how the oil countries are going to make that transition. What happens to our banking system that is so reliant on oil money? How is all this going to be maintained? Perhaps we have something to learn from the fall of Rome and also from the history of dinosaurs and mammals. Big is good under the right conditions, but when conditions change, big can lead to extinction, and the meek shall inherit the earth.

[DJBruce]

I am not an expert on monetary policy, however, I feel that the USD will rise out of the current trouble it is in. If we look at the USD Index we see that over the last half a month the dollar has made a slight comeback hitting right above 75. Granted that this is by no means a huge rally, nor is 75 great, however, we have not dropped bellow our lowest index point, and I would like to give it a little time to see if this rally continues. I doubt that we will rebound to a great level, but I would bet that the dollar will increase and stabilize in the near future. Also some experts are believe that the USD will increase on the EUR in the next year, which will definitely help our currency. As for the dollars relation to oil I do think there is some relation between the two, but I am not sure how strong this is. Also I feel that oil prices will also drop once the Middle East calms down. Who knows when this will be, but when it does I expect oil prices to fall just as they did earlier in the decade, and I would expect that you help the dollar as well.

 

To some extent our economy is built upon future and/or "imaginary" funds, but then the entire idea of money and an economy is built upon peoples belief in it. In my opinion some level of imagery funds is healthy, and important for our economy the problems occur when people purposely use creative/fraudulent accounting to hide losses, and people then lose their confidence in the market.

 

http://www.bloomberg.com/apps/quote?ticker=DXY:IND

http://video.cnbc.com/gallery/?video=3000021724

[Athena]

There are several sites explaining the relationship between rising oil prices and rising unemployment. When the price of oil peaked, people defaulted on their home loans, causing a banking crisis. What is really frightening is at this time there is social unrest in Saudi Arabia. Because of the amount of oil supply that could be disrupted, this would be devastating to our economy, so yes, wall street is very nervous. The tension in Saudi Arabia has been know for years, and if the citizens here rebel, it will not be a surprise as Egypt was. Saudi Arabia's economic growth is dependent on exporting oil. Its population is increasing and the government is having a terrible time keeping with citizen demands, and not flooding the market with oil, causing the price of oil to drop. If this country gets caught up in a rebellion, it will be devastating to our economic recovery.

 

This is one of the several sites that explains the problem.

 

http://www.washingto...economic-crash/

 

I live at the lower end of the economic spectrum, and during the 1970 recession volunteered to assist the poor though St. Vincent de Paul. I intimately know what rising gas and food cost do to people who can barely make it from pay check to pay check, and do not like the news of rising gas and food cost. When things get really bad, the government takes protective measures by increasing the requirements for assistance, and cutting seriously needed programs. This means more people go without basic needs, and this destroys families. Broken families increase the problem, and this damage can effect our country for many years.

 

Some are talking about hyper inflation if we do not get control of the economy. Our national debt is way to large and this is a very bad time to have the economic problems we will have if protesters in Saudi Arabia disrupt the oil supply. I firmly believe we need a plan for getting through an economic crisis that may be far worse than what we have experienced so far. The 1970 recession was really bad, and we are threatened by a worse one.

 

And if that isn't bad enough, China is experiencing a trade deficit. We are borrowing money from China to stay afloat, and China's ability to continue loaning us money may be weakening, while our growing debt problem could cause interest rates on our loans to rise. At the same time the rising price of oil, is taking a big bite out of us. I am not sure, but I think may be we should ration gasoline?

Edited May 15, 2011 by Athena