[+ Font] :: [- Font] :: Printable

U.S. Economy & the U.S. Dollar

Julian D.W. Phillips
February 22th, 2006

As an extension of the Oil crisis section this portion of our publication throws light on the link between the external $ and the internal one and their consequential impact on the gold price and global confidence / stability / uncertainty. What is apparent to all, is the careful separation of the management of the internal $ and the economy and the external one. The Fed manages the U.S. economy alongside the Administration with sustainable growth in mind. This is of prime importance to the authorities, overriding considerations of the external $. So as to clarify what we mean the Trade deficit is tantamount to the "Tribute" [or taxation] levied upon the global economy. Every $ paid away for goods from abroad has been reinvested back into the States in the form of direct investment mainly in liquid Treasury Bills and Bonds. And the interest earned is paid for through the issuance of more dollars. This is a considerably more efficient means of drawing in "Tribute" than the previous world empires ever dreamed of and at little cost to the U.S. Paying nations find this acceptable because they believe they have an item of value in that it can be exchanged for oil almost instantly. The difficulty with this concept is that it works until, like gold in 1971 oil producing nations cut the link to the oil price by the $. Nixon closed the "gold window" to the $, in 1971, but it will be surplus nations that will have to cut oil's link to the $ now. And that is what the U.S. will do their utmost to prevent.

What on earth is being said here you may say? Put it this way, the $ was devalued by 100% when the oil price hit $70, after being $35 the year before. This has made the $ strong as the demand for the $ increased in order to buy the same oil as before. No wonder the U.S. is so calm about the rise in the oil price!

It is this decision making power that is the real transfer of power from the U.S. to Asian nations. But it will not be an easy matter! The path down that road is fraught with structural fractures in the form of rising tensions, conflict, protectionism and currency debauching, a road being looked at by the perspicacious but few others.

It starts with the full Balance of U.S. Payments, the Trade Deficit plus the Capital Account. We suspect, but have yet to validate, that the Offshore purchases and sales of U.S. liquid instruments [Treasuries] ties into the offshore liquidity figures for the $. These are managed to contain any "liquidity spillage" that might undermine the $. Otherwise any shortfall on the Capital Account would lead to an instant $ crisis, as it would on any other less dominant currency. Right now these back-up systems are under test as the U.S. Balance of Payments drops into a deficit overall.

Evidence of this is to be found in the numbers for foreign inflows into the U.S. The Capital inflow to the States of $56.6 billion did not cover December's trade deficit of $65.7 billion. But previous month's inflows have more than covered recent deficits. The overall deficit in December should have dropped the $ just as overall surpluses should have strengthened the $. But there is a discreet 'smoothing effect' in operation that prevented these currency moves. Consequently and in line with what we have said here, Bernanke's speech before congress could reassure the nation that economic growth is on track and inflation remains contained.

On top of this the management of the internal economy, as an insurance against potential inflation and deflation Bernanke reiterated recent Fed comments that further interest rate increases may be necessary.

Be under no illusion, this is not sound global economic management and is leading to power moving across the world to Asia making the future more ominous with more and more individuals, institutions and nations looking for ways to diversify away from the $.

If the Capital Account inflows continue to fall short of the Trade deficit, a $ fall should be precipitated. However, a further devaluation of the $ in terms of oil, will occur and we will see a resumption of the rise in the oil price [more pertinently a fall of the $ against oil]. So long as the bulk of the world continues to put up with this the longer the decline of the $ will be.

But should the rest of the world act to diversify away from the $, the U.S. will be tempted to exert more pressure on the oil producers to continue pricing oil in the $ and no other currency. This will mean an escalation in global tensions. As uncertainty grow, so the future of the $ dims and the future of gold brightens!

February 22th, 2006
Julian D.W. Phillips
email: gold-authenticmoney@iafrica.com

To subscribe to "Gold Forecaster - Global Watch," please go to: www.goldforecaster.com.