I have to agree with most of this article. But I have to say that I think things are wrong at a deeper level with the US economy.
Ironically, the American economy is currently being propped up by high oil prices. Indeed trade in Oil is one of the things that has kept the American economy safe for the past few decades.
All oil is traded in Dollars. As a result all countries in the world need to keep reserves of dollars. Those reserves are like un-cashed cheques drawn on the American current account and the fact that they go round and round the world from one country to another means that the US economy has a ‘float’ of billions of dollars never expected to return on the country. Sure the oil producing countries will be cashing in their dollars from time to time, but the constant demand from other countries more than makes up for this. This factor has been one of the major reasons why the American deficit is as low as it is and the value of the dollar as high.
If the USA was a company, the outstanding cheques (foreign reserves of Dollars) would have to be included as liabilities on the balance sheet. But since the USA is a country it works under different rules. Rules it itself sets. The ‘float’ provided by the world oil trade is an advantage no other economy has and many look upon with envy. And here is the ironic thing, the higher oil prices are, so long as the volume of trade is not impacted, the better for the Federal Reserve. More dollars in circulation, the lower national debt.
But imagine what would happen if the currency in which oil was traded was to change. Say oil producing countries were to decide that they wanted to be paid in, for example, Euros. There would be a headlong rush across the world to sell Dollars, (they would not be needed to the same extent), and transfer their main foreign currency reserves into euros. The value of the Euro would doubtless go up; the value of the Dollar would plummet.
It would be as if a huge number of outstanding cheques on USA PLC were suddenly cashed. With the ‘float’ created by the Oil market gone, the real national debt of the US would be revealed as reserves were cleared and returned to US, imports of goods and raw materials would soar in price and the US would almost certainly suffer unprecedented inflation and job losses.
And this is not beyond the realms of possibility. Many of the Oil producing countries are not on great terms with the US and resent their trade being used to artificially bolster the US economy, indeed a number of have already announced their preference to move onto a Euro oil market. Venezuela, Iraq (before the invasion, very shortly before the invasion), Iran and Korea, all of them have at one stage threatened to move their oil trade into Euros. It’s a move that has been openly discussed by OPEC and so must be taken seriously as a possibility.
And here is where I fully agree with the article. Politicians in the US have treated this bonus they get, this free gift from the Oil trade as something permanent. Rather than reducing the deficit while times are good, they have used it to the n’th degree. Stretched it to the very limit, leveraged it to give presents to those who support them in the form of tax cuts or support for certain industries. This has been an opportunity, like North Sea Oil in the UK, to build long term prosperity and stability into economies. To reduce the national debt for good.
But economic policy does not seem to ever look beyond the next election. Instead it’s a game of pass the parcel, our leaders acting for short-term gain and popularity and hoping beyond hope that they are not the one in power when the music stops and, to mix my metaphors, the economic balloon bursts.
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Ironically, the American economy is currently being propped up by high oil prices. Indeed trade in Oil is one of the things that has kept the American economy safe for the past few decades.
All oil is traded in Dollars. As a result all countries in the world need to keep reserves of dollars. Those reserves are like un-cashed cheques drawn on the American current account and the fact that they go round and round the world from one country to another means that the US economy has a ‘float’ of billions of dollars never expected to return on the country. Sure the oil producing countries will be cashing in their dollars from time to time, but the constant demand from other countries more than makes up for this. This factor has been one of the major reasons why the American deficit is as low as it is and the value of the dollar as high.
If the USA was a company, the outstanding cheques (foreign reserves of Dollars) would have to be included as liabilities on the balance sheet. But since the USA is a country it works under different rules. Rules it itself sets. The ‘float’ provided by the world oil trade is an advantage no other economy has and many look upon with envy.
And here is the ironic thing, the higher oil prices are, so long as the volume of trade is not impacted, the better for the Federal Reserve. More dollars in circulation, the lower national debt.
But imagine what would happen if the currency in which oil was traded was to change. Say oil producing countries were to decide that they wanted to be paid in, for example, Euros. There would be a headlong rush across the world to sell Dollars, (they would not be needed to the same extent), and transfer their main foreign currency reserves into euros. The value of the Euro would doubtless go up; the value of the Dollar would plummet.
It would be as if a huge number of outstanding cheques on USA PLC were suddenly cashed. With the ‘float’ created by the Oil market gone, the real national debt of the US would be revealed as reserves were cleared and returned to US, imports of goods and raw materials would soar in price and the US would almost certainly suffer unprecedented inflation and job losses.
And this is not beyond the realms of possibility. Many of the Oil producing countries are not on great terms with the US and resent their trade being used to artificially bolster the US economy, indeed a number of have already announced their preference to move onto a Euro oil market. Venezuela, Iraq (before the invasion, very shortly before the invasion), Iran and Korea, all of them have at one stage threatened to move their oil trade into Euros. It’s a move that has been openly discussed by OPEC and so must be taken seriously as a possibility.
And here is where I fully agree with the article. Politicians in the US have treated this bonus they get, this free gift from the Oil trade as something permanent. Rather than reducing the deficit while times are good, they have used it to the n’th degree. Stretched it to the very limit, leveraged it to give presents to those who support them in the form of tax cuts or support for certain industries. This has been an opportunity, like North Sea Oil in the UK, to build long term prosperity and stability into economies. To reduce the national debt for good.
But economic policy does not seem to ever look beyond the next election. Instead it’s a game of pass the parcel, our leaders acting for short-term gain and popularity and hoping beyond hope that they are not the one in power when the music stops and, to mix my metaphors, the economic balloon bursts.