Tuesday, May 23, 2006

The Tooth Fairy

For personal and professional reasons, I am always trying to get a handle on the future of the dollar. Given that the dollar, or the petrodollar as it is called, is the singular currency for the most widely traded commodity on earth, it has significant strengths and arguably, some unique weaknesses.

Several years ago, I was visiting with friends in Paris when a new acquaintance characterized his employer as the Country Club United Nations. He was of course referring to the OECD. The OECD is the organization for Economic Cooperation and Development.

"The forerunner of the OECD was the Organisation for European Economic Co-operation (OEEC), which was formed to administer American and Canadian aid under the Marshall Plan for reconstruction of Europe after World War II. Since it took over from the OEEC in 1961, the OECD vocation has been to build strong economies in its member countries, improve efficiency, hone market systems, expand free trade and contribute to development in industrialised as well as developing countries.

After more than four decades, the OECD is moving beyond a focus on its own countries and is setting its analytical sights on those countries - today nearly the whole world - that embrace the market economy.

The Organisation is, for example, putting the benefit of its accumulated experience to the service of emerging market economies, particularly in the countries that are making their transition from centrally-planned to capitalist systems. "

The OECD is not a radical organization given to hyperbole. (radical right maybe)

With that in mind, I noticed this story in Forbes.

OECD warns rebalancing of US deficit
may drive dollar down sharply

LONDON (AFX) - The OECD has warned that the eventual rebalancing of the US current account gap 'looks increasingly unavoidable' and will send shock waves across the globe, starting with a slump in the dollar's exchange rate.

The OECD said in its world economic outlook that the depreciation faced by the dollar could be 'of the order of one-third to one-half.' The adjustment in the deficit would 'need to induce a sharp slowdown in US domestic demand and that this would have adverse spill-over effects on other economies both through the trade and asset revaluation channels,' it said.

The rebalancing may be accompanied by an increase in risk premiums and a reversal of private capital flows, it added. Countries with current account surpluses have been accumulating dollar reserves and 'their willingness to hold dollar assets on their balance sheets may diminish,' the OECD warned.

It also cautioned that a protectionist response from the US may accelerate the dollar's falls. 'The US deficit is becoming a pretext for protectionist pressures. If this were to prompt surplus countries to reduce their official US dollar reserves or raise expectations thereof, support for the US dollar could wane.'

Already, the widening of current account imbalances has been sustained far longer and with much smaller exchange rate responses than would have been judged plausible even a decade ago, it said.

So far the United States has attracted the capital needed to finance its current account deficit with relative ease. But it has also moved from being a major international creditor to a net external liability position amounting to slightly over 20 pct of GDP, and the current US external deficit is approximately twice the level that would be consistent with a stable net foreign liability position. "


If you look at the price of Oil,

it might be said that the depreciation (inflation) has already occurred.

Or, if you look at Real Estate and land prices in many places,

the depreciation has already taken some affect.

When folks tell you to pay off your debts,

they are not thinking straight, if the dollar is about to be halved.

I'll pay my debts off with cheap dollars, thank you very much.

A fifty percent devaluation would make the stock market look good,

but it would make bonds look horrible.

That's assuming that Wall Street doesn't read,

and they know nothing about climate change or peak oil.

Oddly, the last Bloomberg hot shot that I went out with,

didn't even know what a Blog was.

Or that the War is about Oil.

For my friend and her other Wall Street chums,

St Nick still comes down the chimney without a speck of soot,

And "the market " is the salvation of humankind.

Personally, I'm more fond of the Tooth Fairy Theory.

At least then when you lose something of value,

a mysterious force makes you feel better about it.


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art courtesy of Shannon Playford


Anonymous Anonymous said...

Interesting post, OZ, can you tell me what happens if Iran and Venezuela switch to the euro instead of the dollar as the standard for valuing oil?
Thanks, K

4:47 PM  
Blogger oZ said...

K, If Iran and Venezuela change to the Euro, they are in line for a regime change.

If that fails, the dollars weakens.

If Russia follows, which Putin has announced, we see the fall that the OECD is referring to.

6:47 AM  
Anonymous Anonymous said...

totally scary art?

I don't get it. MS

6:50 AM  
Blogger oZ said...

You don't think that a 50%devaluation of the dollar warning announced by the OECD is scary?

It will also be ugly.

6:51 AM  

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