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| Joined: | Mon Nov 21st, 2005 |
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"If the petrodollar collapses, and interest rates rise, the bubble will burst, and the stage is set for National bankruptcy.”
Why does the interest rate go up?
Why do people automatically assume that interest rates will rise?
“We had to pay in Euros…so we had to sell…”
Why is currency trading so mysterious? If I need Euros to buy Oil from Iraq, or Iran, or even Venezuela, do I have to change the currency? The answer is clearly no; I merely have to change the rate of payment. I have to add the cost of exchanging the rate of pay.
If the Euro is the currency chosen as the “rate of pay”, then the barrel of oil is sold for a price denominated in Euros. How much can someone afford to pay to get one barrel of oil?
Suppose the affordable price of a barrel of oil is 100 Euros in Europe and 100 Dollars in the U.S.A.
Now suppose that things stay that way for 10 years. People in Europe can afford to pay 100 Euros for 1 barrel of oil for 10 years and people can afford to pay 100 Dollars in the U.S.A. for 1 barrel of oil for 10 years.
Now suppose that the U.S.A. begins to print twice as many Dollars on the first day after that 10 year time period where 100 Dollars will buy 1 barrel of oil, and on that first day the Euro remains the same, where the same number of Euros are in circulation.
10 years go by like this:
100 Dollars = 1 Barrel of Oil
100 Euros = 1 Barrel of Oil
One day after 10 years of the above economic rate of pay the Dollar “inflates” while the Euro does not inflate:
200 Dollars = 1 Barrel of Oil
100 Euros = 1 Barrel of Oil
If someone has inside information concerning “inflation” of the U.S.A. Dollar currency “rate of pay”, then someone would “peg” their sales on the stable currency and in so doing someone would avoid being “taken to the cleaners”.
If you were in the business of selling Oil and you were also in the business of “exchanging currency”, then you would have the inside information on which currency inflates (or at least know which currency inflates sooner rather than too late) and which currency does not “inflate”.
Think of it this way:
You are the U.S.A. and you want to buy one billion new barrels of oil from Iraq, you are also in competition with Europe because Europe also wants to buy one billion new barrels of oil from Iraq (the U.S.A. and Europe both know that the price of Oil is going up so they both want to get the Oil before the price goes up).
Europe does not decide to create 100 billion new Euros to pay for 1 billion new barrels of oil, because Europe prefers to have its currency stable (not inflating). Europe chooses to keep its currency “rate of pay” at 100 Euros for each barrel of oil.
The U.S.A. decides to create 100 billion new Dollars to pay for 1 billion new barrels of oil, because the U.S.A. needs the oil to invade Iraq, and seize the oil.
The Oil sellers sell 2 billion barrels of oil, 1 billion to the U.S.A. and 1 billion to Europe. What price do the Oil sellers use in exchange of Oil for Dollars? What price do the Oil sellers use in exchange of Oil for Euros?
If the U.S.A. is paid 100 Dollars for 1 barrel of oil while the U.S.A. “inflates” the supply of dollars (by doubling the number of dollars), then the Oil sellers will be selling Oil to the U.S.A. at half price if the Oil sellers also sell oil to Europe at 100 Euros for each barrel of oil and Europe does not inflate (increase the number of) Euros.
I’m going to watch the rest of this video on money (it is interesting).
Last edited on Mon Jun 15th, 2009 11:16 am by Joe Kelley