The Problems of America
The PetroEuro

For the last several months, the media pundits have centered on the sub-prime lending crisis in this country. Congress is now debating a bill to bail out lenders and borrowers who engaged in questionable mortgage loans. But, the real crisis does not concern the debt of individual Americans but the debt of their country.

Treasury bonds held by foreign investors carry the debt of the USA. It is a low cost way for the country to carry its debt. But, that only works as long as there is such an animal as petrodollars [oil is traded in dollars] and foreign investors are willing to hold our debt. As we all know the dollar continues to lose value in comparison with the Euro. If and when oil starts to be traded in petroeuros, look out.

The outlook for oil continues to be dire. Today, 16 May 2008, the Saudis refused President Bush’s plea to increase oil production. The price per barrel hit an all time high near $128. And, Goldman Sachs has revised their prediction of prices saying it will rise to $141 per barrel. The dollar continues on its nosedive making an alternative pricing method more and more likely. Again, beware of the petroeuro for it will result in consequences for the USA.

There will no longer be a reason to hold dollars and the US debt. The government will no longer be able to finance their debt cheaply with Treasury Notes. The result will be the interest rates rocketing up. Remember the 17% Carter year rates? It could be worse. The inflation that is now creeping upward will zoom. Asians have held dollars so that we can buy the things they produce. But, with oil being pegged to the Euro instead of the dollar, the dollar would decline even more and the US as a market for goods would not outweigh holding increasingly worthless US debt.

There are many who pooh pooh this scenario. The Arabs, it is said, cannot afford to see their US dollars and debt take such a hit, so pricing oil in anything besides the dollar is not likely. But, will not the Euro continue to look better as the days wear on? The EU does not have a large deficit nor is it indebted to the world for its excesses. It imports more Arab oil than the US. The Arabs can buy their luxury yachts, condos, Lear jets and yellow Ferrari’s with Euros as easily as dollars. A potential painful short run, but not a big deal over the long haul.

The Fed cut rates by 25 basis points recently. And, they signaled that may be the end of cuts. They have apparently come to the realization that more liquidity is no solution for a crisis spawned by excess liquidity coming from easy credit to questionable risks. Oil prices keep climbing and the dollar keeps weakening. The time is coming when we will have to stop printing dollars because no one will want them…Arabs, Asians, borrowers. When the world decides to shift emphasis from the dollar to the Euro, we will be at their mercy. We put ourselves there by selling cheap debt to those who wanted us to keep consuming their goods. We are walking on the edge of catastrophe. We are no longer immune from our creditors. An ugly day is coming, probably sooner than later.