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Thursday, December 23, 2010

Very smart Uncle Sam is back…


It goes back to my earlier posting written on September 18, 2008 where I shared my views about the rise in crude prices to $145 levels. The crude is again inching close to $100 now. In retrospect that article is making an equal sense in current scenario because the prevailing circumstances are the same as earlier.

When in 2008, the crude prices reached to USD 145 per barrel levels, the US economy was in doldrums and that pushed the government to bring significant liquidity in the market. To protect the depreciation of the US Dollars – crude’s prices, the biggest import bill of every nation, were artificially increased by managing the supply side.

Today, the world is witnessing the same phenomena wherein the US government is increasing the liquidity to increase the employment opportunity, investment and thereby brining the US economy on the track. The US government has pumped in more than USD800 Billion in the system. But this excess supply of US Dollars could also impact the dollar negatively; remember the first law of Economics – the law of demand and supply. But it might not happen because the history is going to get repeated in a span of just 2 years.

The US Dollar seems to be stabilizing around 45 levels, though it is still weak right now and may touch even lower. The crude is providing, and will continue to provide, much relief and support to the dollars and may help it retain its dominance. However, the cost of (financial) mismanagement in US will have to be paid by every country importing crude. We will again witness inflationary pressures building up because crude is reaching towards new highs, It may cause fiscal imbalance in a country like India where the government may not pass the increased crude cost to the common man and which will result in inflationary pressures, anyway.

Look forward to receiving your comments on this article directly on the blog or over email: niteen.dharmawat@gmail.com

Niteen S Dharmawat
===========IMPORTANT DISCLAIMER===========
Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

My earlier posting: http://dharmawat.blogspot.com/2008/09/crude-price-increase-uncle-sam-is-very.html

Thursday, September 18, 2008
Crude price increase - Uncle Sam is very smart

I was thinking about this subject for sometime now. However, I was not sure so never voiced my thoughts on this over email/blog. But when I discussed this with some of the friends and shared my logic with them then some of them agreed and some wondered if it's really a case. But everyone was unanimous and encouraged me to post it for comments from others.

In my view/guess(?) crude price movement from $45 to $145 was a conspiracy of Americans and OPEC. Both of them were hand in glove on this subject. Why?

As I explained in my earlier posts (subject: Rupee-Dollar equation) that crude and dollar have a very strong relationship. This very relationship leads us to believe that crude prices were increased by OPEC to save American dollar and thus economy.

When real estate crash and subsequent sub-prime crises hit the American economy, which led to lowest ever consumer confidence, demand slowdown, job losses, and a complete gloomy future, then the American government decided to print more dollars and give it to its citizen to spend. The idea was to artificially increase the demand and keep the confidence level of industry, public and investment community up. They completely believed (policy makers and Fed) that if this had not been done by them then it would have certainly led to an evident economy depression similar to 1929.

Now, what's wrong if they have printed more dollars and decided to give those new dollars to their citizens? This is suicidal.... Because if you are printing more bills and distributing it free of cost then you are depreciating the value of that currency. It's like everyone will be paid without productively contributing anything to the economy.

This act of printing so much currency by any government is certain to depreciate the value of its currency. And the dollar started depreciating against all the major currencies world-wide including INR. Dollar hit a bottom of Rs 37-38 from a high of close to Rs 46-47 with in a span of 18 months.

It could have touched Rs 32, as many were predicting but it did not lost that long.

When dollar was in huge supply because of extra printing by American government then it was made sure that there is an equal or more demand for the dollar worldwide. Americans have the advantage because US dollar is the most dominant currency in world trade. They took advantage of this.... They made it sure that price of crude, value-wise amongst the top listed product worldwide, is increased multi fold. This led to a worldwide rush to catch dollar so that they can buy crude. So on the one hand an extra supply of dollar was created and on the other it was ensured that extra dollar is consumed in the world economy without any problems.

But now the next question, why would OPEC join hands with Americans because it's OPEC which controls majority of oil production world-wide?

The OPEC will have to succumb to Americans. Because if Americans were printing the currency which would have depreciated its value and ultimately led to the downfall of the dominance of American currency then OPEC members would have incurred huge losses themselves. Over a period of time, OPEC has accumulated huge dollar reserve. If the currency had been devalued and lost the charm then what they would have done with that pile of reserves? They had to be hand-in-glove with Americans and increase the price of crude so as to keep value of American dollars up and running.

Who is at loss? OPEC members: made windfall profits because they were selling the same crude now at 2-3 times the earlier price. Americans: Everyone got green notes to be spent at the expense of rest of the world which was paying price so that American economy continue to buzz.

Please share your comments to me on this article directly on the blog or over email: niteen.dharmawat@gmail.com

Niteen S Dharmawat