Will Iran Kill the Petrodollar?

Posted on January 27, 2012 by MN Gordon

Will Iran Kill the Petrodollar?
By Marin Katusa, Casey Research

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon.  The punishment: sanctions on Iran’s oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn’t make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand.  That matter is the American dollar and its role as the global reserve currency.

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods.  Massive demand for US dollars ensued, pushing the dollar’s value up, up, and away. Continue reading →

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The Stock Market, Explained

Posted on January 24, 2012 by MN Gordon

Despite an abundance of risk, the stock market continues to climb a wall of worry.  Obviously, with the European debt crisis, China’s economic slowdown, and posturing from Iran, the stock market’s rise defies all logic.  With all the known hazards out there, shouldn’t investors be piling into treasuries?

One of sound mind and good judgment would think so.  But, to the contrary, the opposite is happening; yields on ten year treasury notes topped 2 percent last Friday for the first time in nearly a month.  Similarly, the S&P 500 is up 20 percent since early October.

“Strong start for stocks, but what’s changed,” asks a Reuters headline over the weekend.  “Will equities rally further?” asks Credit Suisse analyst Andrew Garthwaite in the article.

According to Garthwaite, the S&P 500 should rise to 1,400 by the end of the year.  Still, Garthwaite pointed out the risks of a more severe recession in Europe and a slowdown in the United States.

So which is it…will stocks continue to rally or will a financial or economy crisis crash the markets? Continue reading →

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Heating the Stove with Furniture

Posted on January 20, 2012 by MN Gordon

Several important economic data points from last month were revealed this week.  Industrial production and the producer price index were reported on Wednesday.  Then, yesterday, the consumer price index was reported.  Here are the particulars…

According to the Federal Reserve, manufacturing increased 0.9 percent in December…its biggest gain since December 2010.  Manufacturing’s still about 8 percent below its July 2007 pre-recession peak, but it has increased nearly 15 percent from its recession low.  Industrial output, on the other hand, is now less than 5 percent below its September 2007 pre-recession peak, and has increased more than 14 percent from its June 2009 recession low.

No doubt, it has been a long hard slog just to get back to within spitting distance of level ground.  Who knows if industrial production will continue charting its course back up and to the right?  Perhaps this is all just a big economic head fake before things roll down the mountain again.  No one knows for certain, at the moment.  But we’re confident we’ll all know in good time Continue reading →

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The Money Must Go Somewhere

Posted on January 17, 2012 by MN Gordon

In Friday’s issue of the Economic Prism we suggested that, despite all the financial uncertainty going on, the U.S. economy is strengthening.  By the response we received, this optimism astonished many of our readers.  Naturally, we thought that would be the case…and promised there’d be more to follow.  So allow us to explain…

To begin, we still believe things are going to hell in a hand bucket.  Government debt, which recently exceeded 100 percent of gross domestic product, is a ball and chain to economic growth and dynamite to monetary stability.  The debt problem isn’t going away.  It will ultimately restrain the economy and bring about government default or mass inflation as the Fed prints money to lighten the debt burden.

But neither economic progress nor ruin follow a straight line.  Countertrends and cyclical rallies play out making fools of believers and nonbelievers alike.  At the moment we think the economy’s taking a temporary detour from its eventual destination.

Remember, the financial and economic problems we face today didn’t begin in 2008; they began nearly a century ago with the creation of the Federal Reserve.  Moreover, they began in earnest in 1971 when Nixon severed the dollar’s last tie to gold Continue reading →

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