[Permanently_Baffled]

OK I have an economics question.

When I first started reading about PO and the implications for the world economy, one of the repeating themes was the importance of the petrodollar in sustaining the bulging US trade and current account deficits.
For example, the trade deficit is running at approximately $66 billion dollars a month or circa $792 billion per year. This is 7.2% of GDP.

Now as I understand it , this deficit has only been able to be sustained because an artificial demand for dollars is created by the pricing of oil in dollars.

If it wasn’t for this demand, the dollar value would depreciate quickly and cause massive hikes in interest rates and a decimation of the debt laden economy.

Now this is where is gets confusing.

The United kingdon also has the problem of a worsening trade deficit. Indeed ours has now risen (if last months numbers continue)to 6.5% of GDP.

I have always thought that the pound has maintained its value by the interest rate differential between the UK and US, which was 4.5% and 1% respectively.

But now the US has nearly caught up , at 4%.

So what is maintaining the pounds value? We have a deficit on par with America, similar interest rates BUT WITH NO PETRO currency.

Can the experts shed some light?

[Doly]

PB, you should have posted this in the Economics forum.

Anyway, I'm hardly an expert, but I've been trying to figure out our economic situation for a while now. Mr Bill thinks that the petrodollar isn't a major factor in maintaining the dollar, and I'm inclined to believe him, because he seems to know what he's saying when he talks about economy. The fact that the situation of the pound is similar confirms this.

If you think about it, the biggest buyer of dollars is China, and China doesn't import that much oil to justify buying all those dollars. Keeping its trade with the US seems to be the main factor. I believe the same goes for a lot of dollar-buying countries. I guess the petrodollar is a factor as well, but not as important as some people think.

I don't know who is holding reserves of pounds, but it's worthwhile to find out. The economy of the UK depends on it, and it affects all of us living here.

[Kingcoal]

Actually, you've brought up the real issue PB, which is debt/GDP. Debt by itself is meaningless. The reason why GDP is important is that GDP is money moving around. Fiat currencies become worthless unless they keep moving. So long as the dollar keeps moving, it has value.

I've come to the conclusion that Europe really isn't better off than the US. Fiat money's worth is directly proportional to how fast and how much it is changing hands. That's why complicated and diverse financial markets do so well with fiat money. The market it is used in determines the value of fiat money. Money is like a stock certificate. Companies split their stock for the same reason the Fed prints more money.

The value of the money is best kept within a predefined range, with cheaper being better than too expensive. Look at the Great Depression. Money became fantastically valuable at first. Smart people, who liquidated before the market crash were able to buy up all kinds of assets at bargain prices after the crash.

I think that there is a plan underway at the Fed to drive up euro vs. dollar valuation. The idea being that with an expensive euro, EU economies will slow due to the high cost of their goods sold to the US. Also, Chinese goods, which are essentially denominated in dollars, will become even cheaper to EU members. Of course the way to respond to this is to print more euros in tandem with the extra dollars. No wonder the EU is looking forward to the Iranian Oil Bourse.

My prediction for this year is that GM will go bankrupt and will close most all of its US plants. The next step for the US auto industry is to move all of it's manufacturing to low cost regions. GM will become a designer of cars and a seller of cars, not a producer. I bring this up because if things keep going on the same way, EU exporters will have a very hard time selling anything abroad. The EU would prefer to have it both ways, export both products and currency to the world. Don't work that way. Take your pick.