[sterlingman]

Since I haven’t seen this topic covered before in much depth and it seemed like a good time to bring it up, I wanted to make it my first post of the New Year.

What I’m interested in is this: what are the likely ramifications of a financially induced recession this year on the US economy and it’s probable impact on Peak Oil?

The scenario I see playing out this year and next is:

The decline of the dollar is given added impetus with the opening and success of the Iranian Oil Bourse (see posts under Iranian Oil Bourse). The Federal Reserve in an attempt to prevent an outright collapse or dumping of US currency has already decided to discontinue reporting M3 (this is dollars held in foreign countries). This move is designed I believe to hide from the financial markets the degree or rate at which dollar holdings are declining in foreign countries. It, in no way, prevents the decline of those holdings or the fall in value of the dollar.

The effects of the declining dollar will primarily be felt in government and semi-government agencies’ inability to sell enough of their securities and the gradual rise in prices of imported goods. To counteract both occurrences, the Fed will have no choice but to resume raising interest rates. This, however, won’t stop the dollar from continuing to decline, just keep it from collapsing altogether. Due to this action of the Fed – at some point – interest rates will reach a tipping point and plunge the economy into a recession. As the recession deepens, a tsunami of bankruptcies and defaults will sweep over the economy.

Another outcome will be that the weak dollar will make imports more expensive. The cost of oil in particular will skyrocket.

Also, the Federal government will be hemorrhaging red ink.

Between the bankruptcies, defaults and skyrocketing oil prices, the US economy could easily slip into a depression. The Fed will be caught on the horns of a dilemma – keep interest rates high to prevent collapse of the dollar and attract money to finance the Federal government’s massive debt or flood the financial system with liquidity to keep the economy from sliding into a deflationary depression?

If the Fed chooses the former, the US economy will be plunged into a depression from which it might not recover. I say this because there isn’t a sector of the economy that could lead the rest out of a depression.

Recovery won’t be led by manufacturing since it, for the most part, has been outsourced to other countries. The US is mostly dominated by the so called “service economy.”

Services won’t lead the economy since it is comprised mostly of real estate related and retail businesses. With imports of goods and oil being relatively expensive due to a weak dollar and high interest rates, most of the service businesses will disappear.

Consumers won’t lead the economy since housing prices would have collapsed, most have negative savings, many will lose their jobs and homes and they will be drowning in debt and struggling just to pay their bills.

The Federal government won’t lead the economy because it will be hemorrhaging money dealing with unemployment, war, a pension crisis and probably a banking/mortgage crisis.

And, as goes the US, so will the rest of the world. The difference between other countries’ economy and the US’, however, will enable a few to recover. The US might lose its superpower status to Europe and China as their economies recover.

As to the impact of all of this on oil, it will bring down the price of oil, but perversely, oil might remain relatively high in the US because of a weak dollar. One exception might be global natural gas prices. Since NG prices are multiples less than oil, its price might be more affordable. If this were to occur, it would present an opportunity for a way out of a US depression. A post I previously wrote would exploit this opportunity. (For all you Doomers out there, please read my other post first to put the below post in context: A Solution to PO, Resource Depletion and Enviro Degradation, http://www.peakoil.com/fortopic16035.html )

It’s titled:

US Avoids PO & keeps its economy …. (by Atolls)
http://www.peakoil.com/fortopic15867.html

The above is the best-case scenario. If the Fed decides instead to flood the financial system with liquidity, it will collapse the dollar and set the stage for hyperinflation. Contrarily, it will not prevent a depression, but instead compound it with rampant inflation. Whatever freedoms left will be curtailed and the US will most likely become a fascist nation. The next and final act would be to go to war to secure oil. The Four Horsemen of the Apocalypse will finally be let loose.

[the_sword]

Acceleration in the decline of the dollar isn’t impossible and imho the US fundamentals would suggest to me that it’s very likely. But the thought that the Iranian currency will have anything to do with anything is loony. Who in the world would invest in a currency whose government is an Islamic theocracy, lead by the nut case , and about to be blown apart by Western civilization.

I’d stick my money in Gold, Silver, or the Candian Dollar first. Heck, I’d invest in a chicken farm in BFE before Iran and their mullahs.

[Wallygator]

$this->bbcode_second_pass_quote('the_sword', '.')..the thought that the Iranian currency will have anything to do with anything is loony. Who in the world would invest in a currency whose government is an Islamic theocracy, lead by the nut case , and about to be blown apart by Western civilization.

[MonteQuest]

$this->bbcode_second_pass_quote('sterlingman', 'S')ince I haven’t seen this topic covered before in much depth and it seemed like a good time to bring it up, I wanted to make it my first post of the New Year.

[Micki]

Hi Sterlingman
This scenario is pretty spot on to what I speculated in the following post.
Party to go on without US?
I still feel that it is a realistic outcome.
No doubt there will be a recession/depression which brings down most economies. Given US poor fundamentals I think they are a good candidate to fall really hard. As a result, countries that are not as badly affected by economic turmoil will quicker be able to start benefiting from cheaper comodities.

[Micki]

the_sword wrote
$this->bbcode_second_pass_quote('', 'A')cceleration in the decline of the dollar isn’t impossible and imho the US fundamentals would suggest to me that it’s very likely. But the thought that the Iranian currency will have anything to do with anything is loony. Who in the world would invest in a currency whose government is an Islamic theocracy, lead by the nut case , and about to be blown apart by Western civilization.

[Cobra_Strike]

fiat currency is a truely evil thing. It is going to suck so bad whne it falls down to the ground.

[The_Virginian]

"IT" has begun.

Deflation IMHO will take quite a while to set in....

Look at Turkey, Israel for examles of extreme Infaltion coupled with Extreme Debt, and trebled with Extreme Unemployment.


Did prices go down? Hardly. (other than subsidized food staples) Appartments , vehicles , electronics, durable goods etc. just kept climbing.

There was no defaltion, only an inflation...

Untill a NEW CURRANCY was issued.

Then the Governments stole even more value by changing in at a government rate.


The new Sheqel, the new Turkish Lira etc.


The average person to this very day suffers in these respective countries, it is very hard to buy a home, the gov. is forced to susidize mortages a tiny bit, and saddle poor people with even more debt.

Turkey has THREE tax seasons (for diffrent occupations/sources of income), Israel taxes vehicles 120% + 17% VAT....even taxes have VAT (MAM in Hebrew Acronym) applied to them.

Essentialy we face the USA becoming a HYPER-inflated third rate Police State. And we are well adrift on this course.


Now why is the USA diffrent?

Well, our currancy is the FOREX standard. So many forces will keep proping up what they can for a while. The EURO is in no shape to take over just yet...as pointed out by others it's mechanizations don't make for an effective vehicle for taking over.

Why is the USA Simmilar?

We had oil price shocks in the 70's and Inflation, ittook us a while to work out GLOBAL suppliers that would be reliable after the USA peakied in 1970. Now those Global partners (notably in the mid-east) are either in decline themselves, or Bucking at a heavy handed Washington.

So inflation and Energy prices, along with economic decline and Unemployment can still co-exist.

There is ONE major diffrence. The SCOPE of this new downturn we are already in. Our industrial capacity is EXPONENTIALY COLLAPSING. How this will play out, is anybodies guess

So I will GUESS that before we go into Deflation, we are likely to have YEARS of really bad inflation.