Kaboom: Peak copper, superspike prices, oil and US debt

…In effect, higher oil prices have a double negative effect:

* the increased cost of oil creates a significant trade balance for the USA;

* but at the same time, the dollars captured by the oil producers are re-invested in US Treasuries, thus lowering the interest rates and making it easier for Americans (and international investors) to borrow – thus leading to increased spending and increasing imports (thus worsening again the deficit), and inflated asset prices, and creating, strangely enough, a appearance of increased wealth;

Oil costs more, but as the dollars it costs are recycled in the US financial system, they end up being spent a second time (via debt), this time on Chinese stuff. As the Chinese also recycle their dollars in the US, to protect the exchange rate of the yuan against the dollar, the cycle can start anew…

And thus oil prices increase, consumption still grows, and the US debt balloons.

If this sounds like a pyramid scheme, well, it looks suspiciously like one. And as we’ve already seen, it can last for a long time, as it is in the interests of no one in the cycle to rock the boat.

DailyKos