<DrumBeat: August 19, 2008 The Oil Drum DrumBeat: August 20, 2008>

153 comments on Some thoughts on Georgia and other Russian actions

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ThatsItImout on August 19, 2008 - 3:30am Permalink | Subthread | Parent | Comments top

"Putin has been reported as suggesting to GW they will start selling US treasury Bonds if the US gets too involved....what a threat with awful consequences."

Does that make sense? How many dollars worth of U.S. Treasuries does Russia actually have? How did they get them? Most Russian gas goes to Europe, that is the gas that is not burned inside the borders of Russia or sold to their former sattelites. Russia sells no cars, electronics or aircraft to the U.S., and a small handful of farm tractors. From did all these U.S. Treasuries come?

One would assume that Russia would have a far greater surplus of Euros, and this is indeed interesting. In the U.S. the Euro has often been trumpeted as some sort of "super-currency". There is absolutely NO reason to view the Euro as superior to the dollar, and the Georgian debacle has demonstrated that once more, but I will return to that in a seperate post. But again if anyone will please help, and I will look for it, for the amount of money Russia supposedly has invested in American bonds...thanks,

RC

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Kiashu on August 19, 2008 - 4:33am Permalink | Subthread | Parent | Comments top

How many dollars worth of U.S. Treasuries does Russia actually have? How did they get them?

According to the US Treasury, it's about US$60.2 billion, which on its own is not much, since the total is US$2,646.5 billion. Japan, China and the UK are the big ones, but Japan and the UK are unlikely to turn around and shaft the US tomorrow.

Russia got the US money from their oil exports to the US, and also Russian investment; the US has been asking for more Russia investment lately. Yep, the country which "won" the Cold War is asking for a bailout from the one which "lost".

But in currency terms, you'd want to be more worried about China, or the OPEC countries generally; the OPEC countries generally price oil is US$, which makes the US$ an implicitly commodity-backed currency, it used to be gold, now it's oil.

If OPEC were to follow Iran and Venezuela's suggestions and price oil in Euros or else develop their own petrodollar, not only would they have no reason to hold US$170.4 billion in funds, but it'd drop the value of the US$ hugely, since it'd now be backed by... um... debt.

Of course all those countries have substantial investments in the US, the OPEC countries being particularly fond of real estate, so they don't want to tank the US economy, since it'd hurt their own wealth.

Russia could probably do more harm to the US by shutting off their 414,000bbl/day exports to them, this has effectively doubled over five years, making up for drops from the Persian Gulf.

But Russia's real power is over gas and now oil to Europe generally, especially Eastern Europe (about three-quarters Eastern Europe's natural gas comes from Russia). Hurting Europe by turning off or down the tap would hurt Europe directly, and also the US indirectly. If the EU has to pay higher prices for energy, this pushes up the prices of all other goods and services, and leaves the EU with less money to buy US products and lend the US money to bail out its people and credit institutions.

There is absolutely NO reason to view the Euro as superior to the dollar

There's every reason. The US currency is implicitly backed by its use as the oil pricing currency, and by US military might, and a big pile of debts which will never be repaid. And nothing else.

The EU currency is backed by the strength of the economies of a couple of dozen economies. Its diversity gives resiliency - if one country has some idiotic economic policy (say, subprime mortgages and CDOs, or a losing foreign war), it can't fall too far before being saved by the others.

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woodychuck on August 19, 2008 - 5:48am Permalink | Subthread | Parent | Comments top

Kiashu -

RE: "The US currency is implicitly backed by its use as the oil pricing currency, and by US military might, and a big pile of debts which will never be repaid. And nothing else."

Do you not have any faith in my great-grandchildren? Once the US has crashed and burned, the resulting currency devaluation will enable the repayment of that debt with pocket change, if anyone has any. It just seems to me that the main tenet in long range planning of the neocons is the destruction of value of the dollar, since I am sure that they know that the fiscal mess they have embraced through their spend-but-don't-tax policies has brought the US economy to a point of collapse.

Oh yeah, and the "full faith and credit" of the US government is behind the US Dollar, just like in the case of the Euro. No wonder it is gaining strength.

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BOP on August 19, 2008 - 7:31am Permalink | Subthread | Parent | Comments top


Once the US has crashed and burned, the resulting currency devaluation will enable the repayment of that debt with pocket change



You see this, I see this, every other potential investor in US also sees this possibilty. Therefore the risk premium associated with USD holdings increases. In order to attract funds the US must then increase interest rates. Increasing interest rates to placate foreign investors drives up the cost of credit to US householders and firms. This exacerbates the existing credit crunch putting more people out of work, putting more houses into foreclosure, weakening the economy and making it less attractive to foreign investment. This in turn results in a further increase in rates and the downward spiral deepens.


It will not be pretty and your children will not thank you for the world of hurt you have left as your legacy.

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WNC Observer on August 19, 2008 - 12:50pm Permalink | Subthread | Parent | Comments top

It will not be pretty and your children will not thank you for the world of hurt you have left as your legacy.

People in the past had ancestor worship as their religion.

People in the future will have ancestor cursing as their religion.

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Burgundy on August 19, 2008 - 8:01am Permalink | Subthread | Parent | Comments top

I'd say the dollar is currently gaining in value as deflation gets a grip on the economy:

Sharp US money supply contraction points to Wall Street crunch ahead
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusec...

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
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On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March...

...Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

Demand for US dollars is rising as fast as the black-hole of deflation is destroying them. The rise in the dollar's international value is probably due in part to the repatriation by the US of foreign investments as everyone scrabbles for cash.

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BOP on August 19, 2008 - 8:47am Permalink | Subthread | Parent | Comments top



As the money supply contracts the availability of credit declines and the price of credit (interest rates) increase.


The reason for the sudden jump in the value of the dollar is not clear. A partial explanation may be funds liquidating other holdings ( stocks, long commodity trades) and "parking" those funds in Treasuries. There has also been a big investor exit from the GSCs (Fanny, Freddy).


Reuters has an interesting story today:



Large US bank collapse ahead, says ex-IMF economist


SINGAPORE, Aug 19 (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said



http://www.reuters.com/article/newsOne/idINSP21695020080819?pageNumber=1...


The article describes foreign funds buying US financial stocks as they were thought to be at the bottom of the cycle. If the bottom continues to fall then further investment will be delayed and / or other safe havens sought.


My hunch is we will see oil repriced in a basket of currencies. This will benefit China, Russia and the Gulf states and be negative for the US.

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BrianT on August 19, 2008 - 9:55am Permalink | Subthread | Parent | Comments top

Burgundy: Jeez. Those Bernanke helicopters better hurry up.

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team10tim on August 19, 2008 - 12:25pm Permalink | Subthread | Parent | Comments top

I would like to see a post on peak oil vs deflation.

Peak oil implies high oil prices and a yoy decline in oil available to consume. Financial implosion and deflation imply a yoy decline in demand and low energy prices. The question is which one is the stronger force.

Either way we will have economic hardship and energy consumption will decline, but there are differences. If the financial mess is big enough it could hide peak oil for years. If capacity to export oil declines by 4% a year but consumption contracts by 6% a year then we could end up with another glut of cheap oil from over capacity. This perceived glut would quickly evaporate as soon as the economy recovers and we would be deep into depletion with no awareness, infrastructure, or plan.

I'm an amateur in both finance and oil, I know enough to realize that both are going to be big problems but not enough to know which is going to be more powerful in the near term.

Thanks,
Tim

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neal on August 20, 2008 - 2:34am Permalink | Subthread | Parent | Comments top

Helicopters need fuel and when TSHTF the only helicopters getting the remaining oil will be gunships.

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Gaianne on August 19, 2008 - 11:28pm Permalink | Subthread | Parent | Comments top

That was yesterday.

Today the dollar is sinking like a stone.

Tomorrow?

Expect erratic moves in the dollar, against a general sinking to falling trend, from here on out.

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euro on August 19, 2008 - 8:26am Permalink | Subthread | Parent | Comments top

Russia could probably do more harm to the US by canceling the so called Megatons to Megawatts program. Because
... One-tenth of America’s electricity comes from fuel made from Russian nuclear warheads!

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=17626

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Dragonfly41 on August 19, 2008 - 9:34pm Permalink | Subthread | Parent | Comments top

Perhaps Russia and China have an "agreement" concerning US Treasuries. Together, they could do some very real damage to the US economy. China has been very quiet during the whole Georgia conflict. It will be interesting to see their behavior once the Olympics is finished. I'm already noticing that the table is turning again somewhat with the US$, price of WTI crude, and the DOW just as the Olympics are on their last leg.

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fat_tail_rider on August 19, 2008 - 11:47am Permalink | Subthread | Parent | Comments top

Russia holds $65 billion in U.S. securities - really a minor amount compared to Japan ($584B) or China ($503B), and significantly less than the U.K., the oil exporters, Brazil, the Caribbean banking centers or even Luxembourg.

http://www.treas.gov/tic/mfh.txt

Not that $65B wouldn't be enough to create some havoc in the currency markets. But for now, the Russian incursion into Georgia is probably boosting the dollar via reflexive flight-to-safety investment in treasuries.

fat_tail_rider

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petersburger on August 19, 2008 - 5:14pm Permalink | Subthread | Parent | Comments top

Russian government also holds about $100 billion in Fannie Mae and Freddie Mac bonds, although they are apparently trying to limit their exposure in light of recent developments.

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153 comments on Some thoughts on Georgia and other Russian actions

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