This week has seen the US Government bail out a growing number of Wall Street firms, the largest insurance company in the world, and finally end at printing money without subjecting the backing instruments to international market scrutiny.

(Treasury is now selling T-Bills DIRECTLY to the Fed, no pretense of going through an investment bank anymore)

This is pretty shady stuff, and thats being kind.

To understand why this is BAD, we have to understand why inflation is bad.

Yes of course, inflation is bad because prices go up, but that is not what inflation really is, prices going up is just what happens AFTER inflation occurs.

Put simply, inflation is when you add more currency to the currency supply.

Price increases happen, because when you add more currency then each unit of currency already in existence becomes worth less.

So prices rising arent so much because what you are buying is worth MORE than it was a year ago, but simply because your dollar is worth LESS.

So, the reason I explained that to you, is so you can understand what happens when the Government “bails out” all these failing financial institutions.

Really, two things happen:

1. The government creates Treasury Bills, which it then sells to someone, usually an investment bank and now, the Federal Reserve. In exchange, Congress gets currency from the investment bank, or the Federal Reserve, to spend on Bridges to no-where, military toys, and bailouts of corrupt, overpaid, Wall Street Slicksters who are their buddies.

Guess who gets to pay for that? Thats right, US Taxpayers! Arent you excited?!

2. The second thing that happens is, “liquidity”, which is a fancy term for more money, gets injected into the currency supply because this currency was essentially just “created” in order to bail out these silly greedy Wall Street slicksters and the firms who happen to be buddy buddy with our Congressman and Senators.

Ok, so, what happens when we inject all this currency into the system? Thats right, you guessed it, the value of your dollar goes down, prices go up!!!

So essentially, each time one of these Wall Street firms gets bailed out, the value of your dollar to buy groceries and gas, GOES DOWN, so groceries and gas become more expensive.

Now obviously, if you are a Wall Street Slickster,  you are happy with this deal, because you get to do all kinds of stupid things, then get some silly taxpayer shmuck to pay for your severance package of hundreds of millions of dollars anyway.

If you are a Congressman or Senator of course, this is all good, because lots of cash flows into your tax haven bank accounts from your Wall Street buddies, you get to ride around in fancy cars and go to fancy fundraiser dinners, and you get a HUGE pension for life, even if you dont do crap your entire time in office.

AWESOME! Its good to be the King. Or in this case, a Congressman or Senator.

Now now, Mr. taxpayer, dont complain, you should just shutup and eat your gruel, and be happy to get it! Peasants! Your lucky we dont raise taxes to 85% and then make you WALK to work!

But whats really got me miffed right now, even beyond the fact that our “leaders” have no problem raping the wealth of US Citizens to bail out a bunch of greedy, stupid, people who are already rich anyways, all the while destroying the buying power of the common man AND taxing the common man on top of it to pay for all this shenanigans…

Is that just when we think its IMPOSSIBLE for our leaders to get any more stupid, this happens:

President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.

When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.

The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.

So what does all that mean?

Basically, it could very well be the dumbest thing any group of government officials has ever done, in history.

This is a quote from the website of the US Treasury describing what the “Exchange Stabilization Fund” is:

The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.

This is my translation:

This thing gives Mr. Paulson, who already has WAY to much authority, the ability to sell off the gold stocks of the United States, manipulating the gold price down, to prop up the US Dollar and make all the sheeple think that gold is falling and the markets and USD are rallying, so all the stupid people can pour more money into the markets, bail out the corrupt Wall Street Slicksters, impoverish and steal the wealth of US Citizens, and perpetuate the scam that the USD which happens to be backed by nothing is actually worth something insteading doing whats smart and backing our currency in gold.

They are going to sell off gold into the international market, which is going to depress the gold price, and use the money to prop up the US Dollar, the stock market, and to try and ‘neutralize’ all this garbage derivative crap that Wall Street has been creating over the last ten years or so.

This isnt just any gold mind you, its the reserves of the United States, belonging to citizens of the United States.

So not only are these guys willing to tax you to pay for bailouts, which then adds currency to the currency supply, which then reduces your buying power, but now, they are selling off the bedrock of the nations financial health, the gold stocks that belong to YOU as a US Citizen, to again save a bunch of fools who probably should have been hung from the gallows a long time ago.

If that does not infuriate you, well….

A brief prediction.

I dont like to make predictions, because predictions usually make a guy look stupid later, but here it is:

The gold price will drop, they will use this as another means to manage the gold price, stocks and the USD will rise or remain level, they HOPE through the elections in November.

This of course is only short term. A band-aid on a gushing severed limb, if you will.

They are willing to sacrifice the nations financial future, and the well being of our children and grandchildren, just to get one more US President in office and perpetuate the non-sense.

But at what cost?

Ultimately, Gold ALWAYS revalues to match the amount of currency that gets pumped into a currency system.

This is not a theory, its not conjecture, history proves it happens over and over, every single time, as predictable as the seasons.

Over the long term we will see the US Dollar devalued, the gold stocks of the United States depleted just when they are needed the most, the common citizen robbed of everything he has through inflation and taxation to bail out those who do not deserve to be saved, and worse case scenario, it could cost citizens of America our freedom and form of government in the end.

We will see the government start to directly monetize debt as a matter of habit, and once that occurs the United States is on the road to hyperinflation.

Solution?

Anchor your finances in gold and silver now while you still can.

“Unjust weights and measures are an abomination unto the Lord” - What is an unjust weight and measure? How about a piece of currency that changes in value constantly? If something is a “measure” it has to remain constant, not change in value.

If you were a carpenter trying to build a house, and the tape measure you used to measure your cuts changed all the time, how solid would your house be?

I am of the opinion that if this thing goes down the tubes, and there is no indication that Congress, the Senate, The President, The Secretary of the Treasury, or the Federal Reserve Chairman have any inkling as to how to prevent it based on recent decisions, then the ONLY safe place in this coming storm is gold and silver.

Those who have gold and silver, will see a huge transfer of wealth to them. Those who dont….well….sorry. Get used to gruel and string vests.

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Beijing swells dollar reserves through stealth

Last Updated: 3:24pm BST 26/08/2008
The Telegraph.co.UK

Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard

China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

A study by HSBC’s currency team in Asia has concluded that China’s central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

“China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June,” said Daniel Hui, the bank’s Asia strategist.

Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign “hot money”.

Given the sheer scale of China’s foreign reserves - now $1,800bn (£970bn) - any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.

There is little doubt that the key driver behind the wild currency ructions this summer has been the blizzard of dire data from Britain, Europe, Japan and Australasia. The mounting danger of a full-fledged recession across the club of rich OECD nations appears to have caught the markets off guard.

The closely watched Dollar Index reached an all-time low in March. It crept up gradually in the early summer before smashing through resistance in July.

The world’s currency system is swivelling on its axis. Central banks in Asia and Europe have stopped raising rates, and some have begun to cut aggressively. The Federal Reserve is no longer nakedly exposed. Indeed, investors are already starting to look ahead to the next round of Fed tightening.

The 18pc slide in oil prices from a peak of $147 a barrel in July has added juice to the dollar rally. Russia and the Middle East petro-powers tend to recycle a high proportion of their vast earnings from oil into the eurozone, either by purchasing European bonds or expensive imports.

A Bundesbank study found 40 cents of every dollar spent by eurozone countries on oil imports comes back again one way or another. The figure for the US is just 10 cents. This trade bias has given oil a new character as a sort of anti-dollar driving the currency markets.

Even so, the China effect is a key ingredient in the dollar comeback. Beijing’s Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country’s manufacturing hubs eats away at profit margins.

“They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view,” said Simon Derrick, exchange rate chief at the Bank of New York Mellon.

China’s PMI purchasing managers index fell below 50 for the first time in July, signalling an outright contraction in manufacturing output. Hong Kong’s economy contracted 1.4pc in the second quarter. The Politburo has rushed through special rebates for textile producers now caught in a ferocious downturn.

Much of the clothing, footwear and furniture industry has been hit, leading to mass plant closures in the Pearl River Delta.

“During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work,” said the National Development and Reform Commission. “Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy.”

Last week’s rebound on the Shanghai stock market stalled on fading hopes of a fiscal stimulus package. “It is unrealistic to expect the government to rescue the market,” said Li Ka-shing, chairman of Hutchison. “Speculators should be very cautious now. The worst is not over in the global credit crisis.”

Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a “vicious cycle”. House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China’s population.

Inflation Is Worse Than We Think
John Tamny 07.16.08, 11:45 AM ET Forbes

When inflation is presently considered, those who possess a more sanguine outlook about pricing pressures have pointed to the Consumer Price Index to bolster their view that inflation is not a problem. While the dollar has fallen to record lows versus gold and other foreign currencies in the past year, the CPI measure of inflation has remained comparatively quiescent.

To be sure, the CPI announcement Wednesday morning that prices are up 5% since last year–1.1% in June alone–isn’t good news by any stretch of the imagination. But in defining actual inflation, it can’t be said enough that it is always a monetary phenomenon resulting from the currency in question losing value. The problem with the CPI, however, is that consumer prices themselves transmit all sorts of information unrelated to currency strength or debasement. So while rising prices can be a symptom of inflation, they can also result from all manner of things that have nothing to do with the value of the currency.

Indeed, increased sales taxes have nothing to do with changes in the value of the dollar, but when it comes to the CPI, they are booked as inflation. If hotel rooms in New York City become very expensive relative to the past, some would consider this an inflationary event despite simple logic showing otherwise. Put simply, if New York hotel rooms suddenly cost $200 a night more than they once did, the broad impact on the price level would, by definition, be zero due to the fact that consumers would have $200 less to spend on goods that were formerly attainable.

Conversely, if, due to productivity enhancements, a laptop computer today costs $1,000 when it previously would have set a consumer back $2,500, there would be no deflationary event to speak of there either. Falling consumer prices–whether they’re the result of productivity innovations or cheap imports from overseas–can in no way change the real price level. That is because cheap goods merely expand the range of products we can buy. If a consumer has $1,500 extra after the computer purchase, that money is used to demand other goods that were at one time out of reach, either through savings or immediate consumption.

As economist Nathan Lewis wrote in his essential book, Gold: The Once and Future Money “Prices are supposed to change,” and the “information transmitted in changing prices organizes the market economy.” In other words, it is through freely set market prices that the consumer communicates to the producer what, and what not, to bring to market. When monetary authorities target consumer prices, they inhibit this important method of communication and, as a result, the economy suffers.

To the extent that there is a monetary devaluation, it shouldn’t be assumed that a weaker unit of account will immediately be reflected in all consumer prices. This is because prices are very sticky. Because of consumers’ preference for routine, producers are often reluctant to break those habits with price changes.

More important, there’s a way to increase the cost of a good without increasing the nominal price of that same good. Indeed, as a recent USA Today story showed, ice cream makers suffering from rising dairy costs have, in many cases, reduced the size of standard ice cream containers to 1.5 quarts from 1.75 quarts. Frito Lay and Dial have done the same with bags of potato chips and bars of soap.

Forbes Chairman and Editor-in-Chief Steve Forbes has pointed out that while the pastries he buys each morning at Starbucks cost the same amount, they’ve shrunk in size. Containers of Shedd’s Spread Country Crock used to contain 48 ounces of margarine, but buyers now pay the same price for 45 ounces. Frequent RealClearMarkets contributor Doug Johnson notes that the cost of a package of diapers for his children hasn’t gone up, but now there are four less diapers in each package.

So not only are consumer prices a bad measure of inflation given the numerous inputs that lead to one price, but those prices frequently hide real increases that government measures of inflation can’t register. Ultimately, it has to be recognized that the only true measure of inflation does not involve prices but rather involves the value of the dollar itself.

And when we consider the dollar, the most reliable benchmark is not the greenback’s value versus the euro, yen or pound, but the dollar’s value in terms of gold. Gold did not serve as a measure of money for thousands of years because it was unstable, but it has been used as “money” given its historical constancy in terms of price. Thanks to a massive stock of gold around the world relative to small new annual discoveries, gold is the single best measure of money we have. When the price of gold moves, this is not a signal that gold’s price has changed. Instead, it tells us that the dollar’s value is rising or falling.

Notably, gold has risen 283% against the dollar since June of 2001. While a dollar used to buy 1/253rd of an ounce of gold, as of this writing, it buys 1/970th of an ounce. For those wondering why all manner of commodities–from gasoline to corn to meat–have become so expensive over the last few years, look no further than the dollar’s debasement. Just as gold’s rise was a major inflationary event in the 1970s, so it is today. CPI and other government measures of inflation that show that light pricing pressures are charitably wrong.

And to the extent that some have great faith in CPI-like measures, they need only look at countries outside the United States to see that our version of CPI is greatly understating true inflation. Sure enough, if it’s agreed that inflation is purely a monetary concept, we then need only look to other countries whose currencies have greatly outperformed the dollar in this decade.

Despite the fact that the euro and pound have crushed the dollar in recent years, government inflation statistics in both show it at 16- and 18-year highs, respectively. The Aussie dollar is near parity with the greenback (from the $0.50 range back in 2001), but inflation there is also at a 16-year high. Qatar and Vietnam have had direct-dollar links for quite some time–meaning that our monetary policy is theirs–but CPI measures in both countries show it registering 15% and 25%, respectively. And while China has allowed the yuan to rise 18% against the dollar since July of 2005, inflation there is at an 11-year high.

About the worldwide inflation story, the lesson is not that non-dollar currencies are strong. Quite the opposite. In reality, non-dollar currencies are very weak; one need only measure them in gold this decade to see that. Their weakness is masked by the dollar’s much greater enervation since 2001. While the dollar is still the world’s reserve currency, downward movements in its value almost always lead to broad currency debasement just as periods of dollar strength cause world currencies to strengthen.

So while inflation problems around the world confirm that our government measures of inflation are faulty, the bigger story is what a rising dollar price of gold means for the average American. In short, when gold rises, paychecks are emasculated, investment in innovative, job-creating enterprises subsides and money flows to the relative safety of the “real.”

Rather than clinging to the CPI as false evidence of light inflation, and worse, targeting consumer prices, monetary authorities should instead target a stable gold price with an eye on bringing it down substantially. If history is any kind of indicator, an upward correction of the dollar would quickly cheer an electorate that presently has much to complain about.

John Tamny is the editor of RealClearMarkets , a senior economist with H.C. Wainwright Economics and a senior economic advisor to Toreador Research and Trading. He can be reached at jtamny@realclearmarkets.com.

One thing that the world has forgotten for the most part, is that gold is money. It has been parroted around for three generations as a commodity only, with little industrial use or demand, and no value as a currency.

Humans have this interesting tendency to forget history, even though through all of time it consistently repeats itself.

The cycle I am speaking of is the one where societies and economies cycle back and forth between paper fiat money backed by nothing but a governments promise that it has value, and currency that is backed by gold and silver.

This is not new, and in my opinion will happen again, as it always has, for thousands of years.

For a while now I have been going on about how the Chinese, OPEC, and other nations that have trillions of USD in their reserves are not going to simply sit on it and watch it devalue by 16%-20% a year because of a rampant monetary inflation policy of the Federal Reserve.

“Dollar crisis looms, says Nobel laureate Mundell
Reuters June 3, 2008 at 8:36 AM EDT

VALENCIA, Spain — A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.”

If you were China and seeing this happen to your National Treasury, would you sit there and do nothing or look for a solution?

The answer is obvious.

“China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates. “

The excerpts from the above Reuters article shows that China seems to be interested in a gold backed system. If this were to occur, we need to take a serious look at what it means for the price and demand of gold.

I will give you one simple equation, which you can then apply to any nation, or the economy at large. If the USA were to go to a gold backed standard, that means each dollar in circulation would then have to be redeemable in gold. The current measure of USD in circulation based on private firm analysis is above $14 Trillion USD. The US Treasury claims it has 261,498,899.316 ounces of gold according to its website http://www.fms.treas.gov/GOLD/current.html . If we were to divide the number of USD in circulation by the amount of gold claimed to be on hand in the US Treasury, it would make the price of gold $53,537.00 per ounce.

You can perform this calculation on any nations currency, if you know the amount of currency in circulation and the country’s claimed national reserves in gold.

The bottom line is, if the world heads to any form of gold backed currency system, or any world government chooses to make its own currency backed in gold, then two things would happen:

1. That country will be the best runner up for the next world reserve currency

2. The valuation on gold will skyrocket beyond the angels

“Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes. “

I sure hope you own some gold before that happens.

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Alex’s Notes: One of the biggest problems our nation faces today is that the common American has a very low level of financial literacy.

Generations of spin and information control have led us to a current generation of Americans and even “Financial Experts” who do not truly understand how our economy works.

Beginning at US college level teaching economics studies, you can find misinformation teaching our future generations of financial leaders that you can simply create wealth through debt, unchecked printing of money, and federal spending.

A quick look at the facts show that healthy growing economies are based on savings and capital investment, not expansion funded by debt. China for example has a national savings rate approaching 52%. China has a growing middle class and will be able to make the transition from an export economy to a more balanced economy dependant more on domestic revenues.

Yet, when we see a massive devaluation of the dollar, you find hordes of talking head analysts who want to blame it on everything from foreign investment in bonds, money market funds, and other instruments denominated in usd, and completely ignore the root cause of the matter.

The problem we face to day in skyrocketing commodities, debt, a crashing dollar, sky high gas prices, food prices going up, electric bills going up, and on and on can be attributed to one thing: Inflation of the Money Supply.

The problem is is several fold:

1. Your government thinks you are stupid. The government creates all kinds of useless reports such a CPI to measure inflation, that have removed from them key indicators such as the cost of gas and food to reach its conclusions. I dont know about you, but food and gas for my family have gone parabolic in price, so the folks in Washington who come up with this garbage must be buying their gas and groceries on a different planet. The fact that you have to even come up with a way of measuring inflation outside of how much currency created is preposterous, and in itself an insult. But here is the real slap in the face, they publish that garbage assuming you are too stupid to see through it.

2. The Main Stream Media thinks you are stupid. By parroting the same garbage over and over, if said enough times maybe you will believe it. If you have ever seen the media blaming inflation on oil prices increasing, or oil companies who should be audited and punished for making lots of money in a boom in their industry, or the boogie man under the bed or the green alien from mars with the ray gun in your closet, you have had the pleasure of experiencing this. Once again, no one ever wants to talk about the fact that we have added over $14 Trillion to the money supply approaching a rate of almost 20% year over year. Since 1913 when a handful of criminals (oops I mean congressmen) passed the Federal Reserve Act, our nation has printed so much money that we have devalued the buying power of the dollar by over 96%.

3. Wall Street thinks you are stupid. By creating all kinds of red herrings as to what inflation truly means, and making sure to invent thousands of financial terms to confuse people, Wall Street figures they can continue to convince you to give them all of your money to manage, because even though they make money whether you lose or gain, you are too dumb to manage your own money so you should give it to some wet behind the ears kid who just graduated from business school because of his vast financial wisdom. Add to that the fact that when people BUY markets rise, and when people SELL markets fall. When those 85 million baby boomers start to suck their money out of the market to fund retirement expenses, its going to come down like the Hindenberg. Todays tactic is to assume of course that you are too dumb to realize this, and will keep right on letting them suck you dry of every retirement dime you have spent your lifetime accumulating.

I dont know about you but I am about fed up with these people treating the American Public like idiots. I know you are not stupid. You know you are not stupid. Isnt it time we started proving it?

I have bolded the article below where yet another Financial Analyst is 100% off target in terms of why the dollar is crashing.

If you want a spot on interview in terms of the primary reason for the rise in the oil price, see this video interview of Paul Van Eeden of Cranberry Capital 

————–

Bush’s Weak Dollar
By Scott Lilly
May 27, 2008

America’s working families have been squeezed for most of this decade by stagnant wages and diminishing health and retirement benefits. Now they face new economic pressures from rising gasoline, food, heating, and electricity prices. A portion of those higher costs are directly attributable to the weakening of the dollar and the economic policies that have produced a weak dollar.

Since January 2000, the dollar has fallen by 37 percent against the euro, with nearly two-thirds of that decline occurring since January 2006. The dollar has fallen 31 percent against the Canadian dollar, and 17 percent against the British pound.

The fall of the dollar has affected oil prices in two specific ways. First, as the dollar falls against the euro and other major currencies, oil-exporting states have been demanding more dollars per barrel of oil to protect their ability to meet expenses paid in euros and other currencies.

This can be most clearly seen in the price of oil (the spot price for Saudi light crude) as measured in U.S. dollars and euros during the first four years of the current Bush administration. As the dollar weakened, the dollar price of oil increased proportionately.

Measured in dollars, oil cost about 28 percent more on average in 2004 than it had cost in 2000, but the price remained relatively constant if measured in euros. In fact, Europeans were actually paying about 8 percent less for oil in 2004 than they had paid in 2000.

More recently, the declining dollar has pushed the price of oil and other commodities higher for a second reason. Retirement funds, hedge funds, speculators, and other institutional investors around the world have tried to protect themselves against further declines in the dollar by moving money into commodity futures that are denominated in dollars—financial instruments that will remain stable or even rise against other currencies even as the dollar falls.

Stewart Bailey reported for Bloomberg last month that “global investments in commodities rose by more than a fifth in the first quarter to $400 billion, helping boost prices as investors sought a buffer against inflation and a weaker dollar.”

Because so many money managers are attempting to use commodities to hedge against the declining value of the greenback, their investment strategies create at least temporarily additional demand for those commodities, driving the price upward.

This effect is demonstrated by the fact that although the increase in the price of oil has been substantial, it is not out of line with what has happened with other commodities, and in particular agricultural commodities.

Over the past 25 months, the dollar price of oil has increased by 79 percent. That is more than the increase in precious metals such as gold and silver. But it is significantly less than the increase in commodities such as soybeans, which have gone up 137 percent, or corn, which has gone up 167 percent.

There are of course additional factors that influence the price of oil and other commodities. These include growing global demand, particularly from China and other emerging economies, and the so-called “security premium” or “tension premium” that results from the market estimation of the potential for hostilities that could interrupt the production or distribution of a commodity.

With respect to oil, recent U.S. saber-rattling toward Iran and the possibility of hostilities in or near the narrow Straits of Hormuz has clearly played a significant role in a number of recent spikes in oil prices, and perhaps in the ongoing higher price of oil.

Yet the fact that oil prices have risen nearly fivefold when measured in dollars, but slightly less than threefold when measured in euros, would indicate that nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar.

If only 10 percent of the price increase is attributable to the flow of dollars and other currencies into commodities to hedge against further weakening, then at least half of the explanation for high gas prices is the weak dollar.

Is a Weak Dollar Necessary?

Just as the increases in oil prices are not attributable to a single cause, the same is true of the devaluation of the U.S. dollar. Chronic trade imbalances play an important role. But the recent policies of the U.S. Federal Reserve have had an extraordinary effect on the value of the dollar.

When the Federal Reserve began cutting rates last September the dollar traded against the euro at 0.73 euros to the dollar. The 14 percent decline in the dollar over the succeeding eight months can be clearly tracked against each of the seven cuts in the Federal Funds Rate over that period (see chart below).

The explanation is relatively simple—the lower the interest paid on a currency, the less likely foreign investors will want to invest in bonds, money market funds, and other instruments denominated in that currency, and the more likely U.S. investors will want to search for better returns overseas.

Certain industries do very well with low interest rates and a weak dollar. The banks and Wall Street investment firms are greatly benefited by low interest rates, which is why the Federal Reserve has made the dramatic cuts that have occurred since last September.

Energy companies are directly benefited by a weak dollar since the value of their domestic reserves increase in proportion to the dollars decline. While the value of most businesses rise and fall in rough proportion to the value of their local currency, oil companies can gain significant value in comparison to other businesses as a result of a devalued currency.

The nation’s largest oil company, Exxon-Mobil, is only one of many examples of how powerful appreciating commodity prices are in determining stock valuations of companies owning substantial reserves of those commodities.

At the beginning of 2001, ExxonMobil shares traded at less than $36 apiece. By early 2008, the share price had jumped to nearly $85. For most of that period (as the chart below demonstrates), the increase in ExxonMobil’s share price matched almost precisely the appreciation in the price of a barrel of crude oil.

The 138 percent appreciation in valuation of ExxonMobil during these seven years was reasonably typical of energy companies in general, but at stark variance with the increase in share prices of other large companies. Case in point: Between January 2001 and January 2008 the Standard & Poor’s 500 Index moved from 1,366 points to 1,378 points—an increase of less than 1 percent—but had energy companies been removed from the S&P index the remainder would have doubtlessly shown a significant decline.

The government’s monetary policy and the weak dollar not only create winners and losers in terms of consumers and businesses, but also benefit some businesses far more than others.

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