This is why the oil price going up like a sky rocket. US owes so many debt to others. To keep these dollars in creditors' bank instead of to exchange these dollars back by selling assets, US has to raise the oil price.
437. Manipulate oil price (9/20/2006)
After Bush took the presidency, he created a huge budget deficit, and a huge trade deficit as well. The deficit will cause a big inflation. So Federal Reserve has to raise the interest rate to deal with it. In June 2006, the overnight interest rate was raised to 5.25%. The Federal 10 years treasury bill was 5.25% too. The 30 years fix mortgage rate reached its recent high: 6.93%. Although this rate is still low viewed from history, it touches off a down turn of the real estate market. Because the price of house is stretched too tight that a tiny increase of the mortgage rate will cause a big change.
Feds hold a large quantity of houses in my case, they tried their best to keep the property value. What we saw are: Federal Reserve stops its step to raise the interest rate. Oil price declined. The rate of bonds goes down. So does the mortgage rate. From June to September, the bench mark rate of Federal funds stays at 5.25%. The rate of 10 year treasury note drops to 4.73% from 5.25%. The 30 years mortgage rate is 6.44% now.
Today you only pay 4.73% interest rate for a ten years long term loan but have to pay 5.25% rate for an overnight loan. Does that mean there will be no inflation within ten years? Or even mean there is a deflation? With common sense you know it's impossible as long as the oil price doubled in one year. All these were done by Feds to protect their property value so you saw these strange phenomenon.
1. Oil price.
The result of a big trade deficit is that foreign countries hold a large amount of US dollar. When US has not enough goods or assets to exchange these dollars back, it has to think of a way to make these countries to keep the dollar instead of dumping it. One way is to push up the oil price.
A country which consumes one million barrel of oil a year has to keep 30 million dollars in bank (when oil price is at 30 dollars/ barrel) Then how much should it reserve if the oil price jumped from 30/barrel to 60/barrel? It has to double its dollar reserve to 60 millions. So large amount of dollars were locked up in bank as oil payment (Dollar is the appointed currency in oil trading.)
Now you know why the oil price jumped so high. It is used to solve the deficit problem of US. To delay the US financial crisis. Who benefit from it?
(1) Oil export country.(Though much of them are Islamic countries which US dislike. There is no choice.)
(2) Speculator (mostly oil groups). They bought in large quantity of future contracts in a short period. Say, from 30/bar to 60/bar, the average price paid was 45/bar. Then when the market was steady at 60/bar to 75/bar, they sold it at average of 67.5/bar. Their profit is 22.5/bar.
(3) Federal Reserve and US economy. Federal Reserve can avoid to pay a high interest rate in order to lure the dollar in. US can avoid a financial crises.
The loser is always the average people. They have to take the final cost - a higher gas price.
But it's a double side sword. High oil price will also cause inflation to force the rising of interest rate. When it endangers real estate market, then we saw a dramatic decline of oil price. (from 75/bar/Aug 3 to 60/bar/Sept 19, a 20% decline in 6 weeks.) After all, the interest of Feds, is above everything else.
To keep in mind that when the oil price went up this year, it's not that oil supply was in shortage. And when the oil price drops recently, it's not that there is less demand. It's not a market economy any more. It's an artificial manipulating market.
Greenspan knew it. But he could only say what he was allowed to say.
Quote, "The former Fed chief also detailed how investors, rather than users of oil, have come to set the price of oil through purchasing futures contracts."
