[OPE-L] IMF warns of abrupt dollar fall

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sat Nov 03 2007 - 15:26:31 EDT

Placed in historical perspective this is no especially "abrupt fall" of the US dollar yet. Here's a graph:

For more data http://www.federalreserve.gov/releases/h10/Hist/dat00_eu.txt

Point is that if the dollar continues to fall, against rising raw materials prices (especially oil and petroleum products) and other US imports, this must feed through to rising prices in the US for the real economy, implying additional price inflation which, depending on its magnitude, may prompt the Fed to raise interest rates, which would in turn ceteris paribus reduce output growth, fixed investment and employment. 

The financial effect triggered by a falling dollar against rising prices of strategic imports is obviously very much larger than if half a million people foreclose on their mortgages during the year.

In 2006, for example, the USA consumed about 20.6 million barrels of petro-products per day (including crude oil, lease condensates, natural gas liquids, other liquids, and refinery gain), which is about 7.5 billion barrels per year. The USA imported 12.2 million barrels per day (net) in 2006 or about 4.5 billion barrels per year (US Department of Energy), in other words the USA imports about 60% of what it consumes in this respect. Assume $96 or $100 per barrel, this is getting close to half a trillion US dollars worth of petro-imports per year. The US Census reports that in 2006, the US imported 3.7 billion barrels of crude oil valued at $216.6 billion with an average price per barrel at $58.01. http://www.census.gov/foreign-trade/statistics/historical/petr.txt

(For retail price data on gasoline, see http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html and for international comparisons http://www.usatoday.com/money/industries/energy/2007-04-19-world-gas_N.htm).

"In assessing the possible effects of higher oil prices, the inherent uncertainty about their future path is compounded by the limitations of the statistical models available to analyze such price shocks. When simulated over periods with observed oil prices spikes, these models do not show oil prices consistently having been a decisive factor in depressing economic activity. Yet, coincidence or not, all economic downturns in the United States since 1973, when oil became a prominent cost factor in business, have been preceded by sharp increases in the price of oil. This pattern leads one to suspect that the responsiveness of U.S. gross domestic product to energy prices is far more complex and may be quite different when households and businesses are confronted with abnormal price hikes. Macroeconometric models typically are specified as linear relationships, and they reflect average behavior over history. These models cannot distinguish between responses to outsized spikes and normal price fluctuations and thus may not capture the effect of sudden and sizable shifts in oil prices on the economy." - Alan Greenspan http://www.federalreserve.gov/boarddocs/testimony/2002/20020417/default.htm 


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