by Bob Seery

Created on: April 26, 2010   Last Updated: April 27, 2010

The US has gone, in the space of a generation, from the world's largest creditor nation to the world's largest debtor nation facilitated by the largest consumption binge in history. This binge was financed by post-9/11 firesale interest rates and record borrowing amidst the prosecution of two wars that will wind up costing, at a conservative guess, between $3 and $4 trillion dollars.

The Chinese yuan is artificially depressed to prop up the dollar (despite Sarkozy's attempted intervention last year) and the steady erosion of seignorage thought to pay for the $800 billion US trade deficit will be further aggravated by the upcoming decoupling of the Gulf Co-operation Council countries.

Maybe this will prompt the long anticipated run on the dollar, who knows. Stocks have already been smashed. Back in March 09 the Dow was below 7000 - half it's peak value - and representing the loss of a decade's growth.

Depending on the price of crude, the cost of oil imports for the United States account for between a half and a third of that deficit. So when we are talking about the US trade deficit, we are really concerned with the international price of oil.

Allied with the inevitable price pressure of a peak oil scenario comes the growing consumption of the developing economies; a price tripling within the next five years is not inconceivable.

I see the open contract bids for the big Iraqi fields are now predicated on company promises of doubling and tripling output so there is a quiet urgency here, make no mistake.

Another consideration, is the US public debt which is currently 73% of GDP. This places America inside the top twenty most heavily indebted nations. Just take a look at Japan who are now the world's third largest indebted nation (170 % GDP) - their housing bust was twenty years ago.

The bailouts will take America up to 100% in the next two years and it's hard to see where the reverse gears are because all the competitiveness is being exported through Free Trade agreements.

It is not that America isn't productive, the US is still exporting nearly a trillion dollars worth of goods - just that there's a potentially disastrous productivity deficit. 

Iraq's pre-invasion decision to convert to euros for it's oil exchanges wouldn't have made a significant impact by itself; they were only producing 2% of global oil demand whereas (unearned) seignorage from printing reserve currencies like dollars, yen and euro is worth trillions of (real)

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