November 22, 2009

Oil, China, United States

The United States needs a recovery...and fast.  By keeping a devalued dollar, the US can increase its manufacturing sector and export more goods than we import -  and possibly create more jobs (eventually) to restore our country back to its feet.  Ben Bernanke and Timothy Geithner have pledged their support for a strong dollar, but it will be a while before this will come to fruition since the US is in a slow, jobless recovery.  The Fed, taking an active role unlike the contraction years of 1929-1933, has been pumping trillions of dollars into our economy hoping to spur growth and keep the economy from slipping into a depression.  However, the downside of this is that with interest rates held low - inflation is almost certainly due.

China, the largest holder of US debt, is worried that its investments are at risk with every dollar the US prints and has voiced its concern about the stability of the US debt level and our on-going ability to repay back loans.  However, China keeps its currency low (perhaps unfairly) and therefore when the US dollar drops, the renmimbi also falls to keep China's goods and services cheaper than the US.  Although China keeps its currency low - it's economy is growing and may be forced to raise its interest rates to keep its economy's growth from stalling or from experiencing hyperinflation.

To hedge against inflation, China has been dumping its dollars for commodities - mainly oil commodities.  Oil, which is based off the US dollar, has historically been a great hedge against inflation whenever the value of the dollar falls.  So because China is the largest holder of dollars, naturally they would be concern with their US investments and seek to find profits elsewhere or at least shield some of their exposure to US debt/devalued currency.  China's purchases of oil has been helping to keep the price per barrel steady between $77 - $80 even though there is already a surplus of oil inventories in the market today. 

Q: Is oil a good play for an investment if inflation is inevitable?  What about stocks?  A: Yes, both of these are good investments and definitely a lot better than holding cash in the long run!