Oil rises above $85 after Fed bond buying decision (Bye Bye Dollar)

Yahoo Finance ^ | Thursday November 4, 2010, 2:16 am | AP

[11th_VA]

Oil rises above $85 a barrel in Asia after Fed resolves to buy $600 billion of Treasurys

BANGKOK (AP) -- Oil jumped above $85 a barrel in Asia on Thursday as the dollar weakened slightly following the U.S. Federal Reserve's announcement it will buy $600 billion dollars of Treasurys to stimulate the U.S. economy.

The announcement wasn't a surprise for markets but it underlined expectations that the dollar could weaken further and push up prices for commodities including oil. Since crude is priced in dollars, a weaker dollar makes it more attractive to buyers using foreign currencies.

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In its weekly report, the Energy Department said crude inventories increased by 2 million barrels to 368.2 million barrels for the week ending Oct. 29. The total was 9.6 percent more than the year-ago level and remained at the upper limit of the average range for this time of year.

[socialism_stinX]

Then let me be the first to support Ben on this decision. But QE also needs to be combined with a credible long-term deficit reduction plan, which is much more important for our economic future. Quantitative easing is effective short-term medicine for our economy, but our long term economic health depends on major spending reductions in Washington.

[April Lexington]

increase wages and incomes in a lagging manner

This is the part that destroys the middle class. Wages never catch up to prices...

[untrained skeptic]

The problem I have with this scenario deflation increases the buying power of the dollar. People can buy more with what they earn now. What it hurts is paying back debt doesn't get easier as time goes on, and as we all know Americans have a lot of debt. However, inflation only slowly puts more buying power into people's hands. Deflation puts more buying power in people's hands now. It's a reaction to declining demand. Prices go down, and demand should go back up in response.

No that does mean that companies can get less for the products they sell, which hurts businesses. But which businesses does it hurt? We import far more than we produce domestically. If we want to help businesses, and we definitely need to help businesses if we want our economy to recover, cut our insanely high corporate taxes by a bit.

A deflationary cycle of declining demand, declining inflation, declining interest rates, and declining interest income for savers all leading to even lower demand as consumers wait for lower prices and save more to offset lower interest rates, that kind of deflationary cycle could be disastrous for an economy like ours that has so much fixed-rate mortgage debt and government debt that must be serviced.

Deflation makes the money people have saved worth more. It increases their buying power. Inflation on the other had eats away at any returns on an investment. Even worse you still get taxed on the dollar gains even though inflation has made the dollar worse less. Deflation produces tax free gains in the value of savings. That's what the government really can't stand.

If we have 5% inflation, and you are earning 5% interest, you don't break even, because you end up paying taxes on that 5% interest you earned.

Prices of commodities will rise the most, but outside of food, gasoline, and natural gas, commodities are actually a very small part of the cost of all the other goods and services we buy. Except for food and energy, when you look all the way up the supply chain, personnel costs and corporate income taxes are more than 90% of the cost of everything we buy.

But the cost of living for those workers are highly dependent on those commodities, especially when their rent or mortgage are basically fixed costs, unless you think a lot of people are going to be refinancing mortgages at a lower rate some time soon.

The economy is bad. People are living from paycheck to paycheck. They need each paycheck to buy more. That is why they have been buying less. That is why demand is low. Deflation is the normal market correction. Government intervention that causes inflation might make borrowing money more attractive, but it might even help people pay back debt in the long term, but it increases their cost of living now, hurts people's savings, and devalues returns on investments.

What it increases are tax revenues, and makes it easier for our government to service it's debt. However it also makes it harder for the government to borrow more money at a low rate since lenders knows they are going to get paid back with money that we are intentionally devaluing.

That's why our government is having to keep borrowing money with a higher percentage of short term bonds. Lenders are losing faith in the long term strength of the dollar. That is a very bad thing, because we have a huge amount of national debt, and the cost of servicing it could easily balloon dramatically if the treasury can't continue to reissue bonds at low interest rates.