From: bolden@beta.math.unc.edu (Jeffrey Bolden)
Subject: Re: Views? :
Organization: University of North Carolina
Date: Mon, 14 Dec 1992 23:21:53 GMT

>>>>>Oil as a store of value?? Have you SEEN the price of oil flunctuate over
>>>>>the past decade? What you want for a medium of exchange is something
>>>>>*stable*... otherwise, the price of EVERYTHING flunctuates with the price
>>>>>of your store of value. Oil varies widely in price, has an extremely
>>>>>limited supply, gets USED UP, and is primarily supplied by foreign
>>>>>powers. Do you want the economy of the U.S. to sit firmly in the palms
>>>>>of Arabian sheiks? (bear in mind, all they'd have to do is embargo to
>>>>>cause mass deflation here in the U.S.)
>>>>
>>>>	Ok, if the price of gold isn't artificial, then why can't we sell
>>>>of Fort Knox and end our annual budget deficit now.
>>>
>>>oh boy. i'm trying to stay with you, Jeffrey, but you are making it hard with
>>>statements like that. as many other people will probably tell you in a
>>>much less gentle way, you can't end an *annual* problem with a *one-shot*
>>>sell-off of anything. i'd get that flameproof suit on quick... :^)
>>>
>>
>>Sure you can solve an anuual problem.  A one shot sell off ending the
>>budget deficit for even one year would do wonders for the American and
>>world economy.  Think about it:
>
>that solves an "annual problem"? i assume you know what the word "annual"
>means... if we sell $400B in gold in '92, and still overspend the way we
>are now, the deficit just comes back in '93 and every year thereafter.
>a band-aid at best.
>

Agreed.  That's what annual means ONE YEAR.  Our misinterpration is you
keep thinking I'm talking about ending the defecit.  I'm not, I'm talking
about ONE YEAR'S defecit, and I made that clear in the last message.

>>1)  We don't issue 400 b. in bonds and save ourselves about 30b. in
>>interist payments per year for the next 30 years, as well as 400b. in
>>principle 30 years from now.
>>2)  400b. dollars in bond money gets put into corporate investment rather
>>than government waste.
>
>in your highly optimistic opinion
>

Ok fine.  The big pension funds, foreign corporations, ad individual
investors all say "shit well I can't buy govt. bonds better just flush
this money down the tiolet".

[test deleted]
>
>>>>3)  Stablize prices further on oil, by making bidding the price of oil up
>>>>hundreds of times more expensive than it is now.
>>>
>>>i don't understand that. please explain.
>>>
>>
>>Because the price of oil is fixed to the US dollar it becomes very hard to
>>bid the price up.  Think of this way.  Your a bank issuing a $5b in
>>currency off your stock of 200m barrels of oil.  The price goes up to say
>>$30/barrel.  You will buy up $5b in currency and sell your oil reserves. 
>
>to whom? what if they only want to pay $15 a barrel?

Remember were definind the dollar in terms of oil.  It's like me trying to
buy a $20 bill from you for three $5-bills.  It would simply be nonsense.

>
>what if it costs me $5 a barrel to ship it to them? you think you can just fedex
>a couple of million barrels of oil? 
>
>this is no trivial shot at your theory: ease of transfer is an *essential*
>property of a successful exchange medium. why do you think they started
>using paper money in the first place? because even carrying around gold is
>too inconvenient. compared to dealing with oil, it is a joke!
>

Agreed.  But we have an easy way of transfering oil, there called
commodity options.  And they're little pieces of paper (actual I've never
seen one so maybe there big pieces of paper <g>).

>>The net effect being to either:
>>1)  Force the person(s) driving up the price of oil to come up with more
>>cash than is the entire US economy.
>
>baloney. there are other countries out there now. the US doesn't control
>the world market like it did in the mid-20th century. this trend is only
>going to continue.
>

I explained in the banking section, why you couldn't drive up the price. 
You have to effectly buy up all the US currency(backed in oil) to do it.

>>>>4)  All of the above would lead much more stable oil prics ->  much more
>>>>stable energy prices ->  better profits for industry.
>>>
>>>but don't you see the problem? let's suppose we say "from now on,
>>>oil is worth $20 a barrel". if OPEC starts pumping oil and sells to
>>>germany for DM30 per barrel, that sets our exchange rate at $1 = DM1.5.
>>>if either OPEC or germany changes the price, they change our exchange rate.
>>>we lose control over it. if OPEC floods the world with oil, our dollar
>>>becomes worthless. if they shut off the pipes, our money supply disappears.
>>
>>OPEC only controls 35% of world oil exports at this time.
>
>that's more than enough to have a significant impact on our economy, IMO.
>

Yes and no.  See the paragraph belowfrom my previous message.

>>It is doubtful
>>that with guananteed prices for oil (you can always "deposit" it in a US
>>bank for $25 barrel) that this wouldn't fall to about 20%. 
>
>yeah, but now you're argument becomes circular. you get a
>"guaranteed" $25, but what does that $25 mean? remember, you defined it
>as a barrel of oil. nobody else has to accept that definition.
>all the guarantee means is that you can exchange
>your barrel of oil for whatever the rest of those people who accept
>dollars say their product is worth in dollars.

I am assuming only that people's faith in the dollar won't go down as a
result of backing it in oil.  Are you honestly saying that it will?

>
>let's say you have oil and you want to buy widgets. let's say the
>current price of widgets in the US is $5, for simplicity. therefore
>a barrel of oil is worth five widgets. now let's suppose that in
>denmark (to pick a random example), someone says "well, i don't
>accept US dollars, but i'll give you *ten* widgets for your oil".
>what does the seller care about our dollars then? replace "widget"
>with a few important commodities and you will see my point.
>

Ok, but than all that's happened is this.
original price of widgets = 5/barrel = $5 each.
new price of widgets = 10/barrel = $2.50 each.
The price of widgets has just gone down.  What's the problem?

>the net effect is that we lose control of our currency. to be fair,
>i have not yet heard a good answer to this question from the gold-backers
>either.
>

How have we lost control of currency.  All we've lost control of is widgets.

>>	So lets say OPEC floods the market.  And we buy their entire
>>supply of oil (I think they havew 500b on hand currently).  So what? 
>
>all they say is "sorry, we don't accept US dollars, since you arbitarily
>set their value relative to our product". then what?
>

Well I said.  They take dollars now, and do you really think faith in the
dollar would go down?

>>We've bought up like five years worth of oil at a reasonable price and
>>industry will be very very happy.  Plus OPEC has to deliver it to us to
>>claim the $25/barrel price.
>
>they have to do no such thing. they can sell to someone else. there's
>no shortage of demand for oil with the US removed from the market.
>

They have to deliver the oil to us, to get the $25 in cash.  If they sell
it to someone else, who cares?

>>>note: the above argument would be true of gold as well. i'd like
>>>to hear how those who support a gold standard would deal with this
>>>problem. i realize off the bat that it wouldn't be as bad because gold
>>>is not really controlled by any kind of a cartel, but the control issue
>>>is still there.
>>>
>>
>>No it's much worse for gold, because unlike oil if you get stuck with lots
>>of gold their is nothing you can do with it but sit on it, and hope
>>someone will trade you trillions is product for a metal whose primary
>>value is that lots of people think it looks pretty.
>
>not true. people will always trade for gold. it has been that way for
>thousands of years. if it is so "useless", why was it picked by almost
>every civilization which had access to it to be their medium of exchange?
>

Name something in ancient civilizations, that was rare and valuable?  It's
only recently (meaning the last 1000 years or so) that we've had anything
other that precious metals that was rare and people wanted.  Why people
starting wanting gold, I have no idea.

>the fact that it looks pretty (has other values too, of course) is a damn
>good reason to use it. have you seen what "pretty paintings" sell for?
>are they "useful"?
>

Actually that's a great analogy. For example the city of philadelphia was
facing bankrupcy a few years back.  I don't know if you've seen the Phil.
art Mueseum, but it's pretty big.  Down in the cataocombs of the Museum
they have an enormous art collection (I would hazard about 4x as big as
the one on display).  If it were so easy to dump "pretty pictures" than
why not trade in the art museum for its cash value which has got to be in
the billions.  
	Simple cause in the end art isn't useful.  A country like Iran
could dump 10s of billions of dollars worth oil on the market easily however.

>a few more things too: what happens if someone sets your oil stocks on fire?
>or they spill out into the ground? or they decompose? or an alternative
>energy source is discovered?
>--
>charles

	Crude oil doesn't burn.  However remembr this is 1992 people will
be trading commodity options for money not actual physical oil.  We won't
have a fort knox full of billions and billions of barrels of oil.  Just a
shelf full of options that get traded all the time.