Oil. Oil. Oil.

For those that have been in a coma, the price of crude oil reached a intra-day high of $139.12/bbl yesterday. The frustrating thing has been the analysis trying to prove the merits of one theory over another instead of just understanding that oil's meteoric rise has been a confluence of multiple theories. So far, conventional wisdom suggests the following theories, all of which are valid: increased demand in the emerging countries; subsidization of gasoline prices throughout the world; speculation; and, the latest saber-rattling between Israel and Iran. But to me, an ignored cause is the falling dollar caused by our failures in monetary and fiscal policy. As of said numerous times, the Fed's attempt to fix the credit and liquidity crises involved both lowering rates and easing borrowing standards. Meanwhile, Congress hasn't helped matters by increasing the election year largesses, with among other things, a $180B stimulus package and a $300B farm bill. Throw in the GI Bill, a builder bailout, and a couple of foreclosure packages, and you're really talking about real money. And yes, Congress is seriously considering a second stimulus package this summer, and that's before anyone has even addressed the impending heating crisis this winter.

So yes, the US Dollar is toxic right now; the world realizes that American authorities do not believe in tough love and will continue to throw money at the problems. I would hate to be either China or OPEC realizing that the trillions they own are getting more worthless by the day. Our leaders worsen the situation by not fully disclosing it to the public because the weakened dollar represents failures by the government and the American people. Furthermore, the only solution to this problem will betray both parties; taxes have to be raised, and spending has to be cut. Budget-neutral policies will not solve the problem, not with Medicare and Social Security looming in the background. And to those that use the withdrawal from Iraq as the complete panacea for our fiscal policies, the total costs for the war in 5 years has been only $525 Billion.

The following chart from econobrowser.com shows how bad the situation with the dollar really is.

China's Nuclear Option

It's been a stated goal of my blog not to comment on the feasibility of the political promises made by the candidates because in a way, it's all "window shopping." But at the same, it is borderline unethical to criticize the Bush administration for failing to address China's continuing yuan-dollar peg. As much as I've criticized Secretary Paulson for prematurely claiming that the housing crisis had been "contained", to his credit, he has confronted the Chinese on their currency manipulation, which has keep their exports inexpensive, despite the falling dollar. And last year, Congress did threaten to impose tariffs unless the pegging ceased. China's response?

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress . . . .

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US. . . .

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

It's shameful that our leaders won't admit this to us publicly; after all, how do you say that China has basically emasculated us, with the ability to dump $1T of our treasuries bonds. A massive sell-off would have the affect of driving up the cost of borrowing everything from mortgages to student loans. Both parties have been sleeping at the wheel, since it's been three decades in the making. One on hand, it's hard for the GOP to extol the virtues of the free markets when this is the result. And on the other, this situation renders much of the Democrat promises fiscally impossible, unless Congress wants to drive the value of the dollar even lower.

Game, set, match; we're out of bullets. Tariffs are out. A stronger dollar won't work because of the peg. So the question is how to prevent American consumers from purchasing goods made in China? Ten years ago, when China was seen as a low-quality producer, it would have been easier, but now they manufacture everything from Bibles to prescription medication.

Yes, our foreign policy is dictated by a foreign nation because of our addiction to all things cheap.