Crude oil per barrel will reach 200
Like it or not, crude oil per barrel will reach USD 200 or more. After Bear Stearns collapse early in the year, last week, another US bank IndyMac had been declared insolvent or bankruptcy after its depositors withdrawn up to 1.3 billion USD in a few weeks time. At the same time, Freddie Mac (Federal Home Loan Mortgage Corporate) and Fannie Mae, a federal government sponsored home loan mortgage provider is failing and requested federal government to explicitly guarantee the 5 trillion debt it owned. In another word, it is asking the federal government to intervene and be the guarantor of the 5 trillion debt.
5 trillion = 5,000,000,000,000 (五万亿), oh my goodness, if you add that on to federal government 49 trillion deficit = 49,000,000,000,000, I think it wont be too much to say US is a bankrupt nation. The housing market collapse has to go all the way back to Freddie Mac and Fannie Mae, who as the federal government sponsored corporate is supposed to regulate the home loan mortgage market. Instead of regulating, they created subprime mortgages whereby anyone can realise his/her American dream by buying a house without good credit history or strong liquidity (money). To make things worse, Freddie Mac and Fannie Mae borrows money from bond market (bond is like an IOU, you lend me money, I promise to return you with interest after maturity), then buy subprime mortgages from banks. Then they sell to hedge fund managers. The hedge fund managers from financial institution packaged the subprime mortgages together with AAA mortgages, sell them to investors promise them a handsome return. The package is marketed as low risk and big return to other innocent citizens like us because the subprime only stands for <10% while 90%+ is AAA mortgages. This is like telling a patient you wont die, because your cancerous cell is only 1% of your total body cells. While how will the handsome return comes? Because subprime mortgage promises you 0 down payment when you purchased a house, but exorbitant interest rate after a year. They will start with 6% for first year, 8% for following, then 13% . Therefore the handsome return comes from the higher and higher interest rate charged to the home owners year over year. May I ask how could someone without a good credit history or don’t have savings put aside manage to service that ballooning loan? Therefore in the end, there will be a lot of foreclosures (people returning the houses to banks and declared bankruptcy).
How does the subprime crisis began, it started when some people finding themselves difficult to service their home loan with spiralling interest rate and bad financial management. Then they will start to file for foreclosures. With foreclosures cases on the rise, the banks that loan out money fail to get their money + interest back. When they fail to get the money and interest back, the banks will not be able to deliver the handsome return they promised to hedge fund managers. Hedge fund managers will not be able to deliver the promised return to customers, then the fund will ask for more money from customers. But it will not plug the leak because you are borrowing money to people who cannot return money. When financial institution that sells hedge fund failes, Freddie Mac and Fannie Mae will unable to promise the return for the bond market. Freddie Mac and Fannie Mae will fail too. When Freddie and Fannie failes, it will not be able to purchase subprime mortgages from banks. Banks with subprime mortgages will fail too. Now the US financial system is running dry and this is the time Federal Reserves come to the rescue.
Federal Reserves will print more money and loan the money to the banks, financial institutions to bail them out. When they print more money, lower lending interest rate, US dollar value will depreciate. When US dollar depriciates, commodities that are denominated with US dollar will rise. That is the reason why crude oil price per barrel is spiralling upwards because oil is sold in US dollar value, and also the reason for commodity boom. A 10 dollar value today may only be equivalent to 5 dollar value 2 years ago. Having said that, if you purchased a barrel of crude oil with 50 USD 2 years ago, now you have to pay 100 USD.
So when more and more financial institutions and banks in US are failing due to lack of liquidity, more money will be printed and US dollar will depreciate further. Like it or not, crude oil per barrel will reach USD 200 eventually.
Unfortunately this series of unfortunate events will not be limited to US only, it will have a globla effect on all of us regardless of where you are. So we need to be prepared for the dire consequences ahead.
Try to stay away from credit and keep a strong liquidity in your financial portfolio, the safe place to put your cash now will be savings account and fixed deposits.
