In one hour....

The financial calamity which has engulfed Northern Rock is the result of fundamental changes in the world, its monentary systems and international politics. The 'sudden' collapse is perhaps a foretaste of what God has set out in his Word.

The recent collapse in the price of Northern Rock shares has been a long time coming.

In the first half of the 20th century and during the course of the two world wars, oil became the means by which both military machineries and economic development were driven. And following the cessations of hostilities America (as the only superpower in the allied camp) came to an agreement with the Saudis (the main source of oil).
Although these countries are ideologically opposed on every significant front, they entered a mutually-supportive pact.

America would provide the protection that Saudi Arabia needed (witness the first Gulf War) and the Saudis would supply the oil to fuel the American economy and means of production.
Part of this deal involved Saudi Arabia agreeing to set and retain the dollar as the only currency it would accept in exchange for oil. (Hence the term 'petro-dollar'.) This arrangement worked well - at least for the parties concerned - for over 50 years.

However several major changes have taken place in the world's economies over the period...

First of all, while oil reserves have been found and exploited in lands beyond the Middle East, so also has the demand for oil rocketed as less-developed nations acquired the means to catch up with the manufacturing and service provision capabilities of the major producers and their economies.

This has brought us into a situation whereby the consumption of oil is now outstripping supply. And, while the supply of oil has peaked and is forecast to diminish in the near future, the demand continues to grow. So the 'supply/demand' gap is set to widen - very substantially and possibly very quickly and dramatically.

Iran's Euros

Most recently, and into all of this, along comes Iran - a nation bent on bringing down America.

Since he came to power, Iran's President Mahmoud Ahmadinejad has been working assiduously to establish an alternative 'bourse' (trading floor) for the buying and selling of world oil stocks. And he has set the currency-of-choice in this alternative market place as the Euro.  (This has fitted very nicely into the agenda of the EU which benefits from the Euro gaining greater value and credibility, while at the same time threatening the dollar's supremacy as a world currency; and undermining the US in the process.)
And on 18 September 2007 Iranian Deputy Economy Minister Mohammad Zahedi Vafa affirmed: "We have taken measures and now 70 percent of Iranian assets are in euros, other currencies or gold."

As major economies move over to buying and selling oil using the Euro as a means of exchange, the solid link between oil and the dollar will increasingly dissolve.

The result, as more and more trading favours the Euro, will be the demand for (read 'value of') the Euro increase alongside an erosion in the value of the dollar. And, very significantly, there is now a report of the Saudis "breaking step" with the petro-dollar agreement.

'This is a very dangerous situation for the dollar,' said Hans Redeker, currency chief at major world bank BNP Paribas. The Telegraph considers the news as 'signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.'

About 5 years ago the US economy was struggling, but the Federal Reserve allowed the country to 'spend its way out of it' by going even deeper into debt. As one American pundit remarked: 'To prevent the bubble bursting, we created an even bigger bubble.'

With the US leading the world in terms of national debt - the US National Debt has continued to increase an average of $1.41 billion per day since September, 2006! - it does not need a PhD in Economics to understand that the American economy could easily and very quickly collapse.

And, if it were to happen, America will not go down alone...

Financial threats

The fragility of the US economy was portrayed graphically on British TV as investors queued to withdraw their savings from Northern Rock - a direct effect of the serious problems in the sub-prime mortgage sector in the US. caused by reckless lending and borrowing.

Had the borrowing been used to build up the means of production and economic capability it might not be so bad, with the prospect of an eventual return to liquidity. However most of the spending has been on bigger homes, SUVs and new kitchens.

The rub of course is that here in the UK we (with the banks'  encouragement) have behaved in exactly the same way. Britain is now in third place in the world rankings (behind the US and Spain) in terms of what we owe.

So the pictures we see of worried investors queuing at the doors of Northern Rock branch offices could be a prophetic foreshadowing of what could well happen in days to come

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