The Last Gasp of the Dollar?
Iran bourse opens next week
By Mike Whitney
05/07/06 "ICH"
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If one day the world's largest oil producers demanded euros for
their barrels, "it would be the financial equivalent of a
nuclear strike.” Bill O'Grady, A.G. Edwards commodities analyst
“Everybody knows the real reason for American belligerence is
not the Iranian nuclear program, but the decision to launch an
oil bourse where oil will be traded in euros instead of US
dollars….The oil market will break the dominance of the dollar
and lead to a decline of global American hegemony.” Igor Panarin,
Russian political scientist
Overnight the story of Iran’s proposed
oil bourse has slipped
into the mainstream press exposing the real reasons behind
Washington’s ongoing hostility towards Tehran. Up to this point,
analysts have brushed aside the importance of the upcoming
oil-exchange as a Leftist-Internet conspiracy theory unworthy of
further consideration. Now, the Associated Press has clarified
the issue showing that an Iran oil bourse “could lead central
bankers around the world to convert some of their dollar
reserves into euros, possibly causing a decline in the dollar’s
value”.
Currently, the world is drowning in dollars, even a small
movement could trigger a massive recession in the United States.
There’s nothing remotely “conspiratorial” about this. It is
simply a matter of supply and demand. If the oil bourse creates
less demand for the dollar, the value of the dollar will sink
accordingly; pushing energy, housing, food and other prices
higher.
Oil has been linked to the dollar since the 1970s when OPEC
agreed to denominate it exclusively in dollars. This provided
the US a virtual monopoly which has allowed it to run huge
account deficits without fear of crippling interest rate hikes.
As Bill O’ Grady of A.G.Edwards said, “If OPEC decided they
didn’t want dollars anymore, it would be the end of American
hegemony by signaling the end to the dollar as the sole reserve
currency.”
“If the dollar lost its status as the world’s reserve currency,
that would force the United States to fund it massive account
deficit by running a trade surplus, which would increase
inflationary pressures.” (Associated Press)
There’s no prospect of the US running a trade surplus anytime
soon. Bush has savaged the manufacturing sector outsourcing over
3 million jobs and shutting down plants across the country. His
short-sighted “free trade” policies and enormous tax cuts for
the rich ensure that Americans will be left to face skyrocketing
energy costs and a hyper-inflationary greenback. There’s no way
we can retool fast enough to “manufacture our way” out of the
quagmire of red ink.
Currently, the national debt is a whopping $8.4 trillion with an
equally harrowing $800 billion trade deficit. (7% of GDP) The
ever-increasing demand for the greenback in the oil trade is the
only thing that has kept the dollar from freefalling to earth.
Even a small conversion to euros will erode the dollar’s value
and could precipitate a sell-off.
Presently, oil is sold exclusively on the London Petroleum
Exchange and the New York Mercantile Exchange both owned by
American investors. If the bourse opens, central banks around
the world will reduce their stockpiles of dollars to maintain a
portion of their currency in euros. This is the logical step for
Europe which buys 70% of Iran’s oil. It is also the reasonable
choice for Russia which sells two-thirds of its oil to Europe
but (amazingly) continues to denominate those transactions in
dollars.
Washington has succeeded in maintaining its monopoly by propping
up the many corrupt and repressive regimes in the Gulf States.
The prudent choice for Saudi Arabia would be to move away from
the debt-ridden dollar and enhance its earnings with the
stronger euro. Regrettably, Uncle Sam has a gun to their head.
They understand that such a transition would invite the same
response that Saddam got 6 months after he converted to euros
and was removed through “shock and awe”.
Regardless, of the outcome, the profligate spending,
budget-busting tax cuts, and the shocking increase in the money
supply (the Fed has doubled the money supply in one decade) has
the greenback headed for the dumpster. Already, China and Japan
(who hold an accumulated $1.7 trillion in US securities and
currency) are gradually moving away from the dollar towards the
euro (although the Fed has blocked the public from knowing the
extent of the damage by abandoning the M-3 publication of
inflows) The European Central Bank (ECB) and Japan’s central
bank are frantically trying to conceal the probability of a
dollar collapse by issuing carefully worded statements to allay
public fears while they to prepare for an “orderly” retreat.
But, it won’t be “orderly”. The dollar has lost 5% against the
euro since April and is quickly headed south. The Iran bourse
could be the final jolt that pushes the greenback over the edge.
This is the bitter lesson for those who choose to ignore
economic fundamentals and build their house on sand. Paul
Volcker anticipated this scenario in a speech last year when he
said that account imbalances were as great as he had ever seen
and predicted “a 75% chance of a dollar crash in the next 5
years”.
Volcker was right, but economic advisor, Peter Grandich
summarized it even better when he opined, “The only one who
doesn’t know the US dollar is dead is the US dollar.”
Prepare for the requiem.
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