Is Bush petrified of the petro-euro? (2 Viewers)

[fleo]

By Coilin Nunan of FEASTA: The Foundation for the Economics of
Sustainability

In November 2000, Saddam Hussein made a momentous decision: he decided that
henceforth Iraq would sell its oil on the international market for euros
rather than dollars. In doing so, Baghdad branded the dollar a tool of US
hegemony.

Is there in fact some validity in this claim and could Iraq’s decision help
explain the current policy divisions between the US and Eurozone countries,
France and Germany, on Iraq?

At present, the dollar is the de facto world reserve currency, giving the US
an inherent economic advantage by allowing it to import far more than it
exports. The need for dollars outside the US to buy oil, repay IMF debts and
carry out international trade means that foreign countries must supply the
US with extra goods and services to acquire dollars which the US issues at
virtually no cost. It is the demand for dollars which enables the US to live
beyond its means, currently importing nearly 50% more than it exports.

The euro, however, now provides a credible alternative to the dollar. But
even if the dollar only had to share the status of world reserve currency
with the euro, the economic consequences for the US would be extremely
serious, including large dollar and stock-market devaluations.

There is one major obstacle to this happening: oil. For many oil-importing
countries like Japan, there is no point in converting their huge dollar
reserves to euros if the only currency that can be used to buy oil is the
dollar.

Maintaining international oil trade in dollars is therefore crucial to US
economic health. But ‘axis of evil’ member and major oil exporter Iran not
only welcomed Iraq’s euro move, but is considering doing likewise. OPEC
member Venezuela also welcomed Baghdad’s move and has established barter
deals for trading its oil with 13 different countries and encouraged OPEC to
set up systems of electronic barter. Even major oil producer Russia welcomed
the Iraqi move and OPEC itself has said it is considering the benefits of
selling its oil for euros.

If part of the motivation for the proposed war against Iraq and the coup
attempt in Venezuela is a power struggle between two competing currencies,
then this underlines the importance of Feasta’s proposals for reforming the
international monetary system and introducing a neutral world currency for
all international trade.

Further reading: http://www.feasta.org/documents/papers/oil1.htm

The dollar hegemony story took shape on the Feasta e-mail discussion list
which allows members and friends to share information and discuss new ideas.
You can subscribe to this list by sending an e-mail
mailto:[email protected]

 

[snap-apple]

i sent the above to a few mates, one of them put in up on another board somewhere and below is a reply:

Stap me vitals, I knew it and missed it.

I've never quite been able to work out just
how Dubya and Rove and Rumsfeld, perhaps three of the
most ignorant men ever to be allowed to cross
the White House's portal, persuaded so many
apparently erstwhile sane people into their
militaristic camp. Now I understand, and it's all so
dreadfully simple and so bloody obvious that
I'm beginning to believe I should check my brain into a
repair facility and hope I get Lt. Data's in
return.

I have to thank John R. for this insight. As
many of you will know, one of my degree qualifications is
in economics and I specialised in
macroeconomics, so I should have seen this coming. But I was
distracted and fooled by the obvious
macroeconomic factor in the Iraq issue - the procurement and
control of the means of oil production - into
thinking that the White House's motive was pure - simple
greed. It turns out that I was only half-right.

You can read the article provided by John, but
here's a simplified version of it.

If you've ever wondered why the US currency is
so strong in spite of the multiple reasons why it
shouldn't be - basically, economic chaos in
the US and no central hand guiding the general economic
trends except the discount rate - then you
should know that the answer is the "secondary" role of the
US dollar: A means of international exchange.

All kinds of prices are quoted in United
States dollars (USD), from pork belly futures to gold to fashion
garments to ... well, you name it. Because
most international prices are quoted in USD, almost
everyone in the world has an interest in
maintaining a strong dollar. The foreign exchange traders
know and understand this. And act
appropriately, i.e. they don't consistently downsell the USD on
forex markets because it could potentially
hurt too much.

In 1999 Saddam Hussein, bless his
self-interested little heart, started saying that the USD was the
currency of evil (or words to that effect). In
2000, to back up his words with action, he converted his
oil reserves and other external Iraqi currency
holdings (oil is a form of liquid liquidity!) from USD to
the Euro. I noted this with some amusement at
the time. After all, on the face of it, it was no big deal.
One "rogue" nation no longer used the USD as a
medium of international exchange. Whoop-de-doo.
The Euro was only worth USD 0.83, so it looked
like, yet again, Hussein was cutting off his nose to
spite his country's face, because overnight
Iraq's overseas funds devalued by nearly 20%. And
anyway, let's face it, it didn't really matter
to Iraq because of the embargo which meant that Iraq could
only spend its overseas reserves on small
amounts of a limited range of goods. I've always thought
that the embargo was stupid and would have the
opposite effect to that desired. It didn't occur to me
that it could play into Iraq's political
hands. Stupid, stupid!

But that was before the value of the Euro
began to rival that of the USD. In fact, as we speak, it
hovers around parity and is currently, I
think, worth slightly more than the USD on the forex markets.

What's the big deal, you may ask? Well, the
reason why the USD is used as a means of international
exchange is simple. It's been a relatively
stable and consistently high-valued currency. Ask any USn
who's been overseas in the past 30 years. In
fact, only the GBP (pound sterling) has been higher,
and that's based on good, solid economic
principles. The City of London is still the most active
commercial trading area outside of the US. But
the emergence of the Euro has meant that all bets are
off. If you have a group of reasonable
economic performers such as the Nine Minus One using the
same currency, you have set up the Euro as a
credible rival to the USD as a means of international
exchange. Iraq, and, if things continue the
way they are, most of the rest of the Middle East, starting
with Iran - i.e. all the big oil producers -
will move to the Euro, which they will see as having the same
level of stability as the USD and will come
with a much lower political price tag. For any country with a
small or non-existent deficit, it's real
simple. All they have to do is to refuse to accept anything except
Euros as the medium of exchange for their
exports. Such as oil. And, of course, if you piss off China,
the same thing might happen. Bearing in mind
that China (a) has 20% of the world's population and
(b) is an emergent economic dragon, that will
be highly significant within, say, 10 years.

If the standard of international exchange
moves to the Euro, the US could become a second-rate
economic power almost overnight, because the
value of its currency will depend entirely on its
domestic economic performance. Which is
nothing special, as I've already said.

A few hard facts about the US economy: Its
apparent health is based entirely on internal transfers.
This means that the service economy is stoking
the economic fires. For those of you who don't know
what this is, it means that people are eating
in restaurants, getting their hair done, having their houses
painted, having their pools cleaned or sending
their kids to private schools. Money is being
transferred within the economy and the
velocity of that transfer is masking the fact that little new
wealth is being created. USns are getting
wealthy off the backs of other USns, not from
manufacturing goods and selling them overseas.
The US imports 50% of the goods it consumes. A
strong US dollar materially aids this process
- if the USD is strong, it costs less to import goods. But
the US is in deficit - spectacularly so - and
the strength of the USD is the only thing making this
affordable. A significant drop in the value of
the USD would rapidly change that, and imports would
drop. Taxes to fund US government borrowing
would have to go up. There is a potential for a crash
rivalling the 1930s Great Depression, although
this is a worst case scenario. But those of you relying
on retirement savings in property or in bank
investments or in stocks and shares - the only real
options, after all - would rapidly find that
you didn't have enough to live on as the value of those
investments shrivel.

Countries with truly massive deficits, and
Japan is the obvious example here, would effectively close
down from an economic standpoint, because most
of its borrowings are from the US and are held in
USD.

Also, and this is significant (if only I'd
thought about it a while ago), OPEC is setting up an electronic
exchange for oil transfers. Electronic
exchanges keep balances in terms of quantities, not currencies.
The benefit of this is that you are dealing
with an unchanging medium of exchange - the amount of oil
available - rather than quoting its value in
some currency which is, of course, subject to fluctuation.
Electronic exchange would even further (and
perhaps most significantly in the end) marginalise the
USD. If you're quoting amounts of product
rather than amounts of currency, you're bartering, not
trading. There's no room for arbitraging off
currency fluctuations because the value of the medium of
exchange is fixed. To a capitalist economy
dependent upon the strength of its currency as a medium
of international exchange, this is anathema.

Under these circumstances, what is the US to do?

The US has two means of international suasion
- economic and military. If the one is under threat and
is obviously weakened, then the second is the
only one it can use to save the first. If the US invades
Iraq and replaces the current regime with a
puppet of its own, the means of exchange will of course
revert to the USD from the Euro. The US will
be hoping that the message will be heard, loud and
clear, by the other "waverers" - notably Iran
and Saudi Arabia. "Cross us and we'll invade you" will be
the message.

It's THAT simple. I can understand it. Dubya
can probably understand it although I bet he'd be hard
pressed to explain it to anyone else. It
explains while Colin Powell is willing to go along with the
invasion. It explains why the White House
doesn't give a shit about what's happening in North Korea -
nuclear weapons and other WMDs really aren't
the issue at all.

It's economic war using military means.

I don't know about you guys, but this is
leaving an even nastier taste in my mouth even though in the
end it may be in my best long term interests
to support the US!

 

[fleo]

I'm no expert in politics or current affairs and certainly not economics but the more I read the more almost hysterically competitive and fearful it all seems. Everyone hangs on for dear life to their piece of the pie. I may sound like a hippy but 'why can't we share?!' Greed and fear seem to be twins in this game. Aaagh I dunno

 

[snap-apple]

a global currency for this sort o world trade/world bank stuff would make a hella lot o sense. but the us economy would suffer poorly and that could have implications for the world economy.
mess.

 

[fleo]

Big mess. I'd be interested to hear if there were any ideas of what that would mean if we had a global currency for world trade as you mentioned. Would the global economy suffer long term? What would it mean for the stock market? What would be the consequences for everyday life? I supposse there might be too many factors to try and make predictions.

 

[steve albino]

http://www.ratical.org/ratville/CAH/RRiraqWar.html

 

[pete]

Originally posted by fleo
Big mess. I'd be interested to hear if there were any ideas of what that would mean if we had a global currency for world trade as you mentioned. Would the global economy suffer long term? What would it mean for the stock market? What would be the consequences for everyday life? I supposse there might be too many factors to try and make predictions.

One consequence would be a very smug David Icke.

 

[snap-apple]

Originally posted by steve albino
http://www.ratical.org/ratville/CAH/RRiraqWar.html

yowsa. evil evil evil bastards.
Personally I've never been so convinced that this is what's behind ALL of bush's strange policy decisions. The US administration is running around like a wonded animal lashing out. They know the days of the dominance of the US dollar are coming to an end. Shame is it could have profound economic and other effects on the rest of the world. This is not a conspiracy theory...

 

[silo]

Originally posted by conor
yowsa. evil evil evil bastards.
Personally I've never been so convinced that this is what's behind ALL of bush's strange policy decisions. The US administration is running around like a wonded animal lashing out. They know the days of the dominance of the US dollar are coming to an end. Shame is it could have profound economic and other effects on the rest of the world. This is not a conspiracy theory...

em... i'm not convinced. yet.

the u.s. has systematically dismantled the bretton-woods accords (basically, how the winners of ww2 decided they wanted to run the world economy) since about 1970 onwards. but they're not exactly in such a weak position as this appears to imply. the war is a war for control of resources, sure. but it's an extension of american power, rather than a desperate rearguard action against a collapsing currency.

however, i'll continue reading...

 

[snap-apple]

Originally posted by silo
em... i'm not convinced. yet.

the u.s. has systematically dismantled the bretton-woods accords (basically, how the winners of ww2 decided they wanted to run the world economy) since about 1970 onwards. but they're not exactly in such a weak position as this appears to imply. the war is a war for control of resources, sure. but it's an extension of american power, rather than a desperate rearguard action against a collapsing currency.

however, i'll continue reading...

you know more aboot it than me but i think its looking like a matter of when and not if the $ is no longer used as much in foreign exchange what with the strength of the € and electronic payments/bartering.
not heard the uk talking about joining the € for a while now.

 

[silo]

Originally posted by conor
you know more aboot it than me but i think its looking like a matter of when and not if the $ is no longer used as much in foreign exchange what with the strength of the € and electronic payments/bartering.
not heard the uk talking about joining the € for a while now.

i only know what i read in the papers and on the internerd and whatnot... probably we know about the same, we have similarly shaped and sized heads.

just was thinking that the american elites are having a war because they're confident in their power, not because they're scared by their imminent lack of it... though when you start a war, you can give up the idea of reasonable predictions of outcomes. they range from american puppet being put in after short war through to everything escalating into a regional or global war with serious consequences for the whole of humanity. we could turn out to be a pretty short-lived evolutionary error.

 

[steve albino]

03/16 15:05
Traders More Optimistic on Dollar; Quick War Seen, Survey Shows
By Mark Tannenbaum


Tokyo, March 17 (Bloomberg) -- Currency traders and investors grew more optimistic last week that the dollar will rally as speculation mounted that a war in Iraq would be short-lived, a Bloomberg News survey showed.

Sixteen of the 31 analysts, traders and investors surveyed Friday, or 52 percent, recommended selling dollars for euros -- less than the 79 percent that said sell the dollar a week ago. The dollar rebounded last week after tumbling to a four-year low on Tuesday as a rally in stocks fueled demand for the currency.

The dollar's slump was ``too far, too fast, especially if this equities rally continues,'' said Lara Rhame, a currency economist at Brown Brothers Harriman & Co. in New York. ``Investors are looking to sell foreign bonds and looking to get back into U.S. equities.''

The U.S. currency gained 2.4 percent in the week to $1.0745 per euro, its biggest weekly advance since July. It may rebound to $1.05 per euro this week, said Rhame, who recommended selling euros and British pounds for dollars. The dollar gained 1 percent against the yen in the week, to 118.28 yen, as the Standard & Poor's rose for the first week in three.

``We expect a further spike in the dollar,'' said Chris Furness, a currency strategist at financial markets research firm 4Cast in London.

Most of the dollar's gains last week came Thursday, after Cable News Network reported the Central Intelligence Agency is negotiating with some Iraqi military leaders to surrender in the event of an attack. The report fueled optimism a war would end in days or weeks -- the 1991 Persian Gulf War lasted less than two months -- which may bolster U.S. consumer confidence, drive down oil prices and lure investment to the world's biggest economy.

`Gung-Ho'

Some firms, including J.P. Morgan Chase & Co. and Merrill Lynch & Co., said the Federal Reserve will cut its 1.25 percent benchmark interest rate at a meeting on Tuesday to help fuel a faster expansion.

U.S. President George W. Bush's meeting Sunday in the Azores with U.K. Prime Minister Tony Blair and Spanish Prime Minister Jose Maria Aznar to consider options indicates that the countries' efforts to find a diplomatic resolution are nearing an end, said analysts. France and Russia, which have veto power in the United Nations Security Council, oppose the use of force in Iraq.

``The market is gung-ho on buying dollars on `the war is going to be quick and over soon''' sentiment, said Meg Browne, a currency strategist at HSBC Bank USA in New York.

U.S., U.K. Troops

The dollar has fallen 9.5 percent against the euro and 2.8 percent against the yen the past six months as the buildup to war prompted some investors to reduce their risk by scaling back purchases of assets abroad. That left the U.S. short of the $1.5 billion of foreign capital it needs a day to offset a record deficit in the current account, a measure of trade in goods and services, and maintain the value of its currency.

The U.S. has amassed more than 225,000 troops in the Persian Gulf and the U.K. 45,000 as they prepare for an invasion of Iraq.

As war expectations mounted, the Swiss franc -- traditionally a haven in times of international crises because of the money its current account surplus brings in -- garnered the most buy recommendations in Friday's survey. Fifty-five percent of those surveyed said to buy the franc, down from 66 percent last week.

``The Swiss franc is the safe haven play right now,'' said Rhame. Over the next week, ``war fears are going to reach a fevered pitch; that's going to keep the franc strong.''

`Dose of Reality'

While the number of dollar pessimists declined, they remained a majority. Sixty-two analysts recommended buying their countries' currencies against the dollar while 52 recommended selling their currencies.

``We see the dollar continuing its trend lower,'' and reaching $1.17 per euro by yearend, said Michael Woolfolk, a currency strategist at Bank of New York.

``We're going to get a good dose of reality'' this week, Woolfolk said. ``War is ahead; there will be a spike in energy prices; that will take its toll'' on the U.S. economy.

He recommends buying euros for dollars this week.

Euro Yen Swiss British Australian
Franc Pound Dollar

Buy 16 10 17 6 13
Hold 4 8 4 12 11
Sell 11 13 10 11 7
Total 31 31 31 29 31