THE PROPOSED IRANIAN OIL BOURSE by Krassimir Petrov, Ph.D. Austrian Macro Economist/Investment Strategist Commissioned by: J. Douglas Bowey and Associates January 20, 2006 Reprinted with permission. Originally published on www.lemetropolecafe.com Abstract The American Empire depends on the U.S. dollar. The proposed Iranian Oil Bourse will accelerate the fall of the U.S. dollar and hence the fall of the American Empire. II. Iranian Oil Bourse The Iranian government has recently proposed to open in March 2006 an Iranian Oil Bourse that will be based on an euro-based oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddamâs, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that much of the world will eagerly adopt this euro-denominated oil system: The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead use with their own currency. The Chinese and the Japanese will be especially eager to adopt the new exchange. It will allow them to drastically lower their enormous dollar reserves and diversify them with Euros. One portion of their dollars they will still want to hold onto; another portion of their dollar holdings they may decide to dump outright; a third portion of their hoards they will decide to use up for future payments without replenishing their dollar holdings, but building up instead their euro reserves. The Russians have economic interest in adopting the Euro â the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold: their central bank is diversifying out of dollars and accumulating gold. Russians have also revived their nationalism; if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed. The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversification against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk. Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New Yorkâs NYMEX and the Londonâs International Petroleum Exchange (IPE), even though both of them are effectively owned by Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner. At any rate, no matter what the British decide, should the Iranian Oil Bourse gain momentum and accelerate, the interests that matterâthose of Europeans, Chinese, Japanese, Russians, and Arabsâwill eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the exchangeâs operations: Sabotaging the Exchangeâthis could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities. Coup dâétatâthis is by far the best long-term strategy available to the Americans. Negotiating Acceptable Terms & Limitationsâthis is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup dâetat fail, then negotiation is clearly the second-best available option. Joint U.N. War Resolutionâthis will be, no doubt, hard to secure given the interests of all other members of the Security Council. Recent rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action. Unilateral Nuclear Strikeâthis is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The American will likely use Israel to do their dirty nuclear job. Unilateral Total Warâthis is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will alienate other powerful nations. Third, major reserve countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop. Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. III. The Demise of the Dollar The collapsing dollar will dramatically accelerate U.S. inflation and will pressure short-term and long-term interest rates much higher. At this point, the Fed will find itself between two equally disastrous optionsâdeflation or hyperinflation. The first option, deflation, known in the international finance literature as the âclassical medicineâ, requires stopping the monetary expansion and raising interest rates, thus inducing a major economic depression, a collapse in real estate prices, and an implosion in bond, stock, and derivative markets, most likely precipitating a total financial collapse. The alternative option is to take the easy way out by inflating, whereby the Fed pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy. The Austrian theory of money, credit, and the business cycle teaches us that ultimately there is no in-between the mythological Scylla and Charybdis scenarioâbetween deflation and hyperinflation. Sooner or later, as pressure on the dollar rises and inflation rears its ugly head, the monetary system must swing one way or the other, forcing the Fed to make its choice. There is no doubt that the newly-appointed Commander-in-Chief of the Federal Reserve, Ben Bernanke, an renowned scholar of the Great Depression and an adept helicopter pilot, will choose the latter course of actionâhyperinflation. Bernanke has learnt well the lessons of the Great Depression and the destructiveness of deflations. He has also learnt well from the Maestro the panacea of every financial problemâto inflate his way out, come hell or high water. He has even devised ingenious unconventional ways around the deflationary liquidity trap and teaches the Japanese how to apply them. To avoid deflation, he has publicly stated that he will accelerate the printing presses and âdrop money from helicoptersâ. If necessary, he will monetize everything in sight. He will ultimately destroy the American currency in Hyperinflation. © 2006 Krassimir Petrov, Ph.D.
There are too many ways for bad things to happen and it seems like everyone wants to do them. Can't we all just get along?
" ..In 1971, as it became clear that the U.S. Government would not be able to buy back its dollars for gold, it prepared an alternative arrangement to hold the world hostage to its fiat dollar: during 1972-1973 it struck an iron-clad arrangement with Saudi Arabiaâto support the rule of the House of Saud in exchange for accepting only dollars as a payment for Saudi oil. By imposing the dollar on the OPECâs leader, the dollar was effectively imposed on all OPEC members. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at an ever increasing oil prices, the worldâs demand for dollars could only increase. Even though dollars were no longer exchangeable for gold, they were now exchangeable for oil. The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because those dollars were needed to buy oil. As long as the dollar was the only payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist, because it would no longer be able to tax the world by making them accumulate ever more dollars. Thus, Imperial survival dictated that oil be sold only for dollars. It also implied that oil reserves were spread around various sovereign states that none was strong enough, economically or militarily, to demand payment for oil in something other than dollars. If someone demanded a different payment, he had to be convinced, either by political or by military means, to change his mind. The man that actually did demand Euro for his oil was Saddam Hussein in late 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant his demand and even converted his $10 billion reserve fund at the U.N. into Euro, political pressure was exerted to change his mind. Other countries, like Iran, also wanted payment in other currencies, most notably Euro and Yen. The danger to the dollar was clear and present, so a punitive action was in order. Bushâs war in Iraq was not about existing weapons of mass destruction, about defending human rights, about spreading democracy, or even about seizing oil fields. It was about defending the dollar, ergo the American Empire; it was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished...."
I tend to agree I.e. the Euro will follow the dollar down, but (news flash) there are other stores of value and means of exchange. And not just the rupee and the Yuan. For example, the Brazilian Real. Yesterday, it took only 2.03 to buy a dollar, not the 4, it took a few years ago. I.e. some currencies are and will continue to go up as the dollar goes down. I.e. I agree the Euro will not climb much relative the dollar. - The EU is too much like the US. - A maker of high value added products and services, which in a decade or two at most, China and India will produce more cheaply but still require (from Brazil etc.) raw materials - Currencies of those countries exporting to Asia will continue to gain dramatically on both the dollar and Euro.
I simply dont believe the doom and gloom/end of the USA as we know it story. Looking back the DX has traded at these levels many times before. And PHD`s and economists telling me "this time it is different" reinforces my contrarian opinion. Economies the world over ebb and flow. The USA isn't perfect and neither are the rest.
Its a free country. You pay for your choices. Me, I put my dollars in ADRs five years ago. Happy I did.