[midnight-gamer]

I am wondering what people think about the potential for a crash in the world economy due to the fall in the U.S. dollar. Pls read the article in the link. http://www.goldismoney.info/forums/show ... hp?t=19385

[dunewalker]

That article is more than 6 months old---got anything more recent?

[midnight-gamer]

Very true.. but I belive the topic is still relevent. I have seen people make a mad dash to cash in on gold/silver as well as foreign stocks/cd's ect.

[MicroHydro]

It is a feature of the present world that reality is concealed. The value of the dollar has been falling for decades. Whether there could be a dramatic "crash" defined for this purpose as a drop of more than 10% in a single week, I do not think so. On the other hand, it is quite possible for the dollar to fall by 1% a month for years. But, that story would not be on TV, they would distract you with American Idol or the pervert of the week or the missing cute young white woman or whatever.

[peaker_2005]

Interesting points Micro. However, knowing that these sorts of things tend to reach a certain critical mass and then people bail. FAST. One need only look at the various stock market crashes in recent history... (recent meaning in the past hundred years.

Somehow, I get the distinct feeling that the exodus from the dollar is going to begin when it hits the markets that oil production has peaked.

[savethehumans]

Me, I think it will replace the lump of coal in the USA's Christmas stocking!

[linlithgowoil]

dunno really... its a lot more difficult to have a 'crash' these days i think. the us govt would do something about it - and other countries would be supportive and co-operate as its in everyone's interests to keep the dollar a a stable value.

[bobcousins]

The goldbugs like the idea because they are into gold, and do their best to talk up the market. The doomers like the idea because they think that any disaster somehow validates PO theory, which is both illogical and tripe.

Really, all these baseless disaster scenarios become rather tedious. I can see why anti-PO people come to the conclusion that PO people are just silly scaremongers.

[MrBill]

The US dollar has devalued 40% over the past 25-years against a basket of currencies including the JPY, CHF, GBP and euro (DM, FFR, NLG, etc.), so a weak dollar is not new news.

As a matter of fact, against the EUR the USD hit its low at 1.3670/0.7315 in 2004, and since then has appreciated to 1.1900/0.8400, but well short of it's high against the euro in 2001 when the dollar touched 0.8227/1.2155 against a much weaker euro.

Oil is a fungible commodity produced in a variety of local currencies from the Canadian dollar, Russian ruble to the Saudi riyal. It does not matter if oil is priced in dollars or euros or in fact sold in gallons, liters, barrels or by the tonne. They are just units of measurement.

The US is running unsustainable current account, budget and trade deficits, plus it has a huge public and private debt and negative personal savings ratio. This is reason enough to sell dollar assets or at least not accumulate anymore. But the dollar will not collapse just because of peak oil for the very reason that what makes the USA vulnerable also makes European and Asian economies also vulnerable. In the first place they all need oil to produce. Secondly, they all trade with one another. And thirdly, even though the Asians have huge foreign exchange reserves, 60% of them are valued in USDs and they own US treasuries, but also their continued prosperity also relies on the US as a consumer.

I do not doubt peak oil as a geological fact, but beyond that a lot of doomers have problems with basic economics and finance.

[LeonDion]

$this->bbcode_second_pass_quote('MrBill', '
')Oil is a fungible commodity produced in a variety of local currencies from the Canadian dollar, Russian ruble to the Saudi riyal. It does not matter if oil is priced in dollars or euros or in fact sold in gallons, liters, barrels or by the tonne. They are just units of measurement.

[MrBean]

$this->bbcode_second_pass_quote('MrBill', '
')Oil is a fungible commodity produced in a variety of local currencies from the Canadian dollar, Russian ruble to the Saudi riyal. It does not matter if oil is priced in dollars or euros or in fact sold in gallons, liters, barrels or by the tonne. They are just units of measurement.

[MrBill]

$this->bbcode_second_pass_quote('', 'S')ince a lot of us do have problems with macro economics, I wonder if you could help by explaining the effect of new "dollar" creation. Does it matter in which country it is created in? Why or why not?

[MrBill]

$this->bbcode_second_pass_quote('', 'N')o other group have more problems with basic economics than economists who believe in their group thinking economic theories wich are far removed from wider reality.

[MrBean]

$this->bbcode_second_pass_quote('MrBill', '
')Well, yes, Mr. Bean, however, I am not an economist, I am an investment banker and an energy trader. I put my money where my mouth is everyday, so I have to understand micro- and macroeconomics as well as finance and the time value of money. Not to mention foreign exchange trading and money markets.

[Petrodollar]

Mr. Bill, you stated:

"Oil is a fungible commodity produced in a variety of local currencies from the Canadian dollar, Russian ruble to the Saudi riyal. It does not matter if oil is priced in dollars or euros or in fact sold in gallons, liters, barrels or by the tonne. They are just units of measurement."

That is completely false. A monopoly currency for oil allows the issuer of that currency some unique advantages, such as lack of currency risk. Those who cannot print an oil currency must trade goods and services in order to purchase that vital resource. Only those ignorant of the history of petrodollar recycling would dare claim otherwise.

So, I highly recommend you study the 1974 agreement with Saudi Arabia and the US Federal Reserve that initiated what Henry Kissenger called at the time "Recycling petrodollars." The rest of OPEC agreed to this system in 1975. The only book that actually reveals the source documents and interviews the people who set up this system - in secret - during 1973 -1974, is David Spiro's book, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (1999).

Here are a couple of exerts from my book, Petrodollar Warfare:

By the summer of 1971 the drain on the Federal Reserve’s gold stocks had become critical, and even the Bank of England joined the French in demanding US gold bullion for their dollars. In August 1971 the British ambassador showed up at the Treasury Department to redeem $3 billion for its fixed exchange value in gold of $35 per ounce (approximately 5.3 million ounces, or 2600 tons of gold). At this time the Nixon administration opted to abandon the dollar-gold link entirely, thereby going to a system of floating currencies on August 11, 1971. Otherwise Nixon would have risked the collapse of the gold reserves of the US. Rather than risk damaging US credit, he changed the rules, or more accurately, he abandoned the rules.

The break with gold effectively ended the Bretton Woods Agreement and opened the door to an entirely new phase of the American Century. In this phase, large international banks, such as Citibank, Chase Manhattan, or Barclays Bank, in effect privatized control over monetary policy. These institutions assumed the role that central banks held under the Bretton Woods gold system, but of course without any ability to redeem dollars for gold. In this phase, market forces determined the dollar’s value, which resulted in substantial inflation during the early 1970s. In an effort to stem this inflation, the Nixon administration adopted wage-price freezes in late 1971, but inflation continued to increase significantly during the 1970s.

The combined forces of a free-floating dollar, a growing US trade deficit, and massive debt associated with the ongoing Vietnam War contributed to both the volatility and devaluation of the dollar in the 1970s. According to research outlined in David Spiro’s book, The Hidden Hand of American Hegemony, it was during this time that OPEC began discussing the viability of pricing oil trades in several currencies. This unpublished proposal involved a basket of currencies from the Group of Ten nations, or G-10. These members of the Bank of International Settlements (BIS), plus Austria and Switzerland, included the major European countries and their currencies, such as Germany (mark), France (franc), and the UK (pound sterling), as well other industrialized nations, such as Japan (yen), Canada (Canadian dollar), and of course the US (US dollar). It should be noted the powerful G-10/BIS also has one unofficial member, the governor of the Saudi Arabian Monetary Authority (SAMA).

In order to prevent this monetary transition to a basket of currencies, the Nixon administration began high-level talks with Saudi Arabia to unilaterally price international oil sales in dollars only — despite US assurances to its European and Japanese allies that such a unique monetary/geopolitical arrangement would not transpire. In 1974 an agreement was reached with New York and London banking interests that established what became known as “petrodollar recycling.” That year the Saudi government secretly purchased $2.5 billion in US Treasury bills with their oil surplus funds, and a few years later Treasury Secretary Blumenthal cut a secret deal with the Saudis to ensure that OPEC would continue to price oil in dollars only.

In typical understatement Spiro noted that, “clearly something more than the laws of supply and demand ... resulted in 70 percent of all Saudi assets in the United States being held in a New York Fed account.”

Naturally, this arrangement with the Saudi government prevented a market-based adjustment and was the basis for the second phase of the American Century, the petrodollar phase. What follows is the extraordinary history in which petrodollar recycling was vigorously implemented during the 1970s.

...and here's the essence of petrodollar recycling...


Referring again to Spiro’s analysis of petrodollar recycling:

"So long as OPEC oil was priced in US dollars, and so long as OPEC invested the dollars in US government instruments, the US government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil. "

"The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC. Again, so long as OPEC held the dollars rather than spending them, the US received a loan. It was therefore important to keep OPEC oil priced in dollars at the same time that the government officials continued to recruit Arab funds."

....BTW, the CIA was not happy with this arrangement, and 30 years ago warned...

"Though it was less concerned with the secrecy of Arab investments, the CIA concurred that OPEC money continued to have a great potential for disrupting markets if an Arab government became displeased with US policy. [The CIA report stated] ‘Temporary dislocation of international financial markets would ensue, if the Saudi Arabian government ever chose to use its accumulated wealth as a political weapon.’ "[emphasis added]

– CIA memo “Saudi Arabian Foreign Investment”, marked “Secret, Not Releasable to Foreign Nationals,” reviewed for declassification in May 1985, as noted in David Spiro’s book, The Hidden Hand of American Hegemony

...Yep, and here's some more evidence - the ugly truth of the matter..

Saudi Arabia’s Prince Muhammad Bin-Turki Bin-Abdallah Bin-Abd-al-Rahman said … rather than resorting to an [oil] embargo … he argues that a more effective punishment for the United States, Israel’s principal source of financial and political support, would be to change the currency in which oil is traded from the dollar to the euro, something that Iraq has already done. This option, he said, is a strategic and rational one, compared with cutting off production, and it is purely commercial. The Arab countries have the right to choose the currency, just as it is the right of consumer countries to choose to deal with oil-exporting countries. [emphasis added]

– “Protest by Switching Oil Trade from Dollar to Euro,” Oil and Gas International, (US), April 15, 2002

...and what does the US Congress know about this issue? Quite a lot actually, as statements during 2002 by the former US ambassador to Saudi Arabia hint that some may question why they should be “so kind” to the US in pricing oil exclusively in the dollar...

"One of the major things the Saudis have historically done, in part out of friendship with the United States, is to insist that oil continues to be priced in dollars. Therefore, the US Treasury can print money and buy oil, which is an advantage no other country has. With the emergence of other currencies and with strains in the relationship, I wonder whether there will not again be, as there have been in the past, people in Saudi Arabia who raise the question of why they should be so kind to the United States."

It is doubtful that US Congress members at this committee meeting missed the subtle warning that was carefully articulated about petrodollars versus petroeuros. In December 2004 the Bank of International Settlements (BIS) stated that, in spite of oil prices increasing 85 percent from 2001 to 2004, overall OPEC bank deposits barely rose. The BIS report noted this usual phenomenon, “Oil reserves have not been channeled into the international banking system in the most recent cycle.”

Bottom Line:

"Petrodollar recycling was unusual in that it was a severe shock to international economic stability. Yet insofar as the oil shocks were a symptom of US hegemonic decline, similar shocks can be expected in the future. International institutions do not have the capability to handle such threats to stability, and US unilateralism will prevent the strengthening of multilateral cooperative regimes."

"Although the relative decline of US hegemony has led to an increase in observable power outcomes, the result ultimately will be worldwide economic instability. When it is in a period of relative decline, it is in the short-term interest of the United States to pursue unilateral exploitation of its dominant position. This interest is increasingly at variance with the international goals of confidence, stability, and cooperation.”

– David E. Spiro, The Hidden Hand of American Hegemony

[FatherOfTwo]

We saw what the US response was to Iraq going to the euro.

[abelardlindsay]

$this->bbcode_second_pass_quote('midnight-gamer', 'I') am wondering what people think about the potential for a crash in the world economy due to the fall in the U.S. dollar. Pls read the article in the link. http://www.goldismoney.info/forums/show ... hp?t=19385

[MrBill]

Petrodollar - I have William Clark's article Oil Currency Geopolitics on my desk in front of me. If I quote you The Da Vinci Code verbatum would it make the story true? It is published isn't it? Thanks anyway.

The dollar has declined some 40% in the last 25-years against the yen, the legacy currencies of the euro, the pound and the swiss franc. I would maintain that the nominal price of crude oil at $65 per barrel is higher than it would have been had the dollar not devalued by 40%. In effect, the price of oil is more expensive in dollars, but worth comparatively less when measured in euros, yen, pounds and swiss franc. Perhaps not capturing the entire 40%, but some portion there of.

The US is not getting a free ride when it comes to the price of oil. It is getting a good deal as silly OPEC members are not only willing to sell their oil in dollars, but instead of hedging their own foreign exchange risk, they hold dollars in the form of US treasuries, in a currency that is losing its external value. Not very good business. I am sure their investments in London real estate have performed much better on an exchange adjusted basis?

Gazprom is western Europe's largest supplier of natural gas. Those contracts are priced in euros. It doesn't matter. If they want to hedge their price risk, they would still hedge in dollars on either the IPE or NYMEX and manage their forex exposure accordingly. Really, anyone who has an excel spreadsheet and a live Reuters feed can view the price of oil & gas in dollars or euros or rubles in real time.

By your logic, the US is also getting a free ride when it purchases grain & oilseeds, precious or ferrous metals or any commodity that is priced in US dollars? If Russia sells China oil or gas or aluminum they may price the deal in dollars (or not), but the true cost will be determined by their respective purchasing power parity not the external value of the dollar which is just a scorecard.

The history of the Gold Standard and the Bretton Woods Treay is a matter of public record as it the ERM crisis in 1992. Governments sign agreements all the time. Just because European governments sign the Maastrict Treaty doesn't mean the euro will not go up and down in value in line with its fundamentals. Some conspiracy?

[GoIllini]

$this->bbcode_second_pass_quote('MrBill', '')$this->bbcode_second_pass_quote('', 'A')ny comments on the bolded sentences in Mr. Benson's article regarding the dollar's role as the World's Reserve currency, underpinned by petrodollar recycling?

[Petrodollar]

Mr. Bill,
Your reference to the Da Vinci Code is a false dilemma, and appears to be a defense mechanism to avoid addressing the actual subject matter... Indeed, what I posted earlier is regarding the 1974-1975 agreements is a matter of historical fact, backed by US gov't docs. Again, here's the one of the few books that reveals the facts, and I strongly encourage anyone interested in these issues to read this fascinating book:

David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Cornell University Press, 1999
Amazon

...one more note about your post...

"By your logic, the US is also getting a free ride when it purchases grain & oilseeds, precious or ferrous metals or any commodity that is priced in US dollars?"

Yes, you are correct, the US dollar as the monopoly currency for these commodities effectively reduces the currency risk for the US consumer. Oil, given its relative inelastic demand qualities, if of course the most important "commodity." (BTW, I do not consider oil a mere commodity). What is unque about petrodollar recycling is that the money flows of all OPEC customers flows back into the Federal Reserve....which of course allows us to create strange things like a $600B annual trade account deficit, a $400B annual budget shortfall, and $7.7 trillion dollar debt - and yet - nations continue to accept our currency, in part b/c they need it to pay their monthly oil/energy/survial bill....

...FWIW, here's what an OPEC executive stated in April 2002...


"The question that comes to mind is whether the euro will establish itself in world financial markets, thus challenging the supremacy of the US dollar, and consequently trigger a change in the dollar's dominance in oil markets. As we all know, the mighty dollar has reigned supreme since 1945 .… Having said that … in the long run the euro is not at such a disadvantage versus the dollar when one compares the relative sizes of the economies involved, especially given the EU enlargement plans.

Moreover, the Euro-zone has a bigger share of global trade than the US and while the US has a huge current account deficit, the euro area has a more, or balanced, external accounts position … looking at the statistics of crude oil exports, one notes that the Euro-zone is an even larger importer of oil and petroleum products than the US.

From the EU’s point of view, it is clear that Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removed the currency risk.

.… There is also very strong trade links between OPEC Member Countries (MCs) and the Euro-zone, with more than 45 percent of total merchandise imports of OPEC MCs coming from the countries of the Euro-zone
.… Of major importance to the ultimate success of the euro, in terms of the oil pricing, will be if Europe’s two major oil producers —– the United Kingdom and Norway join the single currency .… This might create a momentum to shift the oil pricing system to euros.

In the short-term, OPEC MCs, with possibly a few exceptions, are expected to continue to accept payment in dollars …. In the long-term, perhaps one question that comes to mind is could a dual system operate simultaneously? Could one pricing system apply to the Western Hemisphere in dollars and for the rest of the world in euros?

…Should the euro challenge the dollar in strength, which essentially could include it in the denomination of the oil bill, it could be that a system may emerge which benefits more countries in the long-term .... Time may be on your side. [emphasis added]

– Javad Yarjani, Head of OPEC’s Petroleum Market Analysis Department, in a speech to Spanish officials, April 2002

...and this is interesting quote from a member of the CFR...

"The Saudis are holding the line on oil prices in OPEC and should they, for example, go along with the rest of the OPEC people in demanding that oil be priced in euros, that would deal a very heavy blow to the American economy."

– Yosef Ibrahim, Managing Director of the Strategic Energy Investment Group in Dubai and member of the US Council on Foreign Relations, as reported in the Observer (UK), February 2003

...and finally, here's an exert from my book...

Yosef Ibrahim, the managing director of the Strategic Energy Investment Group in Dubai and a member of the US Council on Foreign Relations, stated that Saddam’s switch to the euro for Iraqi oil trades ‘was another reason [why the US attacked]. There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that’s mainly because of what happened in Iraq.’[emphasis added]

Further evidence that Russia is gravitating toward a petroeuro system was provided by Lukoil vice president Leonid Fedun, who stated that the transaction cost for the switch would be minimal at just 0.08 percent. Fedun said, ‘There is no problem .... If the state decides to do this, then we will support this initiative. From the point of view of the [Russian] economy, there’s no difference.’

This Moscow Times article included comments from Yevgeny Gavrilenkov, chief economist at Troika Dialog, stating that debate is growing on a move toward the euro as Russia mulls siding with the EU: “Such an idea is really possible. Why not? More than half of Russia’s oil trade is with Europe. But there will be great opposition to this from the United States.”

The proposition that Russia, the second-largest oil exporter in the world, switching to the euro will be met with “great opposition” from the US is an understatement. Nevertheless, according to the same article, from a purely monetary and trade perspective this Russian switch appears logical. Obviously the US government would prefer that Russia sell its oil in dollars or a dual currency arrangement, as opposed to a single currency, petroeuro oil-trading system.


Footnotes and other interesting articles:

“The Choice of Currency for the Denomination of the Oil Bill,” speech by Javad Yarjani, head of OPEC’s Petroleum Market Analysis Dept., on the International Role of the Euro, April 14, 2002, http://www.opec.org/NewsInfo/Speeches/s ... nApr14.htm

Patrick Brethour, “OPEC Mulls Move to Euro for Pricing Crude Oil,” Globe and Mail, January 12, 2004, http://www.theglobeandmail.com/servlet/ ... /Business/

Faisal Islam, “When Will We Buy Oil in Euros?” Observer, February 23, 2003, http://www.observer.co.uk/business/stor ... 67,00.html

Catherine Belton, “Putin: Why Not Price Oil in Euros?” Moscow Times, October 10, 2003, http://www.moscowtimes.ru/stories/2003/10/10/001.html or archived, http://www.globalpolicy.org/socecon/cri ... ceeuro.htm

Coilin Nunan, “Petrodollar or Petroeuro? A New source of global conflict,” Feasta Review 2, 2004, http://www.feasta.org/documents/review2/nunan.htm