Strange ideas about the Iranian oil bourse

The internet can be a good source of information about issues that aren’t adequately covered by the mainstream media. It can also be a font of considerable kookiness.

Tyler Cowen as well as several Econbrowser readers have called attention to Iranian intentions of creating an exchange in which oil would be traded for euros rather than dollars. Krassimir Petrov’s excited account gives a flavor of what you can find out there:

one of the Federal Reserve’s nightmares may begin to unfold in the spring of 2006, when it appears that international buyers will have a choice of buying a barrel of oil for 60 dollars on the NYMEX and IPE– or purchase a barrel of oil for 45-50 euros via the Iranian Bourse. This assumes the euro maintains its current 20-25% appreciated value relative to the dollar– and assumes that some sort of US “intervention” is not launched against Iran. The upcoming bourse will introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world– global oil and gas trades. In essence, the U.S. will no longer be able to effortlessly expand credit via U.S. Treasury bills, and the dollar’s demand/liquidity value will fall.

How exactly will that have any effect at all on the Federal Reserve or the demand for dollars? Petrov explains:

The economic essence of this [post Bretton Woods] 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 they needed those dollars to buy oil. As long as the dollar was the only acceptable 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. Thus, Imperial survival dictated that oil be sold only for dollars.

Elias Akleh sees this oil bourse, rather than nuclear bombs, as the thing that Bush fears most about Iran, while
Soj writing at Daily Kos finds a conspiratorial connection between all this and the Federal Reserve’s intention to discontinue publication of the monetary aggregate M3.

Where shall I begin? Well, for starters, you don’t need to acquire any U.S. assets in order to purchase a barrel of oil that is priced in dollars. You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.

And even if the oil were purchased with dollars drawn on a U.S. bank, there is no reason at all that the seller needs to retain the proceeds in that form. Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished. What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.

You could buy gold right now in New York for dollars or in London for pounds. Which one is cheaper? Guess what– you’ll pay exactly the same price either place once you make the currency conversion at the current exchange rate. The same will surely hold for crude oil.

And the notion that the U.S. dollar is currently “backed by oil” is so nonsensical that it is difficult even to fathom what that phrase is intended to convey. When we say that under a gold standard, the dollar is backed by gold, I know exactly what that means– it means you can surrender dollars at any time to obtain a fixed amount of gold promised by the government. But if you surrender dollars on any given day in January 2006, how much oil are you going to get back? It varies literally by the minute, and the rate at which dollars get exchanged for oil has nothing to do with the promises made by any government and everything to do with market fluctuations in supply and demand.

Which is also my explanation for the prevalence of these theories on the internet– there is a demand for a deeply conspiratorial interpretation of world events, and always someone willing to supply such.


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139 thoughts on “Strange ideas about the Iranian oil bourse

  1. StrategyUnit

    James,
    Thank you and Tyler for covering this issue. I have noticed this viewpoint gaining an ever steadier foothold in the press. A quick search on Google News highlights its growing popularity.
    As Tyler noted, there are many reasons to fear Iran situation and we dont need false and misleading fears at this moment.
    Thanks Again,
    StrategyUnit

  2. jim miller

    This is one more example of the looniness of the folks in Iran.
    I can imagine Wall Street licking its chops over the idea. Just imagine the arbitrage opportunities available- oil priced in dollars vs. euros, the dollar/euro exchange rate. Plus, there are probably over 100 prices for oil in the world,so the opportunities. What a wonderful idea!
    If it takes off the Chicago Mercantile Exchange (or the Board of Trade,or NASDAQ,or some such) will quickly coopt the business. I will bet my bottom dollar that the Iranians cannot compete with the Merc.

  3. Robert Sczech

    “You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.”
    Professor Hamilton: I think your definition of Eurodollars is confusing. Eurodollars are not accounts as you claim. There is no difference between Eurodollars and US Dollars – they are the same Dollars except that Eurodollars are on deposit at an institution outside the US while US Dollars are on deposit in the US. Question: Is a US$100 bill kept on deposit in Europe a Eurodollar or a US Dollar?
    I agree that the importance of the Iranian oil bourse is overrated. However, I think your dismissal of the idea that the Dollar is backed by oil is not convincing at all. If oil is sold for Dollars only, then this creates a world wide demand for Dollars to the tune of more than 1 trillion Dollars per year. Dollars can only be invested in US assets. Now you claim that the world demand for Dollars arises from the desire of the world to invest in the US – not because the world needs Dollars to pay for oil. You do not give any argument in support of this claim. I still think that the “internet” argument you quoted is correct after all: The world demands dollars in order to pay for oil (and other essential commodities which also trade in dollars only). Since Dollars can be invested in the US only, the world has no other choice and must invest the surplus Dollars in the US. If that were not true, we could not possibly have a strengthening Dollar and at the same time trade deficits in excess of 6% per year.

  4. Josh Wagner

    I was just wondering why exactly the situation became this way to begin with. I mean, why did Saudi and OPEC only exchange oil for US dollars for so long? Thanks.

  5. JDH

    Josh, it’s actually a relatively recent development that the U.S. was not the world’s biggest oil producer, and certainly during the 1950′s, the price of oil anywhere in the world would have been calculated as the price in Texas plus the transportation cost to wherever it was sold. And even when the U.S. was no longer the single biggest producer, it remained the single biggest consumer, so it again made sense to price transactions in terms of dollars. On the other hand, with the emergence of the euro, it makes perfectly good sense to price transactions in terms of euros now.

  6. JDH

    Robert, a $1 bill with a picture of George Washington on it is certainly a U.S. dollar, and you are correct that you can deposit it in either a U.S. bank or in a Eurodollar account abroad. As long as that $1 physically remains with that bank, it remains a dollar. But whereas a U.S. bank that is a member of the Federal Reserve System is required to hold physical dollars (or electronic credits for those dollars in the form of deposits with the Federal Reserve) in a certain proportion to the dollar-denominated accounts they maintain, there is no such requirement on a foreign institution, so the physical dollar does not stay with the foreign bank but ends up being handed back to some tourist who wanted a $1 bill, while the original customer merely has a $1 credit to their account. These credits, rather than the physical dollar bills that pass through foreign banks, are what we refer to as Eurodollars. That customer can write a check for $1, which the receiving party could accept in the form of more dollar-denominated deposits with the foreign bank. From the point of view of the U.S., all those credits are simply accounting entries rather than a liability of any U.S. institution.
    It is not necessary for anyone abroad to hold a trillion dollar bills in order to have a trillion dollars worth of transactions denominated in dollars to be executed.

  7. Ashish

    See my post on relationship between oil and US dollars.
    Here is the excerpt:
    Why do most of the countries accumlate dollars? If all they wanted to subsidize export-led growth they could have purchased any other currency, say Euro. I think a major reason is because their biggest import is oil from the Middle Eastern countries. To buy oid they need dollars. Why?
    Because M.E. countries demand dollars for oil! Oil selling countries need a currency which has low inflation and also make it easy for them to invest in a relatively low-tax property-safe environment. US provides a reasonably low-tax, property-rights based economic and political environment to the Oil selling countries. Plus, US also protects them from invasion by maintaining bases in the M.E. region.
    If oil selling countries in M.E. region decide to switch to Euros, they may not be sure if US will protect them with the same enthusiasm. Also, in order to invest in US economy they will have to again convert Euros to US dollars.
    Therefore, dollar may reign as an international currency of choice until countries in M.E. region decide to do something different.

  8. Stephen

    Of course the last time a major middle east oil exporter sold oil in a currency other than US dollars it was invaded. If this happens again, people might start believing it is more than just coincidence.
    As an aside, is it possible to estimate the affect on the US dollar by comparing pressure on the dollar when Sadam sold oil in Euros, with today when Iraqi oil is sold again in US dollars?

  9. anon

    The idea that the borrow and spend crew in the bush administration invaded Iraq (or did anything else) to protect the value of the currency is a little far fetched.

  10. peter

    Is it correct if I assume that the Iranian oil bourse could make the dollar more vulnerable to exchange rate volatility because oil is no longer only denominated in dollar? In that case wouldn’t it be more dangerous to ‘neglect’ the exchange rate?

  11. amy

    I’m sorry, apologies if I’m just being dumb, but if Middle Eastern countries require dollars for payment, how is it possible to buy oil from them without generating dollar demand?

  12. JDH

    Peter, there have been historical periods when the price of oil in dollars would remain relatively stable, while the price in other currencies would fluctuate with the daily change in the exchange rate. If we were going from such a regime to one in which the price of oil in euros were constant while the price in dollars fluctuated with the exchange rate, then I would say you might have a point.
    But my reading of the current environment is that there is nothing remotely fixed about the dollar price of oil. In the current setting, I see the consequences of quoting an oil price in euros rather than in dollars as quite secondary, and certainly not of anywhere near the significance that some writers seem to be attaching to it.
    Whether oil is officially priced in euros or in dollars, I would expect to see a depreciation of the dollar associated with an increase in the dollar price of oil.

  13. Chris R

    Here’s how I’ve managed to explain this to some of my more conspiracy-minded friends:
    The decision to price oil in Euros or dollars or Slovenian Tolars or whatever is just like the decision to measure distances in miles or kilometers. Canada changed from miles to kilometers some years back; it would be silly to claim that this has changed the length of one mile in the US. It’s still 17.6 football fields long. And as a first-order approximation, the same goes with prices. If I sell meat in pounds or kilograms, or in Malaysian ringgit or in pesos, it’s just a change in units.
    There are some second-order effects on seignorage if currency or US bank deposits have been used in Iran. But since 1979, US bank deposits have been off the table. And somehow I doubt that this bourse had been taking suitcases full of $2 bills and Susan B. Anthony dollars as payment. So the transactions demand for dollars is not likely to affect seignorage revenue much, if at all. Someone correct me if I’m wrong here. Either way, we’re talking small numbers. Measurement error.
    Now if it were the Iranian Plutonium bourse in these news items, I’d be much more worried.

  14. Unscripted Thoughts

    Strangely, I find the Bourse idea a good thing. If the US is unsettled by the idea of something that might cause the USD to decline, then the cost of oil will rise relative to the USD. Keeping the cost UP is the only thing that will force the US to develop and deploy alternative energy and get off the Middle East merry-go-round that is “oil”.

  15. JDH

    Amy, the key question in my mind is what asset do the oil producers want to be holding immediately after they’ve sold the oil? If what they want to hold is U.S. Treasury securities, then I agree with you, the transaction has led to an increase in the demand for dollar-denominated assets. However, if that is their desire, I see no reason why they wouldn’t do exactly the same thing if the sale were transacted in euros, namely, use the euro proceeds to purchase dollars for the Treasuries. Nor, if what they ultimately want is euro-denominated assets, does anything prevent them under the current system from immediately converting the dollars into euros. This is why I suggest that it is the final demand for assets rather than the unit of account of the transaction that is of primary importance.
    I will grant you that somebody must hold some extra dollar-denominated assets during the time it takes to complete the transaction itself. However, I expect that the contribution this makes to the demand for U.S. base money (the sum of physical dollar bills plus Federal Reserve deposits) is unlikely to be very large, and certainly not something that could cause the end of an empire, as if the total seignorage the U.S. collects from all sources were all that huge in the first place.

  16. T.R. Elliott

    I don’t argue with economists on monetary theory. I think I’d lose.
    JDH: You mention there might be some very small effects. Makes sense. But one question–are there any economists within the mainstream–whatever the heck that means–who think otherwise, who think that pricing oil in a currency other than dollars would have an impact?
    I’m going to expect that answer will be no.

  17. Baby Peanut

    Petrodollar recycling refers to the phenomenon of major oilproducing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.
    During this period, states such as Saudi Arabia, Kuwait and Qatar amassed large surpluses of petrodollars which they could not invest in their own countries. This was due to small populations or being at early stages of industrialisation. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.
    These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.

  18. B

    While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems for nations especially oil importing nations who were paying much greater prices for oil and incurring debts. The International Monetary Fund (IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witeven, the Managing Director of the IMF, said in 1974 the international monetary system is facing its most difficult period since the 1930′s.
    From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab gulf countries and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.
    The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico. In subsequent decades, some of these nations have had difficulty in repaying these debts leading to charges by anti-globalisation activists that it was a form of neocolonialism. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.

  19. BP

    U.S. dollar was currently “backed by oil” in the sense that the money from oil sales by OPEC had to overflow someplace in order to keep the value of oil high. If the world economy stumbled the demand for oil and therefore its price would fall. The dollar was supported by oil.

  20. Baby Peanut

    Is the Palm Dubai proof enough that OPEC nations are willing to invest in themselves now? Iran’s oil bourse will turn its back on investing in the US.

  21. Anonymous

    Milad tower is part of The Tehran International Trade and Convention Center. Scheduled for completion in late 2005 (completed in May 2005), the project includes the Milad telecommunication tower offering restaurants at the top with spectacular views of Tehran, a five-star hotel, a convention center, a world trade center, and an IT park (to be completed by March 2007)
    Hey I got an idea? Why doesn’t the US fly planes into those towers on the 9th of November. They could call it 11/9.

  22. Just Me

    So can anyone explain why it is that if it doesn’t really matter what we price oil in… why do we only price it in US Dollars? Why NOT price it in any old currency and settle in any old currency? If it doesn’t matter if Euros are used, then why don’t they use ‘em??
    Also, why is it that anyone that expresses a desire to price and settle in non-USD winds up a) invaded by US forces b) the CIA tries to overthrow them in a coup, or c) they wind up on the axis of evil?
    These are interesting times.

  23. kaz

    It does matter in what currency the oil is priced.
    Everytim eyou convert money you lose a small percentage so if you were to convert to euro whn paying for oil priced in USD you would lose.
    All the option contracts are in USD so you also can not buy them without US currency.
    So paying in USD ,makes the price exact there fore you have to buy USD to purchase the oil and the oil vendor ends up with USD, which sometimes they can not spend so it ends up in a bank account somewhere earning a few %.
    Whenever there is a good demand for currency the currency is valuable and when the demand falters so does the currency.
    Trading oil in Euros will be negative for the US.

  24. miniTAX

    So can anyone explain why it is that if it doesn’t really matter what we price oil in… why do we only price it in US Dollars?
    Because of liquidity. Just like the stock market, if liquidity is low (less vendor, and less buyer), prices are high. Why on earth would the Chinese who are under a mountain of $ cash buy euro denominated oil ? Same for the Japanese ?

     

    Even the Iranian, who are under embargo, can’t take back $ and must convert them to euros before. Does it change anything ?

     

    And the recent showdown with the European on the nuclear question is not exactly a good prelude for success for the Iranian Oil Bourse, is it ?

  25. Chris Erickson

    While JDH’s comments are on the mark, I think that the Euro denominated oil bourse becomes more of an issue if one sees it as part of a larger phenomena.
    The Euro is becoming a more important currency for international transactions and as a reserve currency. The flip side of the coin is a reduced demand for dollar balances by foreigners, the new oil bourse being only a recent example.

  26. Anonymous

    It’s not about what currency oil is traded in. It’s all about where the money used to buy oil goes after that. The terms “Petroeuro” and “Iranian oil bourse” are simply emblematic for the fact that the OPEC nations are not going to invest their money in the U.S. anymore and have started to invest in other things such as Europe and themselves.

  27. Jack

    Don’t forget folks, that a fair number of European countries (Denmark?) declined to ratify the Euro as their standard of currency, and its possible that the European union will collapse, trashing the Euro.

  28. miniTAX

    the fact that the OPEC nations are not going to invest their money in the U.S. anymore and have started to invest in other things such as Europe and themselves.

    These are feelings, but it’s simply not true.
    When you look at the federal reserve statistic for the $ stock OUTSIDE the US, it has not changed :
    http://www.federalreserve.gov/releases/h6/current/h6.htm
    It means that money is still reinvested in the US and will be so as long as US bond are at a good interest rate and the Euro zone (GB is outside) remains weak because of anemic growth and political division.

  29. miniTAX

    The EU won’t crash. But it’s not as attritive an investment zone as the USA because of its divisions, its tax policy, its labor, its slow growth.
    Things will change, but certainly not due to the Iranian Oil Bourse. And no one knows the timescale

  30. Alex

    Hmmm. I’m very sceptical about the whole “Oil-for-s” theory, for most of the reasons Hamilton gives above. There’s one thing I think needs expanding on.
    That is what happens to the dollars after you buy oil with them. Crucially, they will only have an impact on the US if the oil-exporter keeps them. If they convert them into s (or sterling, yen, renminbi, Swiss francs, Somali coupons, what have you) there’s no final goal change – it’s a one-for-one swap. If they use them to buy an import from a non-dollar country that’s priced in US$, again no change – part of the pool of dollars held outside the US has changed ownership, that’s all. If the exporter keeps them in a eurodollar account, no change.
    Consider the exporter’s import bill. They are unlikely to buy all their imports from the zone or the United States. Their imports will break down to some split between them. Hence, the effect on the dollar-euro rate of exchange depends on….the difference between the US and zone balance of trade.
    Which is rather what you’d expect anyway, without a change in the denomination of oil.

  31. Rusty

    Can anyone explain why Iran or any country would want to set up its own bourse.
    What are the advantages to that country?

  32. marcel

    Dear Mr. Hamilton:
    As many of your fellow economists, you do not seem to be aware of the process by which money is created and the advantadge that any institution or country gets from this process.
    Every dollar created either by the US government or by the US banking system is a debt upon the US economy because the holder can always present it and ask for a real asset.
    The US is able to run a persistent balance of trade deficit without beign penalized in the form of currency devaluation, because the rest of the world obtains oil in excahge of your green papers. Those dollars, at the end of your exchange chain, end up in the central banks of the surplus countries (China, Japan, etc.) or in the oil producing countries. What do they do with these surplus of dollars? Well, the only reasonable thing to do with them is to buy US treasury notes, i.e. long term US debt hoping (in vain, I believe) they will ever be paid. In the mean time they collect a meager interest (again paid in dollars) which usually becomes a negative interest rate because of the dollar losing value, in real terms (inflation) or against other currencies.
    All in all, it simply is a house of sand waiting for some wind to be blown away.
    Taking euros for oil would allow the europeans to play the same game: living out of the rest of the world.
    That is the reason why the US went to war in Iraq and this is the reason why it will try to stop the iranians to go ahead with their euro-denominated bourse. They may not go to war again, because they have their hands full in Iraq, and that is the iranian gamble.
    The europeans are simply playing both hands: not to upset to much the US but trying to get their euros as good as oil.

  33. Lon Langille

    Perhaps the key motivating factor behind the feds concern, is not fear of the Euro as a trending currency for oil exchange. I suspect that the main concern in the administration is that Iran could actually signal “it’s time to abandon the boggie”.
    The boggie is – as in industry, employees are typically expected to fall in line and do as others do [THE BOGGIE].
    Once a key employee decides to challenge the Boggie and if left to his/her own mischievous behavior, when observed by other sympathetic fellow workers, a rout can occur in the blink of an eye.
    Sooo, I suspect the administration is all too aware of the disenchantment most foreign govs and banks have toward the US irresponsible fiscal behavior. Once an agent [Iran] of change emerges, and is not put-down, a rout is sure to begin.

  34. Amy

    marcel -
    If I understand JDH correctly, if the oil producing dollar-holders didn’t want to the dollars, they’d simply buy Euros and Euro denominated debt for example. Or anything else.
    It says a lot to me that so many of those dollars go into low yield treasurys, that these days anyone has got to assume will incur bad capital losses at some point.
    It strikes me that if there were a Moody’s rating service for US debt, given the parallels between the US now and, I don’t know, say Argentina few years ago, interest rates would be quite a lot higher to compensate for risk.
    Seems the US is still sailing along on the “full faith and credit of the US government”, and the world is gullibly buying into it. Even though the current US administration is simply a money diversion machine to get funds to the superrich with a PR front end trying to hide what’s behind the curtain, and isn’t a real government at all in the sense of actually looking out for the best interests of the country as a whole (like deficit reduction for example), for some reason our financiers seem to think we have the capacity to reform ourselves and that we’ll mangage to repay them in uninflated money. I just don’t see how that can possibly work out for them given there’s no end to the deficit trends remotely in sight.
    But maybe recent moves in the gold market show someone’s wising up?

  35. Rusty

    Curious that no one who agrees with Professor Hamilton will offer a reason why Iran even wants a bourse.
    To make sense, any argument has to see the issue from the Iranian side as well.

  36. marcel

    Amy,
    If the oil-producers dollar holders want to dump their dolars and get euros in exchange, someone must take the dollars, right? Two things may happen:
    - They cannot sell the dollars, because the European Central Bank doesn’t take them. Yo know, it is one thing to go to your local bank and exchange a few thousand dollars for euros, and a different thing to find a buyer for tens of billions.
    - Someone can take the dollars. In this case, the only thing that has happened is that the debt claim is now held by Europe against the US. What would the EU do with all these dollars? Exactly the same: buy US treasury notes. What else can you do with a currency that can not be interchanged for real goods and services (if they could be interchanged, the US would not have a commercial deficit).
    So playing currency exchange games doesn’t change the nature of the trick. The US is simply living beyond its means and the rest of the world is financing, for the time beign, the consumption spree.
    You may ask, why does everybody seem to be playing according to US interests? Good question. You may realize, however, that the House of Saud, for example, is totally dependendent on US military support and most of their accumulated wealth is in dollar denominated assets that would go to the drain if the dollar collapses. Or you may also look at what happened to a guy called Saddam that tried to break the rules of the game.
    It is a prisioner dilemma. I recommend you reading: SuperImperialism: The Origins and Fundamentals of US Supremacy, by Michael Hudson, Pluto Press, 2003.

  37. Goel

    Amy asks:

    Curious that no one who agrees with Professor Hamilton will offer a reason why Iran even wants a bourse.

    To make sense, any argument has to see the issue from the Iranian side as well.

    Iran has many, many reasons to hold a grudge against the USA. Consider this one:

    In 1953 Iran’s elected prime minister Mohammad Mosaddeq, was removed from power in a complex plot orchestrated by British and US intelligence agencies (dubbed “Operation Ajax”). The operation was conducted following the Prime-Minister’s nationalization of the Anglo-Iranian Oil Company. It reinstated the Iranian monarchy against the people’s will, handing power back to former Shah Mohammad Reza Pahlavi.
    http://en.wikipedia.org/wiki/Iran

    In addition, the USA imposed post-1979 sanctions and armed and supported Saddam Hussein’s 1980-88 Iraq war against Iran.

    The USA and Iran do not have a happy history. Even today, the USA is making particularly aggressive moves against Iran’s stated attempt to develop peaceful nuclear technology – a right that Iran enjoys under the Non-Proliferation Treaty.

    If Iran could do anything to hasten the demise of the American empire, or undermine US hegemony, I reckon they would do it.

    But aside from all that, I believe another poster made the point that most Iranian oil trade is with Europe, not the USA or any other dollar-linked currency.

    Finally, I imagine that an Iranian Oil Bourse would employ Iranians, earn the country transaction fees that may currently go elsewhere and raise the ‘status’ of Iran internationally – a general point that is more important to international relations than many realise.

    This is an interesting discussion, and these are indeed ‘interesting times’.

    Rgds,

    G.

  38. Joo Carlos

    Well, I think we soon will test this hypothesis, as any good science. Soon we will see how much the Iran’s Burse will affect the dollar and if any effect will happen. If nothing happen I think swoon we will not see more news about this issue at the internet. But if something happen maybe some economists need change the models they are using, as any good scientist need to make.
    Joo Carlos
    Sorry my bad english, my native language is portuguese.

  39. JDH

    Joo Carlos,
    Many economists (myself included) are expecting to see a depreciation of the dollar during 2006, but not because of the oil bourse. This is the challenge we face in trying to be good scientists– there are always all kinds of variables changing at the same time, and it’s difficult to determine which one(s) caused what you see.

  40. Bruce Wilder

    It does not seem such a far-fetched theory to me.
    Oil, priced and sold in dollars, creates a transactions demand for dollars, which in turn creates a demand for dollar-denominated financial assets. If the U.S. dollar was replaced as the prime currency for international transactions, there would be less transactions demand for dollars and less demand for dollar financial assets.
    The greater “threat” (if that’s the right word, which I doubt), though, is not from Iran’s oil bourse, or even from Iranian counterfeiting, but from China. China, as its productivity rises, has an incentive to allow its currency to rise relative to the dollar, because each such rise makes oil and other Chinese imports cheaper for China and more expensive for its chief competitor for resources, the United States. Increasing productivity will allow China to choose whether it charges the Americans more for manufactured goods.
    There’s a real potential for a vicious circle to set in, in which a falling dollar is abandoned and repatriated money fuels inflation, causing a further fall.

  41. Anonymous

    Did the Middle East start to turn away from investing in the US before or after the invasion of Iraq?

  42. Roger

    The notion of a dollar currency crisis that would arise from a change to Euro-denominated oil trading is a actually a Peak Oil trope.

    Starting with the web site of Princetons Peak Oiler, Professor Deffeyes, one can follow links to the Life After the Crash site, where the gem below by Peak Oil standout, geologist Colin Campbell is to be found.

    The Peak Oiler idea is that if some valuable commodity does not back a currency, that currency must perforce be worthless. Its all very pre-Adam Smith. There was hot debate on this in the 18th century. Peak Oilers seem bent on reprising it. Heres Campbells warning of the coming deluge,pretty much the standard THE END IS NEAR kind of thing people were saying would happen if we abandoned the gold standard:

    It is becoming evident that the financial and investment community begins to accept the reality of Peak Oil, which ends the first half of the age of oil. They accept that banks created capital during this epoch by lending more than they had on deposit, being confident that tomorrow?s expansion, fuelled by cheap oil-based energy, was adequate collateral for todays debt. The decline of oil, the principal driver of economic growth, undermines the validity of that collateral which in turn erodes the valuation of most entities quoted on Stock Exchanges. The investment community however faces a dilemma. It desires to protect its own fortunes and those of its privileged clients while at the same time is reluctant to take action that might itself trigger the meltdown. It is a closely-knit community so that it is hard for one to move without the others becoming aware of his actions. The scene is set for the Second Great Depression, but the conservatism and outdated mindset of institutional investors, together with the momentum of the massive flows of institutional money they are required to place, may help to diminish the sense of panic that a vision of reality might impose. On the other hand, the very momentum of the flow may cause a greater deluge when the foundations of the dam finally crumble. It is a situation without precedent.

    So, its a conspiracy!
    By the investment community!
    To hide Peak Oil!
    So the rich can keep on with their evil ways!

    Fie!

  43. e sciaroni

    I agree with Bruce Wilder that dollar hegemony is real and is beneficial to the US.
    When I consider the close relations that Iran is developing with China I also think that Iran may choose to price its oil in RMBs.

  44. wanda

    Economic flows are hard to guess and these may not be significant.
    The game is psychological, an attempt to wrest the levers of a key market and to challenge the US.
    Given the importance of psychology on markets this could be significant.
    The alleged “hype” has already worked well for Iran.

  45. tbizzle

    i read through the comments and I think one thing that was missed was the FX transactions costs and the additional hedging costs for central banks to diversify dollar reserves risk. Would a central bank like to be able to hold a more naturally hedged basket that they could match to energy purchases and avoid transactions/hedging/FX flip costs? I’m thinking a central bank might like to hold a Dollar/Euro basket, and an Iranian bourse trading oil in Euro’s allows for a more natural hedge instead of a synthetic one. Just a thought.

  46. jim miller

    The transaction costs are miniscule when the transaction involves billions of dollars or euros at a time. The “hedging” cost,if I understand your comment, is the interest differential between the two currencies so is really not a cost at all.

  47. Henri

    On the state of dollar reserves in the world Bloomberg writes:

    Bloomberg article

    “U.S. Treasury Secretary John Snow said he expects overseas central banks will switch part of their financial holdings from dollars into other currencies. ”

    ““Snow’s admission of central banks diversifying from dollars could be used as dollar-selling material,” said Teruhisa Tsuji, a trader in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest lender by assets. “Especially against the euro,” which is the currency central banks would most likely buy. ”

    “Central banks outside the U.S. hold more than $4 trillion in reserves, with about 66 percent in dollar-based assets, according to the International Monetary Fund. Holdings of euros rose from around 18 percent of the total in March 1999 to 24.3 percent at the end of September 2005, IMF figures show.”

    EU has been lobbying Russia and other countries to use Euro as a reserve currency.

    For short overview of history you might read Richard Heinberg “The endangered US dollar”
    http://www.museletter.com/archive/149.html

    IMHO. the current article is a classical example of how to downplay important topics by bringing in some ‘straw man’ arguments.

  48. sleepingbear

    The idea that iran seeks to trade in euro’s vs dollars is significant in itself that it prefers to TRADE with a different set of partner’s.
    In stead of thinking of there oil sales in terms of dollar’s or euro’s , why not think of it in term’s of Labor. What unit of labor is worth a barrel of oil. Is it the day’s labor of a doctor, a mason, a carpenter, a mayor??
    Another thought

  49. cb

    A few facts that came to mind after reading the comments -
    For those of you talking about low yielding treasuries, yields are low world-wide, and lower in Europe.
    Moody’s does implicitly rate US bonds, and explicitly rates all other countries debt.
    There has been no data released that show much more than a small movement of reserves at the expense of the $. The Euro has gained in favor, not necessarily at the expense of the $, but because it’s a new currency.
    The last time a country’s currency lost it’s position as a reserve currency was Britain, formally after WWII, perhaps sooner, depending on your criteria. The big picture is that the U.S. has the most powerful military in the world, the largest economy in the world, and a relatively stable population. Compare that to Europe, or anywhere else, and there is nothing mentioned in the above posts that would convince anybody with brains and something to lose to think it’s going to change anytime soon, and I do mean decades.

  50. Knowledge Problem

    International Energy: What Is Going On?

    Lynne Kiesling Hmmm … another Western-looking former Soviet satellite experiences disruptions to their natural gas supplies. This time it’s Georgia, not Ukraine, but one has to wonder if this is a coincidence. Certainly Georgia President Saakashvili …

  51. Henri

    Here is a discussion on the matter that FED (the US privately owned central bank) will stop publishing M3 data on US money supply starting from 26. March 2006:

    http://www.peakoil.com/fortopic14770.html

    What Federal REserve Says:
    http://www.federalreserve.gov/releases/h6/discm3.htm

    What’s Happened To M3?
    http://www.gold-eagle.com/editorials_05/chapmand112205.html

    From trader David Chapman
    “Some of the reasons we have seen floated around are as follows:
    History has shown that only failing economies e.g. Soviet Union keep data secret (Financial Sense – Toni Straka – Unpleasant M3 Trend, November 12, 2005). An interesting premise and a theme we saw woven amongst a number of writers is that they have something to hide. The claim is that the Fed should be transparent and by not publishing the number the Fed now lacks transparency.
    The end of publishing of M3 in March 2006 coincides with the start of the Iranian Oil Bourse. The premise here is that the with the oil bourse trading in Euros there will be a rush out of US$ into Euros and that M3 could drop sharply. A sharp drop in M3 would of course presage a recession as falling M3 is a characteristic of weak economic periods.
    M3 is a measure of inflation in the economy. A somewhat unproven rule of thumb is GDP + inflation = M3. Will be able to properly measure inflation going forward if we don’t know what M3 really is.
    We are about to enter a period of hyperinflation and by eliminating M3 we will not know how much liquidity the Fed is pumping into the system. Remember the Fed doesn’t really print money it is the banking system that expands money supply. But the Fed influences it through open market operations. We will have to watch daily Fed repo action very carefully irrespective of whether they are going to publish Repos (RPs) as noted in the bulletin above. The Fed doing repos puts money into the system and the Fed doing reverse repos takes money out of the system. Of course as well this is the exact opposite of the collapse in M3 premised with the oil bourse above.
    Further on the theme above a period of hyperinflation would occur as the Fed tries to save us from a collapsing housing market and softer consumer demand. The Fed adds more and more liquidity to the system to stave off a sharp economic decline. By not publishing Repos (RPs) as noticed in their bulletin above the Fed again is hiding what they do on a day to day basis. This will make it difficult for both currency traders and equity traders to know what the Fed is up to.
    The conclusion is that the Federal Reserve will be hiding a debasement of the US$. ”

  52. John

    http://www.financialsense.com/editorials/petrov/2006/0120.html
    by Krassimir Petrov, Ph.D.
    Austrian Macro Economist/Investment Strategist
    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 Saddams, 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 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 Yorks NYMEX and the Londons 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 matterthose of Europeans, Chinese, Japanese, Russians, and Arabswill 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 exchanges operations:
    Sabotaging the Exchangethis 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 dtatthis is by far the best long-term strategy available to the Americans.
    Negotiating Acceptable Terms & Limitationsthis 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 detat fail, then negotiation is clearly the second-best available option.
    Joint U.N. War Resolutionthis 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 Strikethis 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 Warthis 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.

  53. dave

    Everything I know about monetary policy I learned in the Oklahoma County Jail.
    Tyrone ran it. What he wanted he got. But he was kind enough to “buy” our meager goods from us. Tyrone’s favorites were chips, soda and cigarettes. But the “money” was a little piece of notebook paper upon which Tyrone would write down a number, then rip out the sheet, and hand you your “Tyrone Dolla”. If Tyrone was feeling generous he would write down $2.oo or even $3.00. This was the official currency. Tyrone’s contributions to the prison economy were “protection services”, that no one wanted, and also running the printing press. Those dumb enough to buck the system were RAPED. Day after day Tyrone printed his dollas and inflation kicked in. Everybody had a stash of these stupid slips of paper with Tyrone’s crude printing. Then a new guy came in. Mustafa. Mustafa did not like Tyrone or his stupid slips of paper. So he got his own notebook and went into the printing business himself. Guess what Mustafa did to those dumb enough not to accept his notes…yeah. When I mercifully got out last fall Tyrone and Mustafa were about to go to war.

  54. greenworm

    “Tyrone Dolla”, hahahaha! In all seriousness, perfect analogy. The fed is here to make money, literally. His job is to grow the money supply simply because he profits from it, but he must do so with a sort of balance(i.e. manipulate the interest rate) The rate goes up and investors see opportunities in bonds, but the little guy can’t buy a house or invest in a business. The rate goes down and the little guy will take out loans and the large investor will look for other opportunities. An economy needs both. Am I mistaken or did the value of the dollar decline somewhat sharply in lieu of the euro taking hold in iraq? It makes one wonder why the US took so long in “rectifying” this situation. Could it be that someone saw a potential profit in letting the dollar slide only to watch it gain strength once again? Hmmm. Anyways, it seems history does seem to repeat itself as we are back to the year 2000-2001, but at a much grander scale(i.e. china making a shift to the euro). I just hope Tyrone and Mustafa don’t do anything foolish!

  55. Anonymous

    Marcel –

    Every dollar created either by the US government or by the US banking system is a debt upon the US economy because the holder can always present it and ask for a real asset.

    Precisely. Which is why the Eurodollar market exists.

  56. Barkley Rosser

    John,
    The holding of dollars by the Chinese and Japanese central banks has very little to do with needs to buy oil and everything to do with their desires to keep their currencies relatively low in value so that they can sell goods to the US and keep their people employed.

  57. John

    Barkley: At some point, Asia will change its mind when its citizens demand a better return than their $ denominated assets. The dollar’s slide since 2001 makes this more likely. (The price of oil contributed to the propping up of the dollar in 2005.) Are there better investments than the dollar right now? Will there be in the near future? Or does the interdependence of the world economy mean that the U.S. will take the rest of the world down with it when the U.S. can no longer service its debts and its creditors cut their losses? New markets (e.g., Asia, India, S. America) will replace U.S. demand over time for their products and make currency appreciation in those countries more palatable. These, along with massive twin deficits and a money-pumping Fed, mean the trend is dollar downward. I don’t pretend that the IOB is the only catalyst, but the U.S. can only view it as a dangerous precedent and quite possibly move against it as it has in the past — that is, if it can literally afford to (think $100+/barrel oil).
    I think perfectly well-meaning economists like Dr. Hamilton like to practice their economics in a vacuum and ignore such political realities while calling them “strange”, but to seperate economics from politics is quite naive.

  58. Barkley Rosser

    John,
    “Its citizens demand”??? Central banks do not pay much attention to citizen demands regarding their internal operations. In particular the rates of return on internal bank dealings are not generally publicly reported and certainly not in Asia. I have heard it straight from people who work at those banks that they do not give a damn at all (practically) about the rates of return. They have huge amounts of foreign reserves of various types.
    They are not profit-maximizing entities. They are macropolicymaking entities concerned with macro conditions within their countries, and that is what their people want. Will they be less likely to rise up if a diversion out of dollars throws lots of them out of work?

  59. John

    Barkley:
    Whose $ do you think that is? And what do you think happens to the owners when it loses its value? Or are you just being coy?

  60. Barkley Rosser

    John,
    I am not being coy, and this will be my last post on this thread.
    Sure, the “owners” are technically “the people,” just as the owners of the means of production in North Korea are. So, even in Asian nations that are reasonably democratic, I would strongly argue that the central bankers are more likely to get fired for letting their currencies rise so much against the dollar that their unemployment rates soar than they will be for getting something less than the maximum possible rate of return because they have “too many” US dollars in their vaults. Again, in none of these countries do “the people” know jack bananas about what the rates of return are that the central banks are earning on their reserves.

  61. John

    Barkley: My last post as well. You’re too literal-minded. Of course The People don’t follow the rates. But as you imply they are affected indirectly, and at some point they will make demands (indirectly).

  62. Sydney Hazelton

    I have just read all of the above with amusement. The facts are a) Saddam switched to the euro and got taken out. b) Iran is switching to the euro and will NOT be taken out, although Israel/America will try. c) China and Russia are in bed with Iran. d )The UK and Norway will not hesitate to switch to euro once the USA is dead in the water (already sinking). e) China is the most powerful nation on earth – yes the sleeping giant that Rupert Murdoch and Germany (to name just a few), heavily invested in during the past 18 months.
    Personally, I have already began switching to pounds sterling from dollar as of last year and closed my US safety deposit and bank accounts, save one. I advise all you intellectuals living in denial to wake up, and if you are as smart as you think you are, start protecting your personal future by switching to euro/sterling/yen or Australian dollars.
    Discuss all you desire, but America is doomed so get over your inflated, arrogant, barbarian ego’s and bloody well wake up!

  63. J Wilson

    It is refreshing to see this thread reaching a natural conclusion based in sanity from the misguided and propaganda riddled first entries.
    Imagine the world situation this way -
    There are 3 people. One has oil (person A), one has a factory (person B), the other has a tank and a printing press (person C). Person C needs oil to make his tank work so asks person A for a few barrels and issues them with some freshly printed I.0.U’s or elese they will be blown up. Person B (the guy with the factory)also needs oil to run the factory but must get it from person A using Person C’s I.O.U’s since Person C (the tank guy) will blow them up if they dont use it. Person c (tank guy) can also buy the factory produce from B using the printed I.O.U’s as person B has nothing to do without working at the factory. This whole setup means that Person C’s only real asset is the tank and printing press. So if the oil guy (a) decides not to give them the oil to run his tank unless is is paid in something solid like hamburgers or factory products, then C has no tank and no printing press. C = worthless git. If person B (with factory) makes his own I.O.U’s or better still just trades in solid things then this cuts Person C out of the loop altogether. A fair outcome to many a lay observer.

  64. grant smith

    That is the most ridiculous response I have ever heard. Dollars are held in world reserve banks for the primary purpose of buying and selling goods and for a secondary purpose of propping up the US consumer. If a good no longer needs to be purchased with a dollar, or if the dollar holder doesn’t see much ROI in the credit addicted U.S. consumer, then just maybe central banks, and other US dollar holders may not see a need to hold as many dollars, and just maybe may buy some other asset such as Euros or Gold or whatever else they choose.
    It is simple supply and demand – If there are less dollar users then there will be less dollar value. Plain and simple – Mr. Hamilton don’t confuse the issues….
    And given the fact the US cannot build and sell anything on the world market (look at Ford, GM and all the airlines) much less inside it’s own borders, that reality is going to shortly going to come to pass – America resembles a desparate drug addict in the final throws of addiction. He is selling everything and borrowing from anybody who will who will lend. If you were a foreign holder of dollars and were seeing an admistration print 700 billion phony dollars a year would you want to hold them ?

  65. Lamont Sanford

    Look at all the rivers! All the lakes will be dry soon! All the water will be in the ocean!
    It makes a lot of sense if you have no idea what you’re talking about.
    You know what would be awesome though? If all these confusing conspiracy theories motivated everyone to take an economics class, or at least make a serious effort with an actual textbook.
    I’m not trying to be a snob. Money gets weirder the more you learn about it. I’m not even sure what it is anymore.
    First there is a mountain, then there is no mountain, then there is.

  66. Jack

    Of course, my friends…when America goes, so does the world. Do you really think that China, et al, will play fair with other countries when they don’t even play fair with their own people?
    They are toeing the line because someone (USA) carries a bigger stick. Don’t forget that most of the world’s charitable endeavors come from the US, and these would dry up too if the US founders.

  67. Jack

    Oops. Entered the above too soon. Don’t forget that the news today is that Google will be allowed into China as a search engine as long as they filter anything the Chinese government doesn’t want available to its people. That, my friends, is the world you will get if the USA self implodes.

  68. Keith

    Personally, I cannot see how countries like China will stop holding Amercian dollar. Currently they are preventing the rise of their currency, by buying America dollar and hence bonds, or treasury notes.
    This is to maintain their low value currency, cheaper for them to export their goods and more expensive to import them.
    While oil will defintely be cheaper if they decide to diversfy their holdings to Euro, but their currency will rise, hurting many exporters who are not yet established to compete (except for the low cost labour) with the rest of the world.

  69. Mr.Bill

    Thanks for the post Dr. Hamilton. It must be quite amusing to the Iranians that every discussion about their IOB degenerates into an orgy of self-loathing by some Americans (of French descent no doubt?). Even if it does not materialize on March 21st, it will be because the Israelis & the US threatened to bomb them, and heaven help us if the USD declines in 2006 due to its external imbalances. That should be proof enough that even the threat of the IOB is effecting the dollar’s hegemony. This is just an argument you cannot win. But thanks for trying. Cheers.

  70. Philip

    It doesn’t matter whether oil is prices in euros or dollars. It does cost a little to convert to another currency, but this is not significant in comparison to the demand for a particular asset be is a US one or a European or Japanese one. However, the dollar’s unique advantage is that the US can borrow in is own currency. This makes it very easy for the US to borrow money from abroad. Contrast this with the situation a developing country must face where its own currency depreciates over the years. It must still pay back its loans in dollars while it can only generate its own currency. If the dollar does collapse then this reserve status may be lost. This is a far bigger problem than whether oil has to be bought with dollars or euros.
    I live in Europe and over the last two years pump prices have not risen by nearly as much as they have in the US. Part of this is the higher tax on fuel here, but another significant component was the fact that the Euro has risen relative to the dollar. This essentially proves the fungibility of oil. Part of the rise in fuel prices in the US is the fall in the dollar.

  71. j wilson

    Just remember this folks – if it ain’t sustainable then it won’t be sustained.
    Oil, coal, gas, and uranium will all peak, decline then dwindle to nothing as the world population pops. As commander Scotty would say – ” You canny change the laws of physics, laws of physics, laws of physics”. Currency is a manmade concept, like language. Its an attempt to quantify value. But how do you quantify life? How do you quantify a rock? Is it merely based on how abundant these things are? If so then people must have thought the earth was worthless when they decended from the trees as they surveyed the vastness of nature. Now we are everywhere. Does that not mean that our worth is less as each new mouth is born. 6.5billion+ people on one planet. Id say the planet is thus more valuable irrespective of how many bits of green paper each person has.

  72. Grant Smith

    America is not the problem, it is the people that live in America that are the problem – I know because I live here and have watched this culture evolve over the last twenty years. I spent 10 years in LA and 10 years in the Bay Area during the .BOMB years. I have seen firsthand what an abundance of riches does for a society. With all the wealth generated in those years you would think folks would be well off, right ? Wrong! debt levels in the Bay Area are at historically record levels by all accounts, did anybody save ? America needs to be cut off for it’s own good, more of the same prosperity is going to accomplish nothing, and a crash of the dollar would be the perfect thing to wake them up.
    The USA can, unlike any other country print as much money as it needs, and then under the guise of “ridding the world of tyrany” can force countries to honor it.
    And everybody on this board knows money in and of itself is worthless, oil has not increased in price as much for the Europeans. And the more money GWB prints the more goes overseas the more that is loaned back to us and is used to buy our assets.
    Our consumption is fueling or destruction.
    Any comments “Dr.” Hamilton ?

  73. Jack

    Dr. Hamilton (no ” ” about it) is doing us (the readers) a huge favor to provide PhD level insight into financial issues facing the world, and he’s doing it for free. The “bash America” blogs abound, but forums like this are very few, where PhD’s from many fields rub shoulders.I am humbly appreciative of the gift of his time and analysis to this forum, and there is no need to disrespect him for that.

  74. JDH

    Please everyone try to treat those who comment here with respect. I will (and have) delete any comments that are in the nature of a personal criticism of others.

  75. J Wilson

    If you guys still don’t know whats going to hit america then read about the fall of the Roman Empire. Barbarian at the gates was blamed by stupid, ill-informed historians for the demise of Rome. Truth was that Rome hyperinflated its currency and over extended its military. Just replace the word Terrorist for Barbarian and move forward 200 years and you get the present US demise. Just remeber – nobody has a God given right to a ‘standard of living’ or ‘way of life’ that the planet cannot sustain. These folk are just deluding themselves and will have a nasty shock when they wak-up to reality.

  76. gillies

    “Whose $ do you think that is?”
    most dollars belong to china, japan, drug dealers and oil exporters. the united states only has an overdraft, remember ? so is it time – not to abandon the dollar – but to give china and japan seats on the fed ?
    gillies
    gillies macbain
    also readable at :
    http://darkbrownriver.blogspot.com/

  77. gillies

    “Personally, I have already began switching to pounds sterling from dollar as of last year .’
    what happens to the british pound when the crashed dollar is unable to buy any british exports ? stay up in the sky like a disney cartoon ? your money is in danger . . .
    gillies

  78. gillies

    the reason why the iranians want their own bourse – is because the united states is empowered by long standing legislation to sequester enemy assets in a time of war.
    so their u s treasuries would last until about the end of march.
    gillies

  79. Daryl

    “If you guys still don’t know whats going to hit america then read about the fall of the Roman Empire. Barbarian at the gates was blamed by stupid, ill-informed historians for the demise of Rome. Truth was that Rome hyperinflated its currency and over extended its military. Just replace the word Terrorist for Barbarian and move forward 200 years and you get the present US demise. Just remeber – nobody has a God given right to a ‘standard of living’ or ‘way of life’ that the planet cannot sustain. These folk are just deluding themselves and will have a nasty shock when they wak-up to reality.”
    Great job. You’ve managed to butcher both economics and history together!

  80. Anonymous

    Yeah, I made a typo. Should have read like this -
    If you guys still don’t know whats going to hit America then read about the fall of the Roman Empire. Barbarians at the gates was blamed by stupid, ill-informed historians for the demise of Rome. Truth was that Rome hyperinflated its currency and over extended its military. Grand military and domestic expendature through architecture, games and corruption meant they printed more money to keep things going. Just replace the word Terrorists for Barbarians and move forward 1700 years and you get the present US demise. Just remeber – nobody has a God given right to a ‘standard of living’ or ‘way of life’ that the planet cannot sustain. These folk are just deluding themselves and will have a nasty shock when they wake-up to reality. PS – Rome was built by slaves…another fine similarity to US history.

  81. Anonymous

    Krassimir Petrov (Krassimir_Petrov@hotmail.com) has received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He is looking for a career in Dubai or the U. A. E.
    Hasn’t exactly won the Nobel Prize for Economics, has he? Doesn’t look he’ll be making the short list anytime soon either.

  82. The Nattering Naybob

    http://naybob.blogspot.com/2006/01/bourse-of-sows-ear.html
    My PhD is more like a Pimp and Ho Degree, and I tend to think like a broker or a bookie, not an academic…
    Add up the currency valuation effect and the vig, or transactional and currency exchange costs based on the following calculation.
    Let’s do the math: 85 Million Barrels of Oil per day x $70 a barrel x 45 days (contract life) = 267,750,000,000 or a 1/4 of a TRILLION.
    In 365 days there are around 250 trading days, multiply 1/4 Trillion every 45 day cycle by 5.5 and you get 1,472,625,000,000 or 1.5 TRILLION reasons annually why the US wants to keep all oil transactions worldwide conducted in dollars.
    And they want those transactions to occur on the NYMEX and London IPE, not anywhere else. Unless the Iranians satisfy the appropriate parties, the Iranian Bourse will not do sufficient business or be allowed to exist very long.
    Suffering as those who bucked the Tyrone dolla is a much kinder fate than winding up chum or hog slop. Which is what happens to those who screw with the church, the mob or the governments sources of income.

  83. JDH

    85 million barrels, Naybob? So, oil produced in Texas is going to be sold for euros to a refiner in Houston? These Iranians seem to be pretty darn influential in your story.
    For large transactions, currency transaction costs are relatively small compared to the total return on an investment, so if U.S. Treasuries are where oil producers want to be holding their assets, it’s hard for me to believe they wouldn’t want to hold pretty much the same thing even if you shave a fraction of a percent off the return because you make them convert the euros they’d get from selling the oil into dollars. But, to the extent that what the oil producers want is U.S. Treasuries and there are currency transaction costs, that’s a reason that other oil producers are not likely to join Iran in demanding euros rather than dollars as payment.
    I therefore repeat that the key issue is the demand for assets rather than the currency in which the trade is quoted.
    Personal financial interest, not the threat from “Tyrone”, is why the system is the way it is.

  84. Brian Reid

    I would appreciate any rationale the budding economists on this thread could supply as to the reversal of Hussein’s decision to only accept payment for Iraqi oil in Euros back to payment in dollars. This was one of the first acts after the invasion. Please don’t suggest simplicity as the answer as I would feel my intelligence was being denigrated.

  85. The Nattering Naybob

    Dammit Jim, your a doctor, not a bricklayer.
    “The demand for assets rather than the currency” your point is sound and well taken, but not the point I am making.
    “These Iranians seem to be pretty darn influential in your story.” NOT, they are wannabes, attempting to exercise economic terrorism against the west. In that aspect, we are the 800 pound gorilla.
    “to the extent that what the oil producers want is U.S. Treasuries and there are currency transaction costs, that’s a reason that other oil producers are not likely to join Iran” Correct, especially those who want to stay on the good side of the 800 pound gorilla and their own “personal financial interests”.
    “Personal financial interest” and 1.5 Trillion reasons are exactly why the 800 pound gorilla or “Tyrone” will not tolerate any threat real or perceived to the system as the way it is.
    This is the point I am making.
    It will be interesting to see what reprisal “Tyrone” Bush will bring down on the inmates involved with the “new enterprise”.

  86. The Nattering Naybob

    Jim,
    A bricklayers thought, when petro dollars go to bonds, their velocity goes to zero.
    A doctors question, what would the effect on total velocity be if a large amount of dollars which are tied up or used as petro dollars in oil transactions, were to be liberated or displaced by Euros?
    Would velocity go up or down? Increase or decrease in inflationary pressure? Increase or decrease in interest rates? Or would the effect be negligible.
    Just a passing thought and those are rare moments for me. Usually I’m trying to think, but nothing happens.

  87. Anonymous

    There is a small new colony on Mars. My family owns the ONLY pair of dairy cows in the colony. Milk, because it is essential to feed the colony’s children, is in high demand. In fact, milk is just about the only thing on Mars that no colonist can survive without. Therefore, I am a very important guy. Everybody wants to be my friend, and I get all the ladies.
    Jethro owns the colony’s only brussel sprout farm (and the only firearm on the planet – more on this later). Brussel sprouts positively THRIVE on Mars, so Jethro’s capacity to produce brussel sprounts is practically infinite. Brussel sprouts are packed with vitamins, minerals, fiber and antioxidants, but nobody who has smelled them cooking would ever describe them as palatable. Consequently, demand for Jethro’s brussel sprouts is lukewarm. The health-nut crowd keeps him afloat, but he is doing no better than anyone else.
    One day, Jethro stops by the house. Jethro and I have not always been friends. He is big, pushy, loud and none too bright, but he means well (usually). Even Jethro’s detractors are forced to admit that he does a lot of things that are good for the colony overall, so everybody tolerates him, taking the good with the bad.
    After a few minutes of small talk, Jethro hooks his thumbs into his overalls, smiles in that squint-eyed way of his, and intimates that from this day forward, I shall not, repeat, SHALL NOT, exhange milk for anything but brussel sprouts. Needless to say, I was taken aback, just a little. What am I to eat? I can survive on milk and brussel sprouts if I have to, but I like a little variety in my diet, same as everyone else. And what about my status with the ladies?
    When I presume to question him, Jethro undergoes a sudden and alarming transformation. Gone is the big, genial busybody tolerated by the rest of the colony. Looming over me is a huge, threatening man whom I do not recognize. As his eyes narrow and his lip curls, I notice the bulge underneath Jethro’s work shirt. The gun. The ONLY gun. Message received.
    Obviously, since I am still here to tell this story, I buckle to Jethro’s demands and refuse to exchange my milk for anything but brussel sprouts. Luckily, not much changes – for me. I am still a hugely important guy, which makes me happy, nor does my status with the ladies suffer, which makes me happier still. “How can this be?” you might ask. Well, let me tell you.
    Everybody needs my milk to feed their children. Their children drink it, and the milk is gone, *poof* just like that. The colonists then have to come back to me to get more milk. They have more children, and their existing children get bigger, which means that they require still more milk, each and every day.
    Soon after my little tet-a-tet with Jethro, I am up to my eyeballs in brussel sprouts. I do not mind, because, as Jethro patiently explains to me, I can always trade brussel sprouts for other things. People will trade just about anything for brussel sprouts, because they know that they must have brussel sprouts to acquire my milk. I laugh and laugh, rolling around in my piles and piles of brussel sprouts.
    As you might imagine, Jethro also benefits from our arrangement. Demand for Jethro’s brussel sprouts is sky-high – for a while. Jethro knows that the other colonists can only exchange his sprouts for my milk. Jethro, possessed of a certain low animal cunning, intuits that he can get away with some sharp business deals. For example, before our arrangement, Jethro could only get 1 lb. of bacon for a bushel sprouts, whereas afterwards, he could get 1.5 lbs. of bacon for the same bushel of sprouts. Is this magic? Not really. Martian colonists can live without bacon, or just about anything else you would care to name, but NOBODY can live without milk. And the only way you can get milk is by getting your hands on some brussel sprouts.
    Jethro also puts his sprouts to work for him. He lets people borrow sprouts to get milk for their children, and demands that when they repay him, they have to give him the original number of sprouts borrowed, plus some more. Jethro calls this “interest.” Soon, Jethro is even more of an important guy than me. He runs out and trades some brussel sprouts for the biggest double-wide trailer in the colony.
    My poor cows can only produce so much milk every day. As the colony grows, people are willing to give me ever-higher numbers of brussel sprouts in exchange for my milk, because starving children is no laughing matter.
    Jethro controls the supply of brussel sprouts. Greedy slob that he is, Jethro plants more and more brussel sprouts every season. The HUGE number of brussel sprouts in circulation makes each sprout worth less milk, which drives the sprout-to-milk exchange rate higher still.
    The colonists grumble at Jethro’s shenanigans, but nobody raises too much of a fuss. After all, Jethro allows the exchange rate of his sprouts to float against that of bacon and other essentials, so no harm done, right? Sprout-to-milk might be higher, but sprout-to-bacon is also higher in proportion.
    One day, my little brother, who the week before found out that Jethro had been sleeping with my sister-in-law, and who is part owner of our dairy business, stands up in the town meeting and declares that he will no longer accept brussel sprouts in exchange for his share of the family’s milk. Jethro, without skipping a beat, whips out his pistol and shoots my brother in the face. Ouch.
    Needless to say, our whole colony was furious – but intimidated – at Jethro’s unilateral atrocity. And then we realized something. Jethro might have enough bullets to kill us all, but he would starve to death without us.
    Ultimately, Jethro’s financial hegemony fell apart because the price of his sprouts was overinflated. Milk is a commodity of limited supply and ever-growing demand, and no colonist can survive without it. Without its artificial ties to milk, there is no way in hell anyone gives NEARLY as much flour, bacon, tea, or whatever else in exchange for a given quantity of brussel sprouts. When we kicked the prop out from under the price of Jethro’s brussel sprouts, things went back to the way they were before my “arrangement” with Jethro. On a level playing field, Jethro was not nearly so successful. He even had to trade his gun to get the milk he needed for his children. Ironic, is it not?

  88. The Nattering Naybob

    The book of Jethro and the point of demand for assets are well taken.
    We must remember with regard to capital flows, that the valuation of the dollar will dictate the valuation of the dollar denominated assets that are currently held or to be sold and/or purchased.
    Sounds like Jethro’s, much like Tyrone’s capital flows kinda dried up after a serious devaluation.
    I’ll bet Jethro had a lot of brussel sprouts, and he probably threw alot of those brussel sprouts around to the other colonists to produce crap that he really did not need.
    But, when your the 800 pound gorilla with the only gun, and your sprouts have hegemony, well you gotta pass the wealth around to the others and build up some co dependance.
    Getting those other colonists hooked on having those sprouts and the happiness they could buy with them while being dependent upon Jethro to get them, is a good thing, for Jethro.
    Earning more sprouts means more purchasing power. Those colonists are needful things (wage monkeys) and they like pretty and shiny things and having a good time, its only human nature you know.
    Question: Was Jethro responsible for the bulk of the consumption driven demand which enabled the other colony members production and livelyhood efforts?
    If so, what happened to those colonists which were dependent on Jethro buying their goods once Jethro stopped buying from them??? How did they get their milk and other things??
    Maybe they learned the hard way: that you need to be independent and self sufficient and not be dependent or co-dependent on others who may or may not share your ideology or have your best interests at heart.
    Ultimately, I bet they learned that when things seem too good to be true, they generally are. That rosy promises of one big happy family living in the same coop, and that all boats rising to the same level, are a fairy tale for the feeble minded.
    And maybe they learned that if you ever go looking for your heart’s desire again, you shouldn’t look any further than your own backyard. Because if it isn’t there, you never really lost it to begin with!
    Now close your eyes, click your heels 3 times and repeat after me…..

  89. JDH

    Naybob, by velocity we refer to a measure of a dollar value of all transactions divided by a measure of the total money supply. Are you presuming that in the numerator we should include the purchase of oil from Iran by China, and in the denominator we should include Eurodollars, which are not an asset of any U.S. resident nor a liability of any U.S. institution? If so, why?
    I think the relevant question is what would this do for the demand for a conventional U.S. monetary aggregate such as MZM or the monetary base. I concede that a reduced international demand for Eurodollar deposits would likely translate indirectly into a reduced demand for the monetary base through changes in the correspondent balances desired by the foreign institutions issuing the Eurodollar deposits, and is therefore something that would contribute to U.S. inflation and/or a depreciation of the dollar. If I thought we were indeed talking about 85 million barrels per day, perhaps this would be significant, but I don’t believe that we are. And I think there are other developments, specifically, a desire by the Saudis to hold significantly fewer Treasury securities, that would have far more profound implications for the value of the dollar. My central point is that many of those writing about the oil bourse seem not to recognize the difference between the two concerns.

  90. JDH

    Jethro and Tyrone, oil has been priced in dollars for the last century, so I presume you have in mind not just the Persian Gulf conflict but a long historical record of military threats from many U.S. presidents. Tell me whether the following accurately represents your beliefs: (1) One cannot find a reputable economist who will publicly assert that the international pricing of oil in terms of dollars is of fundamental importance for the health of the U.S. economy. (2) Every American administration for the last half century has been persuaded that the pricing of oil in terms of dollars was of such great importance for the health of the U.S. economy that they were prepared to threaten war whenever anybody raised the possibility of doing anything else.
    Now, I’m just wondering how to reconcile (1) with (2). Is it that (3) all the economists secretly know that yes, this is really of vital importance, but we can’t let the cat out of the bag and actually admit that publicly, but of course when we are privately advising the president we tell him to drop the nukes if anybody sells oil for euros?
    Perhaps my imagination is getting ahead of me here. But I’m really having a hard time understanding how these anecdotes about Tyrone and Jethro might fit together to form a coherent world view.

  91. The Nattering Naybob

    Jim,
    Thank you for your excellent analysis and clarification of the “velocity” question by isolating the calculation to MZM.
    I think Jethro and Tyrone are simple analogies (which are amusing) for the current system or status quo of dollars for oil.
    FYI, 85 MBPD is the current estimated output of oil worldwide. Since all oil transactions are currently based on dollars, 85M is the size of the existing “franchise” so to speak.
    Bottom line, and following the money, my sense is that with $1.5 Trillion in annual petrodollar trade at 85MBPD output, perhaps the long term franchise holder will not be amused with someone trying to “buck” the system. No pun intended.
    My crystal ball is opaque as anyone elses. What, if any, repercussions result from an alternative currency bourse opening, are TBD (to be determined) and as always, wholly at the discretion of the current franchise holder.
    Keep up the good fight, I do enjoy your blog and missives.

  92. Anonymous

    “Perhaps my imagination is getting ahead of me here. But I’m really having a hard time understanding how these anecdotes about Tyrone and Jethro might fit together to form a coherent world view.”
    Uh, coherent world view. I think that’s the problem with people who promote petro dollar conspiracies. Lack of a coherent world view. (insert twilight zone theme music here)

  93. Anonymous

    Jethro here. For the record, I am not a petrodollar conspiracy theorist. I do not believe that the opening of the Iranian Oil Bourse will bring about the downfall of the United States as we know it. The point I was trying to make was that modern monetary systems are, by definition, a reflection of a collective belief.
    Whether you are talking about brussel sprouts, dollars, ducats, tech stocks or tulips, a given “thing” has value because people believe that it has value. If events undermine that belief, the value of that “thing” decreases.
    If you want to buy oil from the House of Saud, you have to have dollars on hand to do so. A certain – probably small – percentage of people on the margin are going to be influenced by this fact, and are going to hold onto some of their dollars when they might otherwise dump. Point being, the fact that the dollar is the exclusive currency for purchasing – and trading in – oil increases the dollar’s value, albeit incrementally.
    The United States is in a precarious position economically. Many economists will disagree with that blanket statement, but a look at the trade numbers and the deficit-addicted government spending patterns tells the tale. A nudge in the downward direction, as might be provided by a slight Bourse-induced devaluation of the dollar, probably will not be determinative. But it will not help.

  94. Anonymous

    It is necessary to distinguish between (a) the idea that an Iranian oil bourse would cause the dollar to collapse and weaken the American position in the world, (b) the idea that the administration in Washington thinks it would and acts accordingly, and (c) the idea that the Iranian government thinks it would and acts accordingly.

    Dr. Hamilton says that (a) is nonsense. The Iranian oil bourse would have little effect. If economic events occurred in a geopolitical vacuum, this might be true. However, if (a) is false, this implies nothing about (b) and (c).

    There is evidence, not just speculation, that concern about how oil is priced was a factor in the invasion of Iraq. In the runup to the Iraq war, Karen Kwiatkowski worked in the Pentagon, in the Near East South Asia directorate (NESA). She watched it happen. In The new Pentagon papers, she says:

    “From May 2002 until February 2003, I observed firsthand the formation of the Pentagon’s Office of Special Plans and watched the latter stages of the neoconservative capture of the policy-intelligence nexus in the run-up to the invasion of Iraq.

    “War is generally crafted and pursued for political reasons, but the reasons given to the Congress and to the American people for this one were inaccurate and so misleading as to be false. Moreover, they were false by design. Certainly, the neoconservatives never bothered to sell the rest of the country on the real reasons for occupation of Iraq — more bases from which to flex U.S. muscle with Syria and Iran, and better positioning for the inevitable fall of the regional ruling sheikdoms. Maintaining OPEC on a dollar track and not a euro and fulfilling a half-baked imperial vision also played a role.”

    It seems reasonable to assume that the real reasons for attacking Iran will be similar to the real reasons for invading Iraq. The main question is whether there is going to be a war. If (b) is true, then the answer is probably yes.

  95. Kaitain

    Imagine a scenario in which Amazon.com sets up a deal with every gas station in the country such that the only way people can get gas is by giving the gas station Amazon vouchers.
    This makes Amazon vouchers things worth having to buy fuel, but ultimately the gasoline companies are either going to have to benefit from their labours by obtaining goods from Amazon, or to exchange the vouchers with someone else happy to obtain goods from Amazon. But what if Amazon started selling crap, or selling stuff that was way overpriced, such that the vouchers only bought
    one book whereas they used to be able to buy two? Would it be a major boon to Amazon to have the gas station scheme in place, a distinct advantage over other online booksellers?
    Think of these variations: imagine that on a particular day, dawn breaks with no-one holding any Amazon vouchers (other than Amazon), and Amazon is (in this scenario) well known for selling only overpriced crap. If we consider the two ceteris paribus scenarios in which the gas station scheme (a) is and (b) is not in place, would Amazon greatly prefer (a) to (b)? Would Amazon start to see people handing over their money for Amazon vouchers just to get gas, even though there was nothing they wanted from Amazon? Would some people end up having (ultimately) exchanged their labor in order to hold a voucher that could only be exchanged for stuff they didn’t really want at the moment? Meantime, would Amazon employees be getting paid in scenario (a) despite not actually doing any work in the warehouse, whereas none of them would be getting paid in (b)?
    I’m not an economist, so there may be a serious flaw in this analogy, even if the (a) scenario would indeed be much better for Amazon. If so, please fire away; I’m here to learn.

  96. Joy

    I know nothing about economics, but then neither do a lot of people in our current administration. I think an important point to keep in mind is not what effect, if any, the establishment of an Iranian oil bourse will have on the USD, but instead what impact does Bushco THINK it will have? Upon this perception will be based the decision to go to war. At the end of the day, that’s what counts. It’s obscene to talk about this issue as if it’s merely some macho Wall Street competition over who will wind up with the most toys, us or them, when human lives are at stake.

  97. le conservateur

    The conspirational theory is also spreading on French speaking blogs and news website, although it is limited to leftist and radical websites at this time, with rare exceptions by people who repeat without verification.
    I don’t know enough economics to be sure of my opinion on this matter, but the article by Mr.Petrov is not economics but politics. Its goal is to weaken the European resolve in supporting the US in the pressure against Iran which is becoming a bigger threat with time running.
    I develop this opinion in my blog (in French).

  98. Greg

    With regard to anyone who thinks that the imminent Iranian Oil Bourse and its global currency ramifications aren’t really significant factors for either the US/UK-run oil markets or US economic sanctity, please see the following inter-department communication from the US Treasury, circa 1978:
    “…confidence in the dollar remains fragile. Recent and more frequent news reports regarding OPEC’s growing disenchantment with use of [the] dollar for oil pricing further disturb the market. If OPEC changed the unit of accounting for oil pricing it ciould precipitate a major market reaction which would be in the interest neither of the Saudis, other OPEC members, nor the US.”
    – Assistant US Treasury Secretary C. Fred Bergsten to Treasury Secretary W. Michael Blumenthal, in a Treasury department internal memorandum entitled, “Briefing for your Meeting with Ambassador to Saudi Arabia, John C. West”, 10 March 1978, P. 1-2.
    There’s also this ditty, which might in part explain why people tend to discount to the public the urgency of the issues related above between government officials:
    “The Monday evening news on the networks tells people how much the Dow Jones Industrial averages went up or down that day, but not … the rates at that day’s weekly auction of U.S. Treasury bills – though the money spent to buy the Treasury bills at this one weekly auction exceeds the total trading in the Dow in the entire 31.5 hours that the market is open each week.”
    – Martin Mayer, from the book, “Stealing the Market”, P. 2.

  99. Mr. Rational

    Changing the denomination of oil from dollars to euros WILL have an effect on the strength of the dollar. That is not a conspiracy theory, it’s economics. (Less demand for dollar + same supply for dollar) = cheaper dollar. The real conspiracy theory is that this will somehow destroy the US. It will not. It will cause the price of imported goods to increase and the price of US produced exports to decrease. This would cause our imports to decrease and our exports to increase which would narrow or eliminate (depending on the severity of the exchange rate adjustment) the trade deficit and increase the demand for domestic goods and services both at home and abroad, which in turn will increase GDP growth and lower unemployment which are all fundamentally positive for the US dollar. What conspiracy theorists are really good at is stringing together a number of loosely related facts, leave out all the detail, and predict dire consequences that either are impossible to stop, or require you to fight some shadowy cadre of people who are ever-present, all powerful, and untouchable. What they are really bad at is Macro-Economics. The world economy is WAY too large for any one or even group of people to control. But if you really believe the doomsday predictions, I suggest you buy gold and survival supplies, and move to a remote location where you can be completely self sufficient and shoot anyone who comes on your property. I’m going to go out to dinner and have someone cook me a steak from a cow raised in the mid-west, drink some red wine from a vineyard in Chile, and smoke a cigar from the Dominican Republic while I’m wearing my Italian silk suit, and my Swiss watch, and then drive home in my Japanese car.

  100. Simon

    Hey guys, thanks for the crash course on the issue from a person who isn’t an economist. The discussion is extremely interesting and I tend to lean toward the side that claims that this is a very important subject. A few questions:
    1.Why is the Fed doing away with M3 data? Is this a Bernake decision or what?
    2. What is the possiblility that that other OPEC nations could follow suit in valuations of their reserves in EUROS (i.e “Boogie” theory)?
    3.For anyone who is skeptical of oil bourse “theories” of the current US posturing toward Iran, do you really buy the nuclear argument after the claims of Iraqi WMD were found meritless?
    4. With China and Russia having back door energy arrangements with Iran, doesen’t that put Us (US) in somewhat of a stalemate where aggressive action could only exaserbate the problem?
    5.I read very few references to peak oil in this discussion. For those that think it’s a hoax, what is your dissenting information? For those that believe it, to what extent does it (the inevitable production decline of oil worldwide) drive this entire issue?
    6. With the devaluation of the “Tyrone” dolla, and skyrocketing national debt (not deficit)($8.2 trillion and increasing by $2.1 billion a day), how can these factors possibly form anything like an optimistic outlook for the future?

  101. Buddy

    I found this discussion very interesting. I wonder how Treasury Sec Snow’s request to increase the debt ceiling will play into this?

  102. Chris

    Very interesting topic. One question seems to be on my mind, why would the US allow the formation of the Euro, knowing it would be a formidable rival as a world currency?

  103. David Davenport

    3.For anyone who is skeptical of oil bourse “theories” of the current US posturing toward Iran, do you really buy the nuclear argument after the claims of Iraqi WMD were found meritless?
    Yes.

  104. Jeremy

    You all keep calling it a U.S Dollar. There is no such thing. It’s Federal Reserve Note that continues to depreciate against other currencies, namely the Euro. Why would any country want to hold billions of “dollars” that causes them to lose money when they exchange them back to their own currency? China buys U.S Treasuries instead of converting in order to keep their currency artificially low, to keep their goods cheap. Japan and alot of other asian countries do this as well. It makes their exports more attractive. If the Euro becomes the worlds more popular reserve currency due to it being more stable. Countries won’t lose money in the conversion due to the “dollar” depreciating while they were holding it, and the other Euro holders may start buying Euro “investments, treasuries, or whatever they call it”. This may remove the attraction of buying the U.S Debt that fund our wars and our toys. Or maybe it won’t.

  105. ams alzidgali

    . Sir,
    You mentioned Major Problems Facing America Today , problems facing America to a an economical crises, The real problem unfortunately majority of American Avoid intentionally or un intentionally to avoid is the subject of the Federal Reserve As know its neither Federal no it has any reserve. It is the thought full American who should in light the public and write more words about the Fed crime than the bullet USA Army fire on innocent people round the world. I believe America has a sovereignty problem until you liberate the country from Cabal you are not going to solve any of the problems (Irresponsible sale of strategic companies to foreign ownership ,Loss or decline of major industries ? (,Loss of good jobs ,Un competitiveness in manufacturing. ,Wealth transfer to foreign ownership $,Difficulty for college students to find jobs ,Manufacturing Outsourcing, Insourcing – Subsidizing foreign companies to operate in America, Educational shortcoming, )
    This Fed is yr real problem sir, just read the historical events and brush the dust on people memory and see it for your self how America lived and can live in prosperity, it is a rich country God gave her every thing any nation dreams of. but the Economical crime creating the poverty in America
    Early governments assumed the monetary power because they needed it to serve the people
    - anonymous
    “Give me control of a nation’s currency and I care not who makes the laws ”
    - Baron Rothschild
    Although Article 1, Section 8, of the Constitution, makes Congress responsible for coining money, it is the Fed that has total monetary control. However, the Fed is not a Federal agency and has no reserves, it is a privately-owned banking system, as proven in court:
    A Mr. Lewis was injured by a Federal Reserve vehicle and sued the U.S. government for damages. The court ruled, “…that since the Federal Reserve System and its twelve branch banks are private corporations, the federal government could not be held responsible.”- Lewis v. U.S., 608F 2d 1239 full :
    . http://iresist.com/cbg/fraud.html
    [edited by JDH for length]

  106. JDH

    Ams Alzidgali, that is very interesting, but I must request that you limit such discussions to a link with a one-paragraph summary rather than trying to reproduce the whole article here.

  107. No One

    Because Tyrone’s scripts were held by many who did not want to see their accumulation lose value rapidly, Mustafa’s scripts were used at a rate which did not dramaticaly affect Tyrone’s paper.

    Both had to be used in a balance to diversify risk.

    Indeed, Tyrone proved he would stand behind it’s value to the holder when he protected the old Sha of Mustafa. The House of Sod really values that kind of protection. Looks like rain and they fear their house might be washed away.

    After all, Mustafa is new and not proven.

  108. ams alzidgali

    To JDH
    Thank you for advice I believe you ment B Franklin historicle visit to England( http://onlypill.tripod.com/factsthebrokersandfinancialreporterswonttellyou/id24.html)not the above artcle I hope.
    His visit is very important unforetunatly very few poeple knows. so I advice those who has not read the article above please do so and compare to the suicidal result of the FED reserve which unfortunatly majority of us still consider it as a Federal Bank.once again thank and have a pleasant time.

  109. ams alzidgali

    To Buddy
    Do you know why the US allowed the formation of the Euro, knowing it would be a formidable rival as a world currency?
    The owner of both currencies, in fact is, the same family of banker. They created a synthetic currency as a genuine rival ( a controlled rival ) this will save them to deal with some one else create real rival currency instead of Dollar.
    NYMEX in New York, IPE in London, both under one umbrella as the Euro, and Dollar. You could see the panic of banker when there is a real uncontrolled competitor like Irans Borouses comes along.
    Do you know the same apply to the Main Stream Media (BBC, CNN, FOX etc). As the public discovered their reality, their credibility no longer exists, so they created alternative media especially on the internet. These Alternative Medias, being promoted as rival to FOX and CNN. Occupation of Iraq is liberation. Its amasing America, God save America from the Poison of Democracy.
    Do you know, can u tell me what is real and what is synthetic in America, do u believe GW BUSH being elected or selected?
    If you answer that you will know the rest.

  110. JWPetroreality

    I think what JDH and many of his supporters fail to realize is the FRNs, being backed by nothing in reality has to be backed by something de facto. The de facto backing is oil. The truth of that statement is held to be the very fact of why Nixon/Kissinger negotiated the deal with the Saudis in the first place. The US needed an advantage for foreign oil purchases that were escalating in price after 1972. If the US had to finance it’s purchases by first buying other currencies then the effective price, of course, goes up. At some point all nations currencies will have to seek some real asset to “back” them otherwise they hyperinflate into worthless status. The FRN is about to do just that when certain other countries realize, after oil needs are met, they simply hold way too many FRNs or other paper debts of the US than can be redeemed for any physical asset. As the Chinese, Japan and others realize the US will not allow them to purchase such assets as Unocal or Port facilities or buildings or big US companies beyond on a certain point, the US has left them no choice but to dump their excess FRNs and other US debt instruments. Likely they’ll be big purchasers of precious metals or in fact already are starting to be now.

  111. amsaar

    I wish it was a hoax created by some bloggers in one way, but in other way I wanted to be a reality, cos that the only way we can break the heavy shackles of the criminal Fed Reserve, and start to print the US note, a free note ,not monetized as we have it now. Do you know each $ printed is a borrowed $. And it belongs to foreigners Bankers, they print thin air paper and sell it to American People, this job should have been the Government not these criminal. That’s why America have to make wars to keep $ as world currency. With out Petrodollar this greenback has no value, that why we went to Iraq and convert the Petroeuro to Petrodollar. Iran will be worst if they went ahead and opened the bourse. Nothing legally stops them, they are smart, and they want to take the political heat out 1st than they will open the bourse.
    Historical shocking facts we r not allowed to know, c & let be seen please
    The Money Masters – How International Bankers Gained Control of America – Part1 (Fixed Audio)
    The Money Masters – How International Bankers Gained Control of America – Part2
    The Money Masters – How International Bankers Gained Control of America – Part3
    You will realise that the most danger does not come from Iran’s civil Nuke requirement, neither it comes from an standing well equipped Army on our borders, but it comes from Fed Reserve. As we all know now America was planning to invade Iran same time of Iraq Invasion, the question is r we ready to loose thousands innocent solders life for greed of some?
    Don’t we think enough is enough?
    Do we have money and blood to pay this coming war from over debted nation?
    My be, we can manage to scarify few thousands solders and 10,000s injured disabled one, but do we have the money?
    please see these video they r eye opening, they surely opened my eyes along with those who let me see them, God save America. America must be First, America Must come First.
    Please see this video, it is an eye opening to lot, it was certainly for me:

  112. amsaar

    Stop Bush before he attacks Iran
    Thanks for some friends in letting me know the money master, it is an eye openning event,it has reminded me of little old story of wolf in a sheep dress while telling and warinning the sheep how the FOX is dangerous TO THE SHEEP, and the SHEEP did beilve that the FOX is No one enemy. Thats why we had all major wars, from our civil war to WWI , WWII , the Korean War, the cold wars, the Gulf wars,
    their own word:
    (Never in her history has Israel had the luxury of having 500,000 foreigners fight her wars for her, until now. Abba Eban, Foreign Minister to Israel, in reference to the 1st Gulf War. )
    lately the IRAQ war, and as the WOLF is so generous we planned more wars, like the coming Iran war,Syria, Labnon, Saudi Arab, Egypet, yr futur thinking and the sky is the limit.
    I could not open the money master,WITH OUT the Google video player, I will add the address bar so it will help:
    Historical shocking facts we r not allowed to know, c & let be seen please
    The Money Masters – How International Bankers Gained Control of America – Part1 (Fixed Audio)
    http://video.google.com/videoplay?docid=8442305921010099392&q=Money+Masters&pl=true
    The Money Masters – How International Bankers Gained Control of America – Part2
    http://video.google.com/videoplaydocid=6802938500605858947&q=The+Money+Masters+How+International+Bankers+Gained+Control+of+America&pl=true
    The Money Masters – How International Bankers Gained Control of America – Part3
    http://video.google.com/videoplay?docid=3510313821923167501&q=The+Money+Masters+How+International+Bankers+Gained+Control+of+America&pl=true
    I hope you will be able to view this historical eye openning event, and remeber you will not become a WOLF, but a better SHEEP, who can recognises the WOLF, and knows the DANGER OF THE FOX
    ENJOY WATCHING. and be better sheep

  113. Reality Bites

    Isn’t the point that petrodollars keep the USD as the world’s reserve currency? If the world moves toward a PetroEuro, won’t that cause the countries propping up the US economy to change their reserve currencies. Namely, China, and Japan. Isn’t that the real problem?

  114. amsaar

    to Reality Bites
    YOU ARE HITTING IT ON THE NAIL, if that happened it will create great problem to America yes, but if America take the initiative 1st, and abolish the Fed Reserve cos it neither Federal nor it has any Reserve, and Congress will take its duty i a w the constitution, and print the US note, we will be out of these debt in one to two years, and we don’t need to pay high taxes, may be any taxes as the history proven, we are not inventing the wheel here at all, the Banker will loose, they r minority of 3% sucking the wealth of 90%. Hell with them. We all must say America comes 1st, America 1st, America 1st, America 1st,
    Do you agree?

  115. justinwp

    If the world moves toward a PetroEuro, won’t that cause the countries propping up the US economy to change their reserve currencies. Namely, China, and Japan. Isn’t that the real problem?

    countries don’t hold reserve currencies to buy oil. each day, they hold their basket of currencies because they believe that is the best mix. if they want to buy oil with those reserves, they can exchange currencies to whatever they need.

  116. amsaar

    Legally America is bankrupt since 18 Aug 1971 when Nixon pulled the $ form the Breton Wood. Please read the empire of Debt WEmpire:http://www.authorviews.com/authors/bonner/bonner-obd.htm
    or just see how America is on the Economic Suicide Road:
    Economic Suicide By
    James Turk
    http://news.goldseek.com/JamesTurk/1142438460.php
    or see these poor solders who lost parts of their body, the problem with us we became so materialistic, the Bankers managed to transform us to what they wanted us to believe. We believed them when they were welcomed to our life (the Bankers) as WOLF in the SHEEP Dress, and told us the FOX is very Dangerous to the SHEEP, that is our Problem, and it will remain, the WOLF staying in the FEDRAL RESERVE, as long as we keep this Satanic establishment rule us, we will end up as a third world country, as a rouge Nation, we are not far with our excellent records. Why we carry some body else WAR. Why we do the dirty works of NEO NAZI, NEo Khazari, why, why , why and why, Why a father loose his son, why a mother cry and cry, because she lost her only 18 yrs old son, why, why ,why. When we wake up and sy enough is enough, when can we say our enemy is NOT the FOX, But THE WOLF, and we know where its staying. imagine America with out the FED RESERVE, we do not need to pay any taxes, our history proven that, we live like kings, our GDP should have been over $100K by now , instead by law we are bankrupt nation,
    These picture Bush avoid American to see
    Achievement in Iraq
    http://www.voltairenet.org/ artic…icle137035.html
    ams | 04.26.06 – 8:18 am | #

  117. bob m

    I have looked at the pros and cons of the effect of the Iranian Bourse. I think it will contribute to the weakness of the dollar. No one has mentioned the Norwegen Bourse that is being discussed.
    What stratigey would you think woud be a good one to hedge your US investments?
    How long before a major move in the dollar?
    BM

  118. Ian T

    I think you are completely missing the point, or maybe I am.

    If I buy 1,000,000 barrels of oil for US$70,000,000 Dollars today, and I exchange my Euros for Dollars, then …
    1. I pay $21,000 on the bid/offer FX spread
    and
    2. If the oil is purchased as a forward contract, then I need to manage my FX risk until settlement, adding further transaction costs (eg.option premiums).

    The easiest way to manage my FX risk is to not manage it at all, this I can do by purchasing US treasury bills (and other debt instruments in Dollars), and use the coupon payments (in Dollars) to purchase Oil. By doing so I prop US debt issue (currently at ~75% of GDP). Thus allowing the ever more gluttonous USians to glutton even more.

    If I can buy Oil in Euros then I can dump my T-Bills, or at least slow down the purchasing of them, causing the US Treasury to sweeten them by raising interest rates. Raising interest rates will crimp US consumer spending, increase the default rate, leading to a further raising of interest rates and a recession.

    I mean, this is really simple economics. What part did I get wrong?

  119. Wo

    “85 million barrels, Naybob? So, oil produced in Texas is going to be sold for euros to a refiner in Houston? …
    For large transactions, currency transaction costs are relatively small compared to the total return on an investment, … ”
    Posted by: JDH at January 29, 2006 09:08 PM
    Wow oh wow.
    At last check Iran’s Oil Bourse is still on the table, but could easily be overshadowed by the Russian Oil Bourse.
    Now, I know very little of economics, but I have a few points.
    I do believe Ben Franklin when he said “a penny saved is a penny earned.” “Simple economics” for sure, thank you Ian T.
    I would ask you JHD if you are even aware of just how much oil there is left in that “Texas” you so boldly speak of.
    A quick run to http://www.CIA.GOV and a close look at the World Factbook might help all of you (yea, its the CIA so the word fact is already in question, but anyway).One thing you will most certianly find (barring a major discovery in Wisconson) is an EXTREMELY limited supply of Petroleum remaining under US borders (at least in light crude).
    Considering that both large new markets for Petrol (ignoring Peak Oil theories) are Asian (for those who don’t know, India and China. Oh, and it looks like Russia’s making an economic comeback too) an Asian based market (near the supply source even?) could be a sensible investment for Asians simply because of proximity.
    As for the Euro vs the USD, I would simply have to ask if it is true that I can trade a Euro for Gold.
    I personally would pick the Gold over the IOU anytime.
    What banker in his right mind, when given a choice, would loan money agianst a Visa card limit instead of the “real-estate”?
    Don’t get me wrong, I live in the US and I’d love to keep all the riches and wealth I’ve seen my parents spending. Unfortunately, it seems most of that riches has made its way to others who have squeezed their pennies tighter.
    Besides, who really thinks that never-ending growth is possible? Goodness, I thought zero-sum was economics 101.
    If the USD does fail, I hope that our leaders (assuming we are still a single nation) return to some sort of real backing.
    Perhaps, just perhaps, the Starship Enterprise will make a major discovery of a totally uninhabited New Earth, just minutes away, with abundant resources and space for all!
    As Opus the Penguin might say,
    ~PHHHHBT!~

  120. wo

    http://www.cia.gov/cia/publications/factbook/geos/ir.html
    Iran
    Oil – proved reserves:
    133.3 billion bbl (2005 est.)
    Oil – production:
    3.979 million bbl/day (2005 est.)
    Oil – consumption:
    1.425 million bbl/day (2003 est.)
    http://www.cia.gov/cia/publications/factbook/geos/us.html
    United States
    Oil – proved reserves:
    22.45 billion bbl (1 January 2002)
    Oil – production:
    7.61 million bbl/day (2005 est.)
    Oil – consumption:
    20.03 million bbl/day (2003 est.)
    Iran will have Light Crude (much tastier than light beer!) to sell long after we are out.
    Now, I admit I am not taking into account the US “middle class”. Nations that trade goods with the US (which are almost all) will have some reason to continue to bank some percent on the US bill.
    However, when it comes to the seemingly unending buying in the US, I personally have to wonder just how many years that purchasing power is going to last?
    Goodness, our own economists are telling us we are too indebted for our own good.
    Average savings are gone, and average creditcard debts are astronomical.
    Our nation is going through market shrinkage as a result of a lowered birthrate.
    The higher costs of petroleum have yet to have (and this is speculative, but isn’t it all?) been felt.
    A bankrupt house doesn’t buy alot of extra electronics and cars, at least a sensible house doesn’t! (but then we are americans, and we are right proud of our rights to be unsensible!)
    I find it hard to believe that economists in other nations are unaware of our personal debt rates.
    Iran offered its bourse (if there ever is one, and if they stick to what they have been selling to their investors) to all nations.
    You make it sound like Iran would be the only nation selling at it’s bourse.
    After watching the last 4 years of Afghanistan, Iraq, and the US hunt for Al-Quida(sp?), does US might(disregarding our nukes) hold the same fear-factor to business or nations as it did in the late cold war or the 90′s?
    With Russia and China both backing Iran in the UN Security Council?
    I also wonder why so many give so little credit to the idea that currency de/valuation is a major reason for holding large amounts of a currency one might daily trade in?

  121. SavingGrace

    I have read a great many articles out there on the causes of the Great Depression (beyond the Stock Market Crash) – everything from Republicans making huge tax cuts in the 1920s which created an investment glut in the stock market to the price of coffee beans going up.
    As the economist for this website has stated “there are many variables”. I think thats what we have here – lots of folks trying to use Microeconomic examples to explain YES/NO to Iran Oil Bourse hurting the World’s Macroeconomic situation. I am afraid that I don’t think anyone (including the economists really knows the answer). Certainly I think that economists have a hard enough time as it is trying to explain what happened in the past. If they really could foretell the economic future they’d be millionaires right?
    I will say that the way that the price of gold (and oil – the “black gold”) has skyrocketed in the past 5 years really scares the hell out of me!
    Sorry to all you economists out there!

  122. Kruvczuk

    It seems to me that the thrust of this debate misses the real meat of the situation (or at least only touched on it a few times). The Iranian exchange by itself will probably have a very limited impact upon the U.S. economy. The issue is that if this practice spreads to additional oil producing countries, such that a real alternative to dollar priced oil is available for Europe, India, China, and Japan, they may further diversify their foreign currency reserves to the detriment of the U.S. dollar. This is the only change that would matter on the macro scale, because short of a larges scale or worse yet coordinated divestiture of dollars, the only expected impact would be a small devaluation of the dollar.
    Given recent history, it does not seem improbable that the U.S. could upset the rest of the world sufficiently to make them turn to the euro, and if (and only if) a large block of countries did this with a coincident sell off of most or all of the dollars in their reserves, we could see a drastic fall in the value of the dollar. Even given a precipitous decline in the value of the dollar, the most profound immediate impact would likely be the drastic increase in the cost of imported goods.

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