The dollar is the leading currency, and that's why most prices are set in dollars on the worldwide market--but not all prices, some are in pounds, euro's etc. who cares? it's not important--at least not important among the heavily traded currencies like I have mentioned. Now the baht--different question--like buying a small cap market stock, with limited liquidity.
The dollar is used simply because if people want to have assets in a currency other than their own, they often pick the dollar--because the US economy is so stable. That could change some day. the currency of choice was the pound years ago, now it's the dollar. but the issue is where people leave their money in a situation like I describe. Has nothing to do with whether the Saudi's quote their prices in yen or dollars. traders have calculators and convert. traders have markets and hedge. no big deal. heavily traded currencies are fungible.
They just say.. no problem America.. you can buy.. but before you have to change currency and pay me in euros, because this is what I want to have in the bank, society, foreign assets...
Dollar will almost completely tank.. why you should have a black market in dollars then? OF course if CHina can take all the slack of debt plus currency then maybe it will not fall.. but they would not do it.
Dollar is oil plus black market plus debt financed by China.
Lose one leg and it is really bothering, lose two and its a disaster, lose three and it is the end of the dollar.
A pleasure I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude
You can only hedge using currency futures for so long. Truly long-term hedging requires rolling futures, and that is risky. In the least traumatic scenario everyone's present holdings are fully hedged and they would let their dollar reserves run out (not completely, it is understood), replacing them with a combination of Euro, Yen and Pound.
Assuming everytone is fully hedged and they convert their reserves smoothly, I'd give it 18 months from the point when Oil is no longer traded solely in USD until the dollar tanks. guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
But the name of the currency of transaction isn't really what's important. I doubt they'd be very happy having to pay 60 euros a barrel, assuming that 60 euros is worth $90 or more. That is a significant price increase.
Which of course would be passed onto the consumer, meaning a 50% or more increase in fuel prices. Something tells me the alarm bells would be ringing.
You still seem to assume that the dollar is special, regardless, that the price of oil would just adjust itself to the falling dollar. According to the economists in this documentary, the price of oil would remain the same for everyone else in the world whose currency does not tank. Americans (and those who still had their dollars) would be, basically, fucked.
I'm sure there's more to it than that but I think your statement ignores the fact that rapid currency devaluations have real world consequences. It's not as if when the Brazilian real went down 75% against the dollar that somehow they could still pay the same amount for stuff. No, suddenly everything got a lot more expensive!
and then you are further suggesting that the oil cartels decide to set their prices in euros.
and then you are suggesting the cost per barrel goes up to 60 euros from 47.43--or a 26% increase from today's prices.
sure, that all could happen. in fact it really already did, except for the oil sheiks deciding to denominate oil in euros. over the last 4 years or so the $1 has fallen from, I think, something like 1.25 euros to .85 today. That is larger than the continued fall to .67 euros that you suggest.
furthermore, wasn't a barrel of oil something like $25 four years ago--whatever, I think it's up 100% ish, quite a bit more than the 26% you suggest.
so Americans have a big increase in oil prices--124%. Europeans have a smaller increase since the euro is stronger against the weaaker dollar. $25 was 31.75 euros, $56 is 47.43 euros, only a 49% increase for Europeans.
So go back to my original post, which was money is fungible. I wasn't saying currencies don't adjjust,,,,they of course do. And that adjustment in fact makes all of the outcomes that you describe happen--not only in your suggested case, but in the last four years. It doesn't require the oil cartels to price in Euro's.
The foremost virue of dollars is that the can buy oil. If the oil producers quit accepting dollars, a key reason for wanting them disappears, and the value has to drop. So finding someone who will accept your dollars and give you euros to buy oil becomes a problem.
A lower price for dollars would be good for American exports, except that we have off-shored most of that, and the increased price of oil to farmers and such industries that have remained offsets the export price advantage.
Meanwhile the main part of American life, based on automobiles and cheap oil to run them, shuts down. Panic and chaos.
That's why the neo-cons are fighting a global war for oil. And that's why, so far, a majority of Americans are letting them do it. The Fates are kind.
If you pay in dollars, the US government can always print more money to buy the goods - a real privilege, called seigneuriage. Also, American companies do not have to worry about exchange rate risk - as you point out, the market is extremely liquid, and you should be able to buy whatever other currency is used, but you still take a risk on that rate. Again, a real advantage for US companies. If you borrow in your own currency, you let others take the currency risk, a great privilege.
On the other hand, the war in Iraq was NOT about Saddam's threat to switch currencies - as I explain in another comment in this thread. In the long run, we're all dead. John Maynard Keynes
thank you for the great word seigneuriage. it may be deep in my old memory banks somewhere, but I had to look it up. the good articles seemed to be in French, and Google translated, more or less. my french is not that good to read directly and understand.
let me see how close we are in our thinking on this point, because like you said earlier, we sometimes talk past each other. I agree seigneuriage is a benefit to the US. but is it not an earned benefit?, that is dependent on the trust of the world in the long term strength of the US economy, and the ability of the US to appropriately manage its debt. My economic history is a little weak, but I think Great Britain had this position of privlege many years ago, but their economy did not remain strong, and foreigners lost their trust in the ability of the Brits to manage their finances. So over time, the market decided to remove this trust from the UK, and it ended up in the US.
It's a benefit to the US because as long as they have this trust, they can effectively borrow money, from their own citizens and the world, by simply printing money. But the flip side of printing money is increasing the national debt, in the form of US Treasury notes. Foreigners look at US 10 year notes today, and at this very second they can buy such a note which will pay them 4.461% per year, in dollars, for the next 10 years if they choose to hold it. That is the market clearing price. (Another diary maybe someday, but this is an incredible innovation in itself that has come with computer technology and well managed financial markets--it makes these financial choices available to you and me, the small guys, and not just the wealth barons.)
So what I'm trying to say is that the US provides a good investment for people outside the US. They can invest in a stable currency and economy, rather than only having the option of investing in their own country, and therefore, their own currency. Why is it viewed as good? Because the market which changes in real time, says that 4.461% is a good return if it's in dollars. If the market doesn't believe that, they'll buy fewer notes, the interest rate will have to go up to clear the market. So this system self regulates.
Traders can do this at anytime with other currencies. Some traders are viewing the Euro as strong, and buying Euro's today as a good investment. (I think someone pointed out that Warren Buffet recently disclosed a big loss by betting on the Euro. On the other hand, many traders made huge gains by doing this during the dollars fall of the last several years.) So the US has to earn this trust every day--to a very hard group of people, slick investment people who just want to increase their return. They'd write off seigneurage for the US in a heartbeat, if they lost faith in the US economy, and the US management of it's debt.
If you borrow in your own currency, you let others take the currency risk, a great privilege.
Am I in line with your thinking, and just saying it in another way (some might say a longwinded way)? Or am I missing something here?
Also, it is pretty obvious that the Pound has been a tad overvalued relative to the Euro for a while. The same retail item will often be priced the same numerically in Dollars, Euros and Pounds. guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
As Nixon's Secretary of Treasury said: "the dollar is our currency and your problem". We live withe this "problem" for so long as its collective benefits outweigh its costs. The USA are busily increasing that cost today. In the long run, we're all dead. John Maynard Keynes
What could turn the US into the world's greatest Argentina is the arrival of $100 per barrel oil.
Trust me, the US is not going to be an Argentina--maybe a UK loss of financial dominace that occured decades ago. But there just is no logical analogy between the US and Argentina. Just to test your belief in that concept, it means the dollar will absolutely plummet, so you should put a ton of your savings into shorting the dollar, and leverage that bet. If you're right, you'll be a multimillionaire--but I wouldn't do it if I were you.
The problem with shorting and leveraging is that you may be able to predict the direction of a movement, but not its time scale. So you need deep pockets. guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
