If the oil market, tomorrow, switched to the Euro we would see a fall in the PPP of the dollar, a rise in the relative PPP of the Euro, further fall in the dollar as all of the dollar denominated finanical instruments are now worth less and owners start bailing out, a rise in the relative Euro/dollar valuation as the scarity of the Euro relative to the dollar comes into play, a sudden influx of dollars entering the American economy as some players trade financial instruments for hard asset instruments or even hard assets themselves, a dramatic spike of inflation in the US as these bucks flow in, a dramatic spike of valuation of the Euro versus every other currency, the US, and the world's, financial industry would come under intense pressure as their balance sheets go south, a switch in relative valuation of industrial production in China back to the US, a drop in the valuation of industrial production in the Euro Zone, and a fall of oil prices due to increased supply stemming from the lessened ability of the US consumer to buy gas for transportation.
And that's just off the top of my head.
How bad things would get would be dependent on the relative size of the moves of the differing inputs versus each other leading to movement of the totality of the system into a new equilibrium.
Example, a currency is fungible when a buyer and a seller agree on a price. If nobody is accepting dollars then, at that moment, the buck isn't worth anything in the other currency. This is what happened to Indonesia a couple of years ago. Nobody wanted the rupiah and so were not willing to exchange their local currency for the rupiah to purchase goods priced in rupiah and so it collapsed. Once it was seen to collapse buyers waited to be able to glean large arbitrage profits from relative movements of two, or more, currencies. The collapse started to end when trans-national corporations started snarfling up assets - such as factories - on the cheap among others factors which finally initiated a positive feedback cycle. And a new equilibrium.
But an "new equilibrium" does not necessarily mean 'better.' It could be 'worse.' Given the centrality, currently, of the US in the world's economy a collapse of the buck would mean, my feeling is, 'worse' is much more likely.
As things now stand.
In the show this is also something that happened, people stopped accepting dollars in forex transactions. That puzzled me, but now that I think of it it makes perfect sense.
One thing that still does not make sense to me is this: at a certain point (in the show) the eurozone artificially instituted and exchange rate of 1.17 to the dollar. Why would they do that? To keep eurozone businesses competitive (like China artificially controlling the value of the yuan)? Any idea?
If you know 1.17 dollars can buy 1 Euro worth of goods/services in the EU then a dollar will fluxuate around 1.17 Euros +/- externalities like transportation cost, market avaliability of the goods/services, arbitraging opportunities, and yadda-yadda. At the same time it, more-or-less, fixes relative labour cost of producing the goods/services which tend to be the largest expense of those goods/services.
Using the Yuan ...
Right now the trans-nationals can "buy" in low cost labour zones (e.g., Mainland China) and "sell" in high cost labour zones (e.g., US) and pocket the difference PLUS the difference (~ 30% of wage rate) in employee cost. A $10/hr worker in the US costs $13 but in China that same worker would only be paid $1.25/hr and total costs of $1.625 with each worker producing the same amount of goods having the same selling price in the US. Stablilizing selling cost of the good at $15 - just for illustration - the profit on the US worker is $2 versus $13.375 profit from the Chinese worker.
In practice it isn't quite as clear cut, and profitable, but the principle is accurate.
What happens is some bright MBA figures they can increase total profit by lowering the cost of the Chinese made goods by a dollar and only make a measly $12.375 per product but make more by increasing market share -- selling more of 'em. Everybody manufacturing the product in China does the same, and the US manufacturer has to follow, or go out of business. But note the US maker has had their profit margin drop a whopping 50%: $1 to $2. The Chinese makers have accepted a (roughly) 8% drop but they are still receiving a huge profit, compared to the US (EU) maker per item.
Again, in practice it isn't quite as clear cut but the principle is accurate.
Eventually the US (or EU) maker have to abandon their workers and move to China or they go out of business.
Fixing the currency ratio stops this - for a while. But the relative "distance" between the high and low labour cost zones will "narrow" over time. How that plays out is uncertain but usually there is movement towards lower wage rates until some sort of parity, however defined and reached, is realized.
