While you pay oil with dollar, there is no possibility of tanking.
The moment that Russia, Iran and venezuela do not accept dollars there is a chance of a deep fall (to avoid a complete disaster...Saudi Arabia will always be there to the rescue).
People need dollars to pay oil, this is why huge black money in South America-Asia is in dollars. Oil, plus black market makes it impossbile to tank, no matter the deficit.
The deficit can make the dollar fall down, an even an important fall (50% more anybody?).
So China can indeed make the dollar fall , but not tank... not as long as oil is payed in dollars.
Great diary by the way.
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
Indeed
Iraq and Iran were just about to start selling oil in Euros and other currencies in 2002, which is why we hastened to invade Iraq.
Iran is still planning on opening an oil bourse in 2006, where oil will be sold in other currencies. In reply, we are getting ready to use tactical nukes on their nuclear research facilities.
Also, I would no depend at all on the Saudis being America's ace in the hole -- they are going to undergo a complete upside down revolution in the next few years. Most of their population is under 25, and unemployed, and very upset about America being in the Middle East. The House of Saud already has their escape planes waiting on the runway, and their money and diplomatic arrangements waiting overseas. Frames exist within larger frames. Draw a larger frame around your opponent's frame; he will appear wrong or insufficient. This is how wizards play.
There you go again, bein' all reality-based. ;-)
Seriously, though, the current administration is admittedly operating in a non-reality-based world, right? What does reason matter to them? The very reasons you state for de-bunking this threat are the very reasons I see that the smallest threat is probably very real to these people -- they know all this too. Plus, they believe, in ways normal people apparently can't grasp, that perception is everything.
I think they very much operate in a perception-based world. Money isn't a real thing to them -- it's pure power. They get more by manipulating perceptions. They manipulate the stock-market, they peddle influence, they dip in and out of industries trading on insider knowledge. Of course they see currency the same way. And in this world, what is the reaction going to be if someone starts fucking around with intangibles?
You list these things as very important: a common currency, existence of a standard, references, trustworthiness, and stability.
There's nothing concrete there. These are all ideas, giant ones, held together by nothing more than mutual agreement. I think the warmongers understand exactly the same how important these things are, and that's why they take any threat to the idea very seriously. It doesn't have to seem real to us, it does to them. Do you think control of the oil has anything to do with the war? If so, do you think your idea of control and their's is the same? Because I don't think they're all that interested in running refineries. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
The threat (that one takes into account in one's planning) depends always on one's perception of existing threats. These perceived threats are often different to real threats due various cultural and personal reasons and assumptions.
Usually you do not know real threats until afterwards when things have happened like they did and truth finally starts to filter through. This time lag could take long time depending on organization or person involved.
So, money based on the Gold standard is based on the belief that, if the going gets tough, you can buy the favour of powerful people by giving them gold so they can look pretty.
A fiat currency, all right. guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
We're dealing with, I think, the problems associated with whatever is the agreed upon standard, be it gold, oil, seashells, or whatever else. It is, at bottom, all about trust. The problem with people like the current administration is that they don't really understand trust. They only understand loyalty, fear and force. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
And I wouldn't say that the whole idea of gold was to bribe favors from the powerful. I'd say it was a tangible manifestation of something of agreed upon value that could be used to back up pieces of paper that we would trade -- something to show so it wasn't all just trust.
But, if a monarch or country printed pieces of paper based on gold that was hidden somewhere, but in reality that gold had been looted -- would the rulers still fight to protect the hiding spot? It's been shown throughout history that they'll fight harder to protect the revelation that there's no gold than they would to protect the actual gold.
So at what point does it make a difference? And when one thing is a symbol of something else that may or may not even exist, does that make the subsequent warring any less real? Because I'd argue that much of the behavior we're witnessing right now is a result of something like gold fever, even though there's no gold involved.
The oil, having some useful purpose, actually clouds our vision when we're trying to understand what's going on. Just because we have a fiat currency, doesn't eliminate the human impulses behind certain behaviors we've seen in the past. That's why I think some things can be about the oil and have nothing to do with oil at the same time. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
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.
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
Because Saddam had swtiched to Euro trading for oil, thus threatening the US military-industrial complex which needs to print money.
This is a fact. You can't be me, I'm taken
You may disagree with the simplistic view that I lay out. But I still say that protection of dollar energy trading was a key factor in the US Administration's thinking on Iraq - especially given that it appears to have been Cheney driven with Oil companies in mind... You can't be me, I'm taken
In terms of long term strength, I'm just looking at productivity trends, growth, and the US position in what I think are key markets for the next 5 years--technology (IT), healthcare, and financial services. I for one like where the Dow is in terms of the last 5 years, and where the Dow is in terms of the very long term. I see it positioned perfectly for significant growth, but as you correctly state, others see doom and gloom. That's good--different opinions make markets work well. But actually I'm not trying to convince anyone of this, it's a forecast that obviously could be wrong--I only mention it because I find people think very seriously about economics before they bet their pocketbook, their retirement, their future--so you'll know I've thought about it--but still could be wrong. Since I wrote my growth diary on Sept 15, the Dow is up 2% ish, and the Nasdaq 5% ish (nasdaq has a higher perc entage of the growth stocks I like). Now my forecast was for 5 years, with ups and downs--so I'm not celebrating--but it's better than a stick in the eye.
Given that they could have a Euro Oil market if certain major producers switch from dollars, then of course they will find the right price to make a profit.
Traders cannot trade in markets that become defunct. So I don't think you quite understood the argument. You can't be me, I'm taken
Now I'm playing this for the med--long term, 5 years, and expect ups and downs,,,,but I am becoming more encouraged with my prognostication based on events this month.
CPI: +3.2% M3: +7.3%
The DOW is down 1.2% versus CPI and down 5.3% versus M3.
I concur both figures have problems. The CPI is notoriously a "political" estimate. But loss of year/year Purchasing Power needs to be estimated when analyizing investment returns.
