Thu Nov 5th, 2009 at 04:57:32 AM EST
Originally published on October 8th
In response to Robert Fisk's the 'U.S. Dollar is Doomed
' article in the Independent
on Tuesday, Dean Baker, an American economist and co-founder of the Center for Economic and Policy Research, has an essay at Foreign Policy
"Debunking the Dumping-the-Dollar Conspiracy
Baker points out the scenario Fisk outlined in his anonymous sourced article has been a "persistent, recurring conspiracy theory" over the past decade.
Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil...
Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.
Baker explains that any market "requires a unit of measure" and while the dollar is convenient, "there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market."
"It's simply an accounting issue," he writes.
We don't need no stinkin' conspiracies - diary rescue by Migeru
Baker's reasoning echoes the argument made by many here at European Tribune.
In response to last month's news that the Iran was trading oil for euros, Jerome wrote that "The currency actually used to make the payment makes very little difference as long as the underlying currency to value the trade is the dollar."
To which earlier this week Migeru further refined with "it doesn't matter what currency oil prices are denominated in." Which is something Chris Cook has "always said", mind you.
Bernard added Mish's analysis that "it takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency."
Baker makes a similar point:
If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.
However, Baker concedes trading oil in dollars does increase the demand for dollars, but today not all oil is traded for dollar and the total dollar amount of daily oil trades is miniscule in comparison to the amount of U.S. dollars sitting in the world's currency reserves.
Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.
By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.
Baker points out that lower the value of dollar "was and is an official policy goal of both the George W. Bush and Barack Obama administrations." The U.S. government wants China to stop "suppressing the value of the yuan against the dollar." If Chinese goods become more expensive, then Americans will buy less good from China is the reasoning thus improving the trade balance. "Not too many people would be frightened by this prospect", he writes.
A little more than a week ago, BruceMcF posted an essay titled 'Celebrating the Fall of the American Empire' in which he linked to recent blog post by Baker who noted "China buy U.S. bonds to keep the dollar expensive and the yuan cheap. I admit I had a hard time following and understanding the scenario BruceMcF presented, but I took it to be what happened to the U.S. when China shifted away from using the U.S. dollar as a reserve currency and the subsequent (possibly positive) impact of the collapse of the dollar.
Baker summarizes "the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade."
"The White House wants the dollar to decline anyway because it would improve the United States' trade balance", he adds. Baker concludes:
The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.
Personally as an American who once was able to afford to travel to Europe, I'd like ideally for the dollar to be at a 1-to-1 parity with the euro. But the trade balance between the U.S. and Europe is not the balance I suspect the White House is worrying about. From a personal perspective, since the dollar will probably continue to decline in value my personal emergency savings in dollars will continue to decrease in value. So, it would be best to switch out of dollars into other assets.
Even if the dollar doesn't collapse next year as BruceMcF's scenario depicts, now may be the last best chance for middle class Americans to emigrate comfortably. Leaving the U.S. will only continue to get more expensive.