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LQD: Iran at the crossroads

by Migeru Tue Jul 9th, 2013 at 07:14:40 PM EST

From our very own Chris Cook: Iran at the crossroads (Trend, 9 July 2013)

...  today's high oil prices have not only acted to deter consumption, but have enabled Iran to act against unsustainable energy subsidies and pin the blame for an unpopular policy firmly on the US and EU. Iran's far-sighted strategic decision to process Iranian oil and gas into petrochemicals is now bearing fruit, since it keeps in Iran value previously extracted by the country's oil buyers, and transcends sanctions on crude oil.

...

... being ejected from the international SWIFT bank payment system meant that Iranians would necessarily have to use their renowned ingenuity to do something else. I also pointed out that the inability to access Swiss hard currency bank accounts would deter anyone tempted to take advantage of an official position.

In my view, even if Iran is tempted through negotiations to go back down the Western financial road, the toxic combination of partisan US politics and external relationships are such that financial sanctions are to all intents and purposes irreversible, at least in relation to the dollar.

You can read the rest over there, and comment over here.


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Very interesting and well written.

By definition, the oil and gas reserves of Iran will be a permanent target for the industrial and consumption powers of the planet. How will Iran withstand this threat?

Glencore has become a key Russian oil trader ...
"Igor Sechin left the government and was appointed Rosneft chief executive. Sechin took a course of industry consolidation and sealed a $55bn deal to buy out the Russian - British oil consortium TNK - BP."

In the "prepay financial instrument now re-emerging in use in fact pre-dates the banking system" are you referring to the Italian and Dutch merchants use of the bill of exchange? It predates the Amsterdam bourse and VOC.

For the present, how does the exchange in gold (Turkey and UAE) play a role for Iran to make trades in oil and gas possible? It seems India and China do not participate in the sanctions on Iran.

by Oui on Wed Jul 10th, 2013 at 07:43:57 AM EST
For the present, how does the exchange in gold (Turkey and UAE) play a role for Iran to make trades in oil and gas possible?

Ultimately, it allowed Iran to obtain US$s, Japanese Yen, Euros etc. from the gold souks in the UAE. But this makes clear why the price of gold has dropped so notably in the last few months. Gold is just roadkill of the US sanctions regime for Iran - likely funded by 'QE' for JP Morgan. The Fed credits Morgan's account and Morgan purchases naked puts on gold. That certainly would not be inflationary and, so long as the US Government wants to punish Iran, they can just keep doing it - while correctly denying that they are 'just printing money'.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 10th, 2013 at 12:23:03 PM EST
[ Parent ]
I think that the dangers of Iran oil and gas being 'liberated' ended in or around 2007, when my take is that the US had an end of empire 'Suez Moment' and we went from a military and economic unipolar world to an economic bipolar world.

That is to say, since that point - when US was indebted enough to China that they became capable of Mutually Assured Economic Destruction - we have seen currency and cyber conflict, not military. Another way of looking at this is that energy security is as much a red line issue to China as it has been for 100 years to the US.

Re Bills, absolutely correct. Bills of exchange ('Real Bills')are the paper equivalent of private sector use of tally sticks.

Gold has indeed been used via Turkey to settle transactions with Iran, but physical gold is a clumsy and expensive means of settlement. Having said that, gold-backed clearing of trade credit obligations would not be Rocket Science. The problem is the need to hedge the gold price by reference to the unit of account.  ie the dollar.

I heard that China is now sitting on maybe $50bn owed to Iran, and is refusing to settle other than in kind, which doesn't go down too well with Iran since the Iranian public does not have a high regard for Chinese quality.

Note that this reluctance to pay $ to the order of Iran is not a matter of choice for China. They are - and have been for some time - extremely short of dollars, despite sitting on mountains of T-Bills.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Jul 12th, 2013 at 08:52:15 AM EST
[ Parent ]
Note that this reluctance to pay $ to the order of Iran is not a matter of choice for China. They are - and have been for some time - extremely short of dollars, despite sitting on mountains of T-Bills.

Please explain how this situation can persist for so long. Could they not just discount those bills by a sufficient number of basis points and sell them to anyone else who is short dollars or are these 'registered' T-Bills that can only be redeemed by the US Government?


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 12th, 2013 at 09:35:29 AM EST
[ Parent ]
I think that the dangers of Iran oil and gas being 'liberated' ended in or around 2007, when my take is that the US had an end of empire 'Suez Moment' and we went from a military and economic unipolar world to an economic bipolar world.

That is to say, since that point - when US was indebted enough to China that they became capable of Mutually Assured Economic Destruction - we have seen currency and cyber conflict, not military. Another way of looking at this is that energy security is as much a red line issue to China as it has been for 100 years to the US.

As I said at the time, when many here were convinced we were going to invade Iran, the chances of such a "liberation" were pretty much nil.  Even if the US public had no appetite for it, and I suspect the Iranians would be quite happy to blow Abqaiq and other installations off the map in the event of an invasion.  Which would completely negate any benefit the neocons might conceive.

Even with the crazies running Israel, I don't see much risk of an attack from them.  It would be as damaging to Israel militarily and demographically as it would be to Iran.

I also don't know what you mean by Mutually Assured Economic Destruction.  You haven't fallen into the "ZOMG China owns all our debt" trap, have you?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jul 13th, 2013 at 10:01:13 AM EST
[ Parent ]
Even if [T]he US public had no appetite for it, and I suspect the Iranians would be quite happy to blow Abqaiq and other installations off the map in the event of an invasion.

Bah, FTFM.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jul 13th, 2013 at 10:02:36 AM EST
[ Parent ]
Nope.

If China liquidates its T-Bills aggressively and then sells the resulting dollars aggressively for other currency things get rather nasty for the US at the same time as losing a fortune for China.

They are essentially like two drunks holding each other up.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 14th, 2013 at 05:36:32 AM EST
[ Parent ]
How does it get nasty?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jul 14th, 2013 at 09:14:20 AM EST
[ Parent ]
The same way China would lose a fortune? If a large net holder of US Treasury notes aggressively sell those notes for other currencies it would depress the price of those notes and of the US$. This would greatly displease many of those who are currently renting the US Government as US Treasury notes and bills are the base of the US monetary system, of the US money supply and of their wealth. If the action resulted in a 20% loss of value for US Treasuries that would satisfy the definition of a depression. (I don't know how much China could affect the price of US Treasury Bonds and the US$ but I suspect we would at least notice and it might have catastrophic consequences for the derivatives markets.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 14th, 2013 at 10:35:40 AM EST
[ Parent ]
You'd need to start paying full price for your imports.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 15th, 2013 at 03:12:49 AM EST
[ Parent ]
You'd need to start paying full price for your imports.

Oh My God! Inflation! But wait, it would be in the context of a deflationary environment and might even spur increased repatriation of US manufacturing from China.

The Fed, Treasury and Congress refuse to consider the two things that they could do to produce inflation up to at least 2%: QE for the people and or stimulative fiscal policy directed towards infrastructure and social needs. China aggressively selling its Treasury Notes could do it for them while possibly reducing the size of the financial sector. But the entire US government would be too busy again trying to put Humpty back together again to allow anything helpful to the people.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 15th, 2013 at 12:55:07 PM EST
[ Parent ]
No, terms-of-trade driven price increases generally do not help alleviate domestic deflation, unless the terms of trade deteriorate to the point of hyperinflation. They certainly do not have a stimulative effect - if anything, terms-of-trade driven price increases are more apt to create stagflation. And we all know how Modern Independent Central BanksTM and Pragmatic Centrist PoliticiansTM react to stagflation.

It mightwould incentivize reshoring, yes. But that takes more than one election cycle, so from the perspective of the incumbent government it's all pain and no (or very little) gain.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 15th, 2013 at 01:19:53 PM EST
[ Parent ]
If the items of trade concerned were essential to the US economy - food, fuel, vital raw materials, I would agree. In the case of China almost everything that is imported is something that could be wholly or partly foregone for a considerable period. Of course reduction in the value of the US$ could affect imports of oil from the mid-east, but in a world wide deflation the price of commodities will fall all around. My biggest concern would be for the effects of the captured government's efforts to protect the wealth of its captors - the financial sector.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 15th, 2013 at 03:46:03 PM EST
[ Parent ]
None of the above analysis requires the imported goods to be essential or strategic.

The stimulative impact of inflation is that it increases the nominal cash flow in the domestic nonfinancial private sector relative to the domestic nonfinancial private sector's nominal debt burden. If the price increases are driven by deterioration of the terms of trade, then it is perfectly possible to have deteriorating nonfinancial domestic private sector cash flows and rising consumer prices at the same time. This is called stagflation in the vernacular, and is generally considered a Bad Thing.

(This is why central banks should not target consumer prices. If they are to target inflation at all - a dubious proposition in itself - they should target prices net of taxes, interest and changes to the terms of trade.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 15th, 2013 at 06:24:42 PM EST
[ Parent ]
I see what you are saying, but would not this be a transitory effect IF, as a result of a decline in the terms of trade, import substitution from repatriation of production were to occur. And, additionally, might not the positive effects of increased domestic manufacturing in such a situation be worth the government providing incentives for such repatriation?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 15th, 2013 at 08:02:27 PM EST
[ Parent ]
I see what you are saying, but would not this be a transitory effect

All effects are, ultimately, transitory.

Including constitutions.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 16th, 2013 at 02:35:43 AM EST
[ Parent ]
Yeah, and in the long run we are all dead. But for economic policy it is the next three to ten years we should be concerned with, not next quarter, next election or next century. Let our environmental policy be concerned with the next century and have our economic policy be consistent with it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 16th, 2013 at 10:27:06 AM EST
[ Parent ]
 (T)he "prepay financial instrument now re-emerging in use" refers to the 'tally stick' method commonly used by monarchies in the Middle Ages to handle feudal payments to the monarch. It was used in England prior to the time of the establishment of the Bank of England in the late 17th Century.

See Chris Cook's diary: Euro Stock - Part One - the Tale of The Tally

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 10th, 2013 at 12:09:43 PM EST


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