Currency economics.

HoldStady

Hi

http://www.independent.ie/opinion/analysis/economic-power-shifts-as-oil-slips-away-from-dollar-1904863.html

By Robert Fisk

Tuesday October 06 2009
In the most profound financial change in recent Middle East history, Gulf Arabs are planning, along with China, Russia, Japan and France, to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place, although they have not discovered the details, are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs.

Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.

"Bilateral quarrels and clashes are unavoidable," he told the 'Asia and Africa Review'. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."
This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil, yet again turning the region's conflicts into a battle for great power supremacy.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power, along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system, which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60pc of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq, blocked by the US until this year, and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Chinese exports to the region now account for no fewer than 10pc of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease pressure on the euro.
'These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

I have a few questions about this article.

I remember when Iraq changed to the Euro for its oil and this was coincided with a massive increase in the reasons for attacking Iraq. However this article leads me to a few questions:

1) Would the dollar die a death if was not tagged to oil and would it make the current situation there/ in the West much worse.
2) If so could this be used as a bargaining tool for Iran in current nuclear talks ie stop annoying us or we change to the Euro (especially if before the importance of this was enough to go to war about).
3) The BRIC countries are mentioned in this article along with another one written by David McWilliams. The importance of these countries grows by the day. This is more an opinion.
4) Could someone explain the movements in currencies ie how China's artificial valuation of the YUAN lets the dollar slide. Can you buy the YUAN for later appreciation as predicted by David Mcwilliams last week.

http://www.independent.ie/opinion/columnists/david-mcwilliams/chinese-takeaway-is-paid-for-with-american-dollars-1893425.html

I have a lot of questions but there seems to be a lot of change going on and the currency changes are just signs of the upheaval but I would like to know a bit of the mechanics of the oil sales in dollars especially.

Time Magazine

By Robert Fisk

There's your main problem

Think about this for a minute. Imagine you're living in 1800, in a crappy house shared with two other families in the west of Ireland. You left school at ten, farmed the land and at times had barely enough food to survive. Call this Point A. Fast forward 200 years and think of how we live today. Call this Point B. Going from Point A to Point B has very little to do with whether we use punts, pounds, dollars or euros. It certainly has far less to do with what Iran uses to buy and sell black stuff. Movement from A to B is caused by a load of great inventions (cars, planes, thermos flasks, telephones, condoms, choc-ices, Grainne Seoige, television, pizza, internet, boards.ie); discoveries (Pasteurisation, electricity, radioactivity, Leitrim); innovations (democracy, widespread education, mass-production, universal piped water, rural electrification, national health services, the free travel pass) and the accumulation of capital (Ardnacrusha, the N17, Farmleigh House, Christchurch).

It's these widespread improvements through time that make our lives so much more comfortable than those of our ancestors eight generations ago. We're not going to stop being educated, stop having piped water, stop having machines that can produce 48,000 nails a day or stop eating choc-ices because Iran goes off in a huff. It might cause a temporary shock where we experience inflation/deflation while we sort our monopoly notes out, but ultimately that's not looking at the bigger picture. Even in this awful recession there's still more than €30,000 per head, which is better than 2000 never mind 1800.

And if you don't believe me, you can read what Prof Jim Hamilton (an expert on oil prices, basically) has to say about it.

HoldStady

HoldStady wrote: »

2) If so could this be used as a bargaining tool for Iran in current nuclear talks ie stop annoying us or we change to the Euro (especially if before the importance of this was enough to go to war about)..

The Iranian Oil Bourse opened last year to trade oil in currencies apart from the dollar..It could probably be argued that the last couple of years of Iranian hostility could be down to this..

Wikipedia

The opening of the bourse coincided with a mysterious cut off of internet to the middle east too if I recall correctly..

Time Magazine

Deleted User wrote: »

It could probably be argued that the last couple of years of Iranian hostility could be down to this..

And if you'd like to make that argument, feel free. Otherwise, you're not in the right place.

Deleted User wrote: »

The opening of the bourse coincided with a mysterious cut off of internet to the middle east too if I recall correctly..

This is Economics forum. We discuss economics here. We don't talk about ludicrous conspiracy theories. The OP wants to know the economics behind these conspiracy theories, which is perfectly fair. If your intention is to just come along here and throw out soundbites, please do it elsewhere.

Hasschu

The decline of the US$ as a reserve currency has been underway for at least a decade. When the Euro was introduced it was attacked by US politicians and the Wall Street fraternity. The writing was on the wall at that time. The first time I had US cash declined was in 2007 in Argentina the Euro was the preferential currency in their eyes. The US$ will continue its slow decline as a reserve currency, it will be a death by a thousand cuts over a decade. Individuals, corporations, governments will slowly back away the main reason being that other than the Euro there is no other alternative. By that I mean there is risk associated with individual countries so that while you can put a small proportion of your assets in many countries with little risk a country like England for example would have led to losses in the recent past. This can happen to any country at any time but is less likely to happen to large economies such as the EU and the US and when it does there is enough liquidity to get out quickly.

paddyman

Sinking a countries currency is a sure way to cause havoc to its economy. The US economy/dollar is no different in this regard. The problem is the size of the dollar economy and its hold in the world economy.

There is an extreme view on this based on the dollar/oil relationship. The dollar used to be linked to the gold standard. I.E. 1 dollar was worth .xx grams of gold. The problem was accountability. The US said 1 dollar was worth .xx grams of gold but in reality they kept printing more and more dollar's without enough gold to back it up. I think it was France that decided "ok, here's your dollar's back, give us the gold for their value". This opened the problem and America defaulted on its gold payments. This could be viewed as the US admitting its insolvency.

So we have a world of economies stuffed with dollar's that now have a lot less value then what they were supposed to be worth. Oil was/is a massive market. What the US government did in a stroke of genius was get countries in the middle east (especially the Saudi's) was to only sell oil in Dollar's. This started the process of the Dollar's becoming the international unit for buying and selling.

This meant that countries needed dollar's so they could buy oil/goods ETC giving the dollar its reserve currency status. This new power gave the US the ability to keep printing dollar's which countries needed to hold more and more off. I.E. here's a billions dollar's, give us a billions dollar's of oil...How much does it just cost the US to do this? Nothing, its just accepted as dollar's are perceived to have a value. I could print a billion Paddy dollar's and ask you for a billion in oil but it aint going to be accepted!!

However this fantasy that you can run massive debts/keeping printing money without effect was never going to last. The fact is the Dollar is a hyper inflated currency loosing more of its value every year. There are trillions and trillions of dollar's in the world between holding's in central banks/US own economy/funds/markets ETC but what value do they really have. Unpegging the dollar from oil ETC means more countries are going to need less dollar's so they going to sell them. Supply and demand means the more dollar's been dumped onto the market decreasing its value. America can't take them all back, I've read estimates that it can't even take 10% of them back without collapsing. So what happens next????.

As can be read in the article countries are tired of this hold. They are changing the international markets and removing the dollar from its status of reserve currency. But collapse the dollar and you'll collapse the world economy into an even bigger recession then were in now. No one wants to wipe billions from there economies by making there dollar holding's worthless.

It is a very interesting topic which no really has answer's to, but there are a lot of points of view. Can the us transform its economy to an export led one? Can it turn around its finances? Can it pay off its massive debts? Will the US scrap the dollar for a new currency? What effect would this have on the world?

Low Energy Eng

Folks,

I've subscribbed to Peter Schiffs youtube vids as I find them quite interesting.
Anywho, some light watching regarding the O.P.'s questions.

Demise of the Dollar


http://www.youtube.com/watch?v=DyTr-EZJF-I

HoldStady

Thanks for the replies. The you tube vid was interesting. Hyperinflation in the US and Hyper deflation in the rest of the world.

I'm getting my head around the dollar and the strains current policies are putting on it.

Okay, the Chinese are lending to America. They get paid back in dollars. The dollar is weakening therefore China is trying to buy up resources with the dollars in order to relieve its burden as the dollar devalues. Synopsis of David McWilliams piece and makes sense here with the replies given.

However how does the artificial protection of the yuan affect this. Is it that they do not let people buy their currency and therefore trade it, increasing demand and pushing its value up, or is it that China printed shedloads of money when they rescued their economy therefore increasing supply and keeping the currency weak. Or are they doing something totally different?

daveirl

This post has been deleted.

Hasschu

"Artificial protection of the yuan". When any country except the US moves its currency up, down or sideways relative to the US dollar it is always labeled as artificial, manipulative, unfair by US politicians and bankers. Trying to keep a currency undervalued as China is accused of doing is extremely difficult and rarely successful. For example the Canadians are trying hard to keep their currency from rising against the US $ with little success. If a 1/4% bank rate and politicians threatening action to keep the $C down doesn't work then what will. The US$ is declining because it is widely expected that the US will take the easy way out and that is to keep interest rates low and the flow of money up using quantitative easing. The alternative is to raise taxes and cut spending which would mean the elected millionaires would lose their seats which to them would be a real crisis that must be avoided at all costs.
We are lucky that we are subject to checks and balances that will ensure our boys in the Dail cannot do too much damage beyond Nama which is too much already.

daveirl

This post has been deleted.

Hasschu

The last thing the US wants is a strong currency. They will continue to maintain that the US $ is strong and will remain strong long into the future. They are desperately seeking trade advantage by forcing China, Japan and the EU to keep the value of their currencies high with respect to the US$. They hope to manage the rebalancing in an orderly fashion while reducing their external trade imbalances. The goal is to create manufacturing jobs in the US which will only happen if the US $ depreciates 20% to 30% relative to its major trading partners. The other tack and this should not be ruled out is to impose import duties of 20% to 30% or to ramp up non tariff barriers to trade which is under way already. Or god help us, they could do both. By the way a trade agreement with the US is just as solid as our treaties with the British were over the centuries.

HoldStady

he other tack and this should not be ruled out is to impose import duties of 20% to 30% or to ramp up non tariff barriers to trade which is under way already. Or god help us, they could do both. By the way a trade agreement with the US is just as solid as our treaties with the British were over the centuries.

Isn't this what the Smoot Hawley protectionist bill did which was a major contributor to the great depression. Is the WTO not supposed to deal with this. I thought the Obama administration had moved away from this despite his non trade agreement rhetoric during the election. Can you show where they have made these movements. Surely the EU/ China would be up in arms.