The Iran Bourse Meme
"The U.S. will bomb Iran because Iran attempts to start an oil bourse."
That is meme flying around the blogsphere and in some comments here. It is wrong.
The meme is constructed around this thesis:
"The value of the U.S. Dollar would go down, if oil would be traded in exchange for other currencies."
Thereby, this construct says, it would seriously harm the U.S. and the U.S. preempts this with war.
Two distinct different transactions and economic calculation are mashed in this argument.
First: I want to sell this stuff. How do I get compensated?
Sometimes a compensation might be a product or commodity. During the cold war the USSR delivered gas to Germany and got compensated with thousands of miles of special seamless pipes and other industrial goods. I did learn to weld at a shipyard that sold ferries to Indonesia for thousands of tons of agriculture goods.
Usually the compensation medium is some form of money and the preference is on the side to have it in a currency that is universally accepted. The U.S. Dollar is a usual candidate, as is the Euro. Gold in the form of gold related currencies could be a good candidate too. But you would also take rice, sheep or tons of ore, if that is the better deal at hand.
Everybody thrives to optimizes the deal. The currency is not relevant in this, the value is.
You make a deal where you exchange one value for another value but when the deal is done, and you are not in immediate need of seamless pipes or rice or dollars, there is the real question.
Second: How do I store this value.
If you did get a somehow interchangeable value for your goods, dollar or euro or gold or rice or ore or sheep, you are not a bit restricted in your decision here. The penalty for changing a billion $ to € or vice versa is quite small. For ore it may be bigger, but you would have reflected that in the deal above.
All this dwarfs if you look at yield differences and risks of various investments. Do I buy a 4% bond in currency X or a 2% bond in currency Y. Will X fall and Y rise? Do I buy shares in A or in B? How are the dividends?
This decisions is not based on the currency you did the deal with. It is based on expectations of inflation rates or company prospects.
A Iran oil exchange or trading place is not a danger for the U.S. $. Someone who trades oil does not care about the currency related to the exchange as long as that value is, somehow, interchangeable with others. The currency question only comes up in investments where the yield of a euro bond may be less of a the yield of dollar bond while the dollar bond may have a higher risk of inflationary devaluation.
So the Iran oil-exchange meme is wrong when it is founded on the trading currency - dollar dump argument.
The meme could be right if it were is based on the notation that both of todays major oil trading places, the IPE in London and the NYMEX, are owned by powerful U.S. banks.
Owning an exchange includes making the rules and judging on them. That allows for some creative schemes to boost ones profits. But there is not yet much prove that the lobbying of these folks would induce a military conflict of the foreseen grade.
But the power to control the flow of oil, to be able to deny oil to some at will and to give it at favorable (with a profit) rates to other is a much bigger financial and national interest incentive than some trading scheme profits.
Iran is THE middle east producer that is currently NOT under U.S. control.
With Iran under U.S. control, any U.S. President would have great leverage to deny oil at a reasonable market price to any other state. Be that Japan, some E.U. country that doesn´t follow the rules or China, the ultimate enemy the military-industrial complex needs to have.
So what is the best way to make Japan, the E.U. and China your enemy?
Posted by b on January 24, 2006 at 22:17 UTC | Permalink
Perhaps the meme should be:
"The value of the U.S. Dollar would go down a tiny bit faster, if oil would be traded in exchange for other currencies."
And perhaps that is sufficient.
Posted by: correlator | Jan 24 2006 22:35 utc | 2
Thanks for this Bernhard. Something wasn't right about the petroeuro bourse-crashing-the-dollar argument, which reminded me of the Y2K meme in 1999. For instance, why would Iran [and Iraq before it] go along with Bush's/MSM's covering-up the bourse reason for war?
The meme incorporated some facts to give it an air of truthiness [love that word!]. What's your interpretation of the US decision to stop measuring M3 in March?
Posted by: gylangirl | Jan 24 2006 22:40 utc | 3
It would be nice if Billmon would chime in on this; he is usually pretty cogent on these type of matters.
I liked DiD's post on this from the previous thread. To pick up on his thinking, the move (or threat thereof) to a bourse seems to help Ahmadinejad consolidate power centrally and away from oil traders who may have a higher allegiance to profits than his government.
I thought the issue was one of foreign currency holdings; that all nations needed a supply of dollars on hand for currency exchange, but that this was diminishing due to them pegging their currencies to "mixed baskets." The oil bourse was only suppossed to accellerate the trend, not cause the dollar to crash--that is a gross oversimplification.
b- I don't know very much about these things, but I thought that if a nation had a debt to production ratio that is as large as the US's, they would be considered at risk of financial apocalypse or something.
like GM being rated as junk.
I also thought that the reason the US had been able to get away with running such a deficit and maintaining such a low rate of savings was because they are the currency that sort of oils the engines of int'l finance.
Posted by: fauxreal | Jan 25 2006 0:26 utc | 5
b-
As I said on another thread, with today's announcement of Ford shedding 30,000 jobs, it might be interesting to set up a thread to discuss what seems to be the planned de-industrialization of the United States, and the consequences thereof.
b,
I believe devaluation of the dollar is a concern. In the early 1970s when the US went off Bretton Woods, the devaluation of the dollar caused the 1973 oil embargo. The middle east wanted more dollars for a barrel of oil due to getting cheaper dollars. So, this is a problem, but I believe the real concern for the US and particularly banks, is if a bourse takes palce and others start doing the same, the recycling of petro dollars to US and London banks will stop. If another "basket" of goods to park the medium of exchange is found, ie Euro, yen, metals, water, real estate in Afghanistan, who knows, wow, the US is in big trouble.
Now on the China issue, the admin was supposed to address China years ago, but got bogged down in Afghanistan, and then the stupid neo-cons decided to go into Iraq. What fools.
I also agree with Malooga, the de-industrialization of the US has real excelerated under Bush. It's as if they are purposely breaking the middle and lower classes at an ultra hyper speed rate instead of the slow drop of the 1975-2000 period. What the f--- is up? Something major or tin-foil hattish must be going on.
Posted by: jdp | Jan 25 2006 2:16 utc | 7
It's as if they are purposely breaking the middle and lower classes at an ultra hyper speed rate instead of the slow drop of the 1975-2000 period.
it almost feels like they know their days may be numbered so they are hurriedly going for the biggest grab,weakening us as much as they can, disabling us so we can never fight back.
Posted by: annie | Jan 25 2006 3:08 utc | 8
It is larger than that Annie, because the DemDems are not opposing this. It is an elite driven conscious strategy. What the intended endpoint is, I'm not sure.
@annie,malooga et al
Are Conservative Republicans Now America's Permanent Ruling Class?
Posted by: Uncle $cam | Jan 25 2006 5:22 utc | 10
US wants to control Iran because of its oil and gas reserves. Controlling Iran means choking off China and other future competitors. The US is a naked empire, and behaves as such.
The enitre US economy and structure is based on cheap oil and gas...from our McMansions, to our sprawling suburbs and low-density housing which makes public transport impractical. That's why, 'going green' really won't help much. The costs will be still high enough to KO a weak economy.
Posted by: folkers | Jan 25 2006 5:33 utc | 11
Malooga - have you visited a 3rd world country recently? The rich have it good - much better than they have it in the US. Servants, drivers, usually low taxes, and an insurmountable education gap between the rich and the poor are the attributes we hope to copy. Factories are cheap to own and operate. This is a race to the bottom - of course some places are already at the bottom - and that's why we do business there. This single issue caused me to reevaluate the value of free trade. Some trade protections are needed if the government is to serve its people (instead of multinational corporations).
But be sure, we'll race to the bottom in style - American Style - so you can feel like you're at the top while all the way down.
Posted by: Obs | Jan 25 2006 13:55 utc | 12
There is a great brief article at CounterPunch called "Exporting Jobs and Security."
This is the thing thats happening, the US is the global military force of the New World Order and the only way out of poverty will be military service because all manufacturing will be overseas.
We are in some scary assed times.
Posted by: jdp | Jan 25 2006 21:42 utc | 13
the link to jdp's above recommendation -- The Bush War Economy: Exporting Jobs and Security by bruce gagnon
Posted by: b real | Jan 25 2006 21:56 utc | 14
b,
I think you are greatly understating the importance of IPEX.
The importance to the shadow government.
The London base is vitally important for money-laundering and other such black operations.
Think Marc Rich and his ilk.
Posted by: John | Jan 25 2006 23:30 utc | 15
jdp and b real have highlighted something that has been a concern of mine for some time. That the people in the US will be left one option. That option is whether to become the mercenaries of the Imperial order or not.
By tying the people's individual life path to whether or not the latest heist is successful, the elite have a self manufacturing consent process complete with automatic built-in policing of dissent.
But there is a major flaw in this system of governance that we have touched upon in recent days in other threads.
That is exposed if the cannon fodder becomes heavily and massively disillusioned. Then the elite are confronted with well trained, self sufficient dissenters who are not likely to surrender at the first sign of unreasonable force.
This is not a new conundrum for large empires and the elite are poised to answer it in a similar way as the roman empire did.
That is to recruit the imperial forces from non-citizens and ensure their loyalty by making the carrot a grant of US citizenship at the end of a long career. If possible grant the retirees a stake in the territory which they have assisted in vanquishing and in that way provide the empire with a reserve of citizens who are trained and ready to defend the new holding to the death.
Eventually Roman soldiers were barred from entering Rome altogether, apart from the occasional Triumph given an army after a famously successful campaign.
If memory serves it was after a triumph that Julie made hisself Ceasar. The generals who later followed Ceasar's example ensured that triumphs were few and far between.
As the US citizens have become increasingly reluctant to be BushCo cannon fodder, the bossfellas have turned to recruiting fresh meat for the maw for the vast repositories of the poor and marginalised dotted about this planet.
After a hiccup or two it seems that the military establisment prefers not recruit followers of Islam. However Latin America is providing a lot of Xtian hopefuls.
One can't help but wonder if the surge in genuinely representative government in central and south america is in somehow connected to the recruitment of the usual candidates for the school of the americas straight into the US forces.
That is, now that the bulk of the stone killers from those nations are going straight into the imperial army; the 'machine' which kept people in south and central america oppressed, is no longer functional.
Posted by: Debs is dead | Jan 25 2006 23:44 utc | 16
By tying the people's individual life path to whether or not the latest heist is successful, the elite have a self manufacturing consent process complete with automatic built-in policing of dissent.
This is what the privatisation of Social Security is all about. Get 'em rooting for the Halliburtons and Bechtels and GEs and Raytheons and their blood-soaked contracts. Get 'em cheering when management cuts another union benefit and one's chosen stock goes up. Hip Hip Hooray for Everyone! Suddenly the interests of Joe Shlub are aligned with the CEO of Chase Manhattan. If you dissent from this tie-in, you starve. If you believe in Social Justice and the environment, you starve. That's what an "Ownership Society" is--it's a society with absolutely no collective values or conscience or interests. Me, Mine, Now. Consequences are for "others." If my kids are lucky enough to survive my ignorance, they can reprise the crime.
One can't help but wonder if the surge in genuinely representative government in central and south america is in somehow connected to the recruitment of the usual candidates for the school of the americas straight into the US forces.
Sorry, Debs, you're wrong here. Recruitment is largely from Central America, which is still solidly under the thumb of US approved strongmen. Also, remember we have two schools that count here in the good ole US of A. The School of the Americas is but one. Those that attend the other carry the title of "Harvard educated economist at the World Bank" after their name. Those that attend the first school bring back the stick for their poor brothers and sisters. Those that attend the second bring back the carrot for their rich brothers and sisters. South America, except for Venezuela, (Bolivia is yet to be seen) is safely under the watchful eye of the carrot-givers. These folks are all too happy to pay back IMF debt off the backs of their poor, kinda like Clinton. Then the tide will turn and the next leader will refinance now that the country is back in good standing with the money lenders.
b,
This thread is probably now dead.
So I'd like to substantiate what I said above about IPEX and London.
London is the centre of the protection racket, as I found to my own cost.
I'll give a reference below, but first a caveat. It will take some time to read (half an hour?) and more to comprehend.
But comprehension brings profound insight.
Posted by: John | Jan 27 2006 13:18 utc | 18
If the thread was otherwise dead, may I have the last word by pointing out that the man contracted to set up the Iranian bourse, Chris Cook, also thinks that there is no neccessary conexion between it and the dollar's value.
"As anyone familiar with the Organization of Petroleum Exporting Countries will know, the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with economics will tell you, the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the United States, liabilities ) these proceeds are then invested."
He goes on to explain anti-Iran sabre rattling in terms of Iranian financial support for Muqtada al-Sadr.
Posted by: apodo | Jan 28 2006 14:47 utc | 19
Well, I don't know if the thread is dead or not, but no one has explained here to my satisfaction why the compelling arguments made by others linking the Iranian Bourse to a devaluation of the dollar and subsequent potential wrecking of our fragile economy is wrong.
I thought the US is still the largest debtor nation the world has ever seen. I thought also that a major exchange for oil settled in Euros rather than dollars would, in fact, signal to much of the world that it no longer needs to purchase dollars to buy its oil. This seems only like common sense.
Such actions would likely cause other nations to diversify their holdings by adding Euros and by reducing their need and desire to purchase dollars, thereby causing a reduction in the demand for dollars and a proportional decline in its value. When coupled with the staggering US debt, it only seems logical that more and more nations would likely choose not to continue to prop up the dollar as the world's reserve currency, making foreign resources (such as oil) even more expensive. In the case of oil, which will have continue to have upward pressure on its price due to a constricting supply and the increased demand from China, the US, and the rest of the world, irrespective of the dollar's relative value, the US economy would get a double whammy by sharp, unprecedented increases in price due to supply/demand market forces AND a devaluation of the dollar.
The Iranian Bourse, to the extent that it becomes the sole market by which Iranian oil is sold, could easily be the tipping point that causes many nations not to continue to prop up the dollar which, in combination with the other factors previously mentioned, would make the oil/economic crisis of 1973 look like child's play.
What is wrong with this assessment?
Posted by: Jeff | Feb 14 2006 0:45 utc | 20
February 15, 2006
The End of Dollar Hegemony
A comprehensive look at the scales weighing the never-balancing monopoly of the US dollar and why war with upstarts is inevitable.
It's worth a read, here are a few of the high points:
".....In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that's the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.
It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come....."
"....The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.
The artificial demand for our dollar, along with our military might, places us in the unique position to "rule" the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can't last....."
"....Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world's rejection of the dollar. It's bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.
Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged-as it already has been...."
"....Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.
And once again there's this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros...."
Posted by: HON. RON PAUL OF TEXAS | Feb 19 2006 13:16 utc | 21
The comments to this entry are closed.
Opening a new exchange is perhaps a good way to keep it that way, meme or not. I disagree with your assertion that the currency doesn't matter. The actual costs of changing are, in my opinion, high. I don't think you made your case that, somehow, switching away from what we can print at will doesn't matter.
Posted by: correlator | Jan 24 2006 22:32 utc | 1