The last gasp of the dollar; Iran bourse set to open shortly
Online Journal Contributing
May 8, 2006, 00:17
"Everybody knows the real reason for American
belligerence is not the Iranian nuclear program, but the decision to launch an
oil bourse where oil will be traded in euros instead of US dollars. . . . The
oil market will break the dominance of the dollar and lead to a decline of
global American hegemony." Igor Panarin, Russian political scientist.
Overnight the story of Iran�s proposed oil bourse has
slipped into the mainstream press exposing the real reason behind Washington�s
hostility towards Tehran. Up to this point, analysts have brushed aside the
importance of the upcoming oil-exchange as a "Leftist-Internet"
conspiracy theory unworthy of further consideration. Now, the Associated Press
has clarified the issue showing that an Iran oil bourse "could lead
central bankers around the world to convert some of their dollar reserves into
euros, possibly causing a decline in the dollar�s value". ("Iran wants Oil Market in Euros",
Globe and Mail)
Currently, the world is drowning in dollars, even a small
movement could trigger a massive recession in the United States. There�s
nothing remotely "conspiratorial" about this. It is simply a matter
of supply and demand. If the oil bourse creates less demand for the dollar, the
value of the dollar will sink accordingly; pushing energy, housing, food and
other prices higher.
Oil has been linked to the dollar since the 1970s when OPEC
agreed to denominate it exclusively in dollars. This provided the US a virtual
monopoly which has allowed it to run huge account deficits without fear of
crippling interest rate hikes. As Bill O� Grady of A.G.Edwards said,
"If OPEC decided they didn�t want dollars anymore, it would be the end of
American hegemony by signaling the end to the dollar as the sole reserve
"If the dollar lost its status as the world�s reserve
currency, that would force the United States to fund its massive account
deficit by running a trade surplus, which would increase inflationary
pressures." (Associated Press)
There�s no prospect of the US running a trade surplus
anytime soon. Bush has savaged the manufacturing sector outsourcing over 3
million jobs and shutting down plants across the country. His short-sighted
"free trade" policies and enormous tax cuts for the rich ensure that
Americans will be left to face skyrocketing energy costs and a
hyper-inflationary greenback. There�s no way we can retool fast enough to
"manufacture our way" out of the quagmire of red ink.
Currently, the national debt is a whopping $8.4 trillion
with an equally harrowing $800 billion trade deficit. (7percent of GDP) The
ever-increasing demand for the greenback in the oil trade is the only thing
that has kept the dollar from freefalling to earth. Even a small conversion to
euros will erode the dollar�s value and could precipitate a sell-off.
Presently, oil is sold exclusively on the London Petroleum
Exchange and the New York Mercantile Exchange both owned by American investors.
If the bourse opens, central banks around the world will reduce their
stockpiles of dollars to maintain a portion of their currency in euros. This is
the logical step for Europe which buys 70 percent of Iran�s oil. It is also the
reasonable choice for Russia which sells two-thirds of its oil to Europe but
(amazingly) continues to denominate those transactions in dollars.
Washington has succeeded in maintaining its monopoly by
propping up the many corrupt and repressive regimes in the Gulf States. The
prudent choice for Saudi Arabia would be to move away from the debt-ridden
dollar and enhance its earnings with the stronger euro. Regrettably, Uncle Sam
has a gun to their heads. They understand that such a transition would invite
the same response that Saddam got six months after he converted to euros and
was removed through "shock and awe".
Regardless, of the outcome, the profligate spending,
budget-busting tax cuts, and the shocking increase in the money supply (the Fed
has doubled the money supply in one decade) has the greenback headed for the
dumpster. Already, China and Japan (who hold an accumulated $1.7 trillion in US
securities and currency) are gradually moving away from the dollar towards the
euro (although the Fed has blocked the public from knowing the extent of the
damage by abandoning the M-3 publication of inflows) The European Central Bank
(ECB) and Japan�s central bank are frantically trying to conceal the
probability of a dollar collapse by issuing carefully worded statements to
allay public fears while they to prepare for an "orderly" retreat.
But, it won�t be "orderly". The dollar has lost 5
percent against the euro since April and is quickly headed south. The Iran
bourse could be the final jolt that pushes the greenback over the edge. This is
the bitter lesson for those who choose to ignore economic fundamentals and
build their house on sand. Paul Volcker anticipated this scenario in a speech
last year when he said that account imbalances were as great as he had ever
seen and predicted "a 75 percent chance of a dollar crash in the next five
Volcker is right, but economic advisor, Peter Grandich
summarized it even better when he opined, "The only one who doesn�t know
the US dollar is dead is the US dollar."
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