Economic Warfare

[tequila]

Debunking the Dumping-the-Dollar Conspiracy

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. 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 ...

[M-A Lagrange]

But they really shouldn't be concerned. 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 ...

I do not want to be the devil advocate but basically US is paying oil in paper as the US print dollars. Changing the currency on oil market from $ to euro will allow Europe to pay oil in paper, just as the US.
Then the US will have to:
1) pay in foreign currency that they will have to purchase on international market. So the price variations of oil will impact directly the economy of US as even oil produced domestically will be subject to a world price in foreign currency.
2) China is one of the biggest owner of US debt. Actually it does not worst even 1$/$. As curious it can be the bonds have a lower value than the one printed on it. A change in international currency for oil would impact the value of the $ on the market exchange. Then China (for example) will ask to be payed back for all the debt they own. What is actually quoted 0.9$/1$ may in deed be quoted 1.2$/1$.
Just take the time to make the calculation of what represent 50% of US debt but with a 1,2$ value of each $ of debt.

[tequila]

... 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 ...

China does not buy USD or U.S. Gov debt because it is a spectacularly good investment. It has not been a good investment for the past decade, if you haven't noticed.

China buys U.S. Gov debt because it would like to maintain a good exchange rate for its goods in the most important (both politically and economically) market in the world, and secondly because the U.S. remains the haven of last resort even in the face of a U.S.-generated global near-depression.

Given that the U.S. provides the ultimate guarantee of security for the Gulf countries, I doubt highly that they would give up one of their few leverages in such a relationship for euros or a basket of world currencies.

[Brian Hanley]

Backtracking to the Engdahl piece, I agree in substance with some of his economic material, however, his take on the "color revolutions" is false. Even more than military campaigns, intelligence efforts take place in a fog; and in modern America, they suffer from a long history of administrations saying "Go ahead, yes we want that." until the plug is pulled at 1 minute to midnight and a bunch of people die or have to run for their lives.
The color revolutions only look like they could be "directed efforts" in retrospect, and Engdahl's ideas are simply hubris. In Engdahl's mind, the idea that the people of those nations could have been smart enough and motivated enough to make those work isn't even a question. But, I was there, right in the middle of Saakishvili's transition to power, and those people are so capable. Never, ever underestimate them. Stalin was a Georgian, so is Primakov, and other members of the FSB and Kremlin. They didn't magically become cunning because of some "vibrations" in the Kremlin. Yes, the USA does influence from time to time, and Saakishvili has stayed in power by throwing around the idea that he is America's chosen. But it was all very messy, and mostly Georgians. Flatly, those people are so much better at this stuff (intrigue, black ops) than we are that we aren't in the same solar system as they are. Never, ever, ever underestimate them.

Regarding this pricing model, the above arithmetic done on a daily basis adds up to 1.5 trillion on a yearly basis and has cascading effects. Yes, that makes a difference. Basic theory of markets - the marginal buyers set the price. Even during the height of the Enron created power blackouts in California, most of the power was sold at ordinary rates. But if only a few buyers must buy at a higher price, that becomes the new price.

Regarding the other nations of the world creating a new currency instrument - they have no real choice. They have to move to a new instrument because the USA has become a nation run by pirate capitalists. We are the source of the disease, and the Europeans, Russians, Chinese and Indians all know it. Those pirates have our elected officials so well in hand that they can't be stopped or regulated.
What happened with the meltdown is that AIG essentially insured loans made by the major banks. Based on those AIG issued derivatives, the banks moved loans they had made from the suspense account (which is where outstanding loans are carried) into their capital account. When the loans turned out to be bad, it became apparent that the lack of an open market for those AIG issued derivatives had radically underpriced them, because AIG could not actually cover them. What that means is that when the fraud was removed Citibank, Bank of America, et al had real reserves worse than 1:1000 when they are supposed to have 1:20 or at worst 1:40. That is why the international financial system broke. These banks no longer had the cash to carry out simple day to day operations for customers. The executives of those banks knew precisely what they were doing, and they did it to get around banking regulation of cash reserves. Their "record profits" were all lies.
This type of instrument is still not traded openly, nor is it regulated in any way. That is extremely dangerous because now, for the first time in history, capitalism has been decoupled from productivity. To make money (on paper) it is no longer necessary or important to produce value in the economy. In fact, quite the reverse is true. Productivity, the creation of value, is the real stuff that money is a symbol for. We have allowed a financial system to come to life that makes money with no relationship to value at all. This new system will destroy value while enriching (on paper) those who game the system. They are still gaming it. The longer they are allowed to continue to do it, the more industries will shut down, the more jobs will be lost, and the greater share of the total economy will be owned by those gaming it in a vicious cycle.
Given that, the rest of the world has no choice but to figure out a way to wall itself from uncle sam.

I put the majority of my money in accounts in other countries/currencies a while ago.

[slapout9]

US Stages a Fake Coup in order to get rid of National Debt. Best Economic recovery plan I have seen in a while

http://www.theonion.com/content/vide...ages_fake_coup

H/T to Fabius Maximis website.

[bourbon]

Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds, by Michael McKee and Alex Nicholson. Bloomberg, January 29, 2009.

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Short but interesting article. August 2008, same time period as Russia's 5 day war with Georgia.

[Brian Hanley]

Interesting. Nice try Vladimir. :-)

I think I've posted here about that little Georgia war. I ran an office in Tbilisi for 5 years up until 2005. Saw the transition to Saakishvili. I'll quickly recap my thoughts on that and segue into what I think this attempt probably means.

I think the Kremlin decided that McCain was going to pull an October surprise in Georgia, pull the US into kicking some Russian ass to drive their troops back from Tskhinvali in order to throw the presidency to the republicans. Their reasons are: A. Saakishvili needed it to prop himself up. B. Saakishvili had been paying the guy McCain chose for SecDef as Georgia's lobbyist. C. McCain chose Saakisvili to succeed "Heavy Schevy." D. The republicans were clearly on the ropes. (E. It's what they would do in a heartbeat to keep power.)

So, Putin and the boys decided to pop it off early when it they would be in control, and could kick some Georgian ass instead. Saakishvili's government is crawling with FSB agents. And frankly, I have to say, Saakishvili is a good sycophant, but he's just - well - the guy ain't very bright. Since lobbyists always over-indulge their clients, it was no big deal to get Saakishvili to think he should attack during the Olympics. (Schevardnadze never would have.)

Putin knew that he would be in the stands with George Bush, able to watch him at the Olympics. When the balloon went up in Georgia, there he was. I watched him on TV during the opening preamble looking at Bush as Bush was told about it, and then Putin was conferring with his guys. Check the archives if you doubt me. I said right then what was going on - that Putin was using this as his final way to convince Kremlin doubters of the wisdom of his plan. The Kremlin boys have learned about us that our politicians are led around by the nose by our news media. And they knew the Olympics would be just too big a distraction for the Georgia war to get press. And that is why the war started at the Olympic opening, and wound up the day before the end. Nice, neat, tidy, and our politicians didn't have to give a damn.

Consequently, it does not surprise me at all that Putin and company would attempt to try to get the Chinese to whack us with a big stick at the same time. Thinking this through, I would bet good money that there was a contingency plan to extend the Georgia war and push all the way through Georgia, taking control of the capital and annexing the nation back into the Russian Federation. (Georgia was a province of Russia for longer than the USA has been a nation.) I'd bet that the idea was, that if the Chinese could be talked into doing that, it would slam the USA economy so as to make a US military response a non-starter inside the beltway. A quick little blitz, then lock down Georgia until the house-to-house fighting is over. In America, if a War falls in the forest and nobody reports it, it didn't happen.

But, the Chinese are no dummies. I am certain they saw right through it and knew darn well it wouldn't be in their interest. It would have critically weakened China too, because we are in a bit of a deadly embrace these days.

I have said for many years now that the long term Russian Federation plan is to wait until the USA tires, try to provoke nations like Iran and whomever else into provoking a US military response. The long term plan is to be able to waltz in when the USA tires out and runs out of money - then take control of the Middle East. After all, it is as much their backyard as Mexico is ours. In the interim, the Russians learned all about what happens when a nation overspends on military and gets bogged down - we pushed them into that to end the cold war. As Russia sees it, since we have no significant trade relations with them, our loss is their gain.