Ever so slowly just about everybody is starting to realize the nation is being driven to the ground by moronic ideologues. And now it's getting painfully apparent that it is no longer satisfactory to simply smile and nod at their idiocy. And the catalyst for this heavy dose of realism is Iran. The discussion has not been placed front and center by Seymour Hersh, the excellent investigative journalist from The New Yorker magazine who has blown the lid off of Pentagon plans for a combined assault on Iran that would use nuclear weaspons. Finally, however, people both within and close to the military are taking action. First off, there are now new calls for Rumsfeld to step down, coming from former Marine Lieut. General Greg Newbold and Paul Eaton. Even British Foreign Secretary Jack Straw is now publicly denouncing the possibility of an Iranian strike, calling it "completely nuts."
Yet some of the realism rising can be also seen by the US decision to hold direct talks with Iran regarding Iraq that may spill into matters of the nuclear dispute, and Washington's further spin away from talk of a military strike. But the emperors clothes are now off, and it is becoming ever more clear that the entire US' Middle East policy has been a classic case of imperial overreach. But never understimate the desperation of a gambler, and the more dire the rational possibilities are for the sinking US ship, the greater the possibility that the dry-drunk Bush will resort to the most ridiculous "divinely inspired" stupidity.
As weazl has said again and again, is that the disasterous results that the US has witnessed in Iraq, coupled with decisive and forceful militarization in Iran that has provided a deterrent to clear US intentions to extend its drive into the Middle East in a drive for oil.
But let us not forget Iraq, where every single day our global hands are drenched in blood from the most disgraceful of a history of disgraceful interventions, where much of the world's media shies away from war crimes that can seemingly be documented on a daily basis. And if Iran needs nuclear, chemical, biological weapons to protect itself under the well understood doctrine of deterrence, to prevent these war crimes from escalating and proliferating, then sadly weazl must be all for it.
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Well, that's because the oil bourse is on hold for the time being. Will update when plans solidify, but imminent attack put those plans on hold.
I've read a lot of talk about the oil bourse thing, and I haven't found anything to indicate that it will have any effect on the U.S. dollar. Any company can buy oil with Euros today, they just exchange their Euros for dollars when they buy. That's how fully convertable free floating currencies work.
However, the dollar is very vulnerable to Asian and oil exporting countries' central banks. If for some reason they decide to change their reserves to Euros, then the dollar will drop like a stone.
But it's not in their interests for this to happen. If the dollar drops then 1) U.S. imports will drop, hurting the economies of exporters, 2) countries who didn't get out in time will suffer huge foreign reserve losses. So the present situation, while fragile, could continue for a long time.
Anyway, the point is that the oil bourse won't make much difference. Countries that want to buy oil in Euros from Iran can simply change their dollars over when they need to. It won't create a mad rush for the exit.
Do watch, however, as smaller countries such as Venezuela, move their reserves into Euros. They don't have enough to matter much, but you have to figure the larger countries are watching them, wondering how long the house of cards can remain standing. If any of the big boys loses confidence then the fall could come hard and sudden.
... Ami.
Dear Ami,
Yes, the dollar is sensitive to Asian monetary issues, but the issue of petrodollars is far less simple than you make it out to be, and far more important to American economic concerns. For a recap of some of the issues, you can check out this article:
http://www.atimes.com/global-econ/DD11Dj01.html
It is absolutely clear that the ability of other nations to not have to hold dollar reserves and make dollar investments would have a substantial effect on the value of the dollar. And while Venezuela is a "small country" it's petroleum reserves may be even larger than Saudi Arabia, and with Iran also wanting to have a Euro dominated bourse, the dollar is on very fragile legs. But regarding the Asian role in the equation, it is absolutely clear that the dollar is bound to fall. Japan and China have clearly stated that they will not buy as many bonds as before so that interest rates will eventually rise, the Bush Administration is asking China to let the Yuan float more to cut the trade deficit which will mean that the dollar will immediately fall.
And I think that you're overlooking the massive and growing US federal defecit. The US dollar is on extremely shaky legs, and the dollar reserves and purchases have been an integral part of US dollar and economic support. But most importantly, the oil bourse will not be ready for a year at least, and there are reliability issues as well. Norway is also considering an oil bourse:
http://www.energybulletin.net/13081.html
If this happened, the results would be quite devastating for the dollar, as reliability issues would be moot from its inception. (everybody would trust the Norwegians)
Hi Weaz,
I'm not contesting that the dollar is on shaky ground. I'm just saying that the energy bourse has nothing to do with it. The article you linked to summarizes a few issues well, but also introduces a lot of things that sound good, but don't actually mean anything.
The size of Venezuela's oil reserves don't mean anything for the dollar. It's the size of its currency reserves that matters. If Venezuala drastically increased its holdings of Euros then it could have an impact, but I can't think of any reason it would do that.
Reserves reflect a countries desire to _not_ buy stuff. So you could say that the accumulation of U.S. dollar reserves is a symptom of countries willingness to export to the U.S., but accept only paper in return. If they were buying things with those dollars (such as oil) then they wouldn't be holding the reserves. Obviously the oil exporters aren't holding dollars so that they can buy oil.
Anyway, having said that, I do think the U.S. dollar is headed for a big fall. I just have no idea when. The Chinese are trying very hard to manage a gradual relaxation of their peg against the dollar. If they succeed then it's possible that the dollar will drift gently downward rather than crashing. Seems unlikely to me, but possible.
... Ami.
Grunt,
Why do you think selling off $100B of reserves would hurt the U.S. but not China?
Beware of equating China-the-country with private Chinese companies such as Haier. I'm not sure what your point was with that example, but you overlooked the other side of the deal. Haier is to promot the NBA in China.
There will need to be a whole lot more of these sorts of deals if the U.S. is ever to close the trade gap with China. "Culture" is one of the United States' chief exports, so promoting the NBA in China is actually a positive thing for the U.S. economy.
... Ami.
First off, Venezuela has EVERY intention of hurting the US. That's what a failed coup will do to you.
Second, what petrodollars has meant has been that it made nations have to use dollars as the currency of exchange. That meant the nations had to keep dollars reserves TO BUY OIL. And similarly because of the need to have dollars, many countries by having huge dollar reserves would thus reinvest the money into either US goods, US treasury instruments and even US stock investments. And not have to engage in currency trades in which great losses could be effectuated by speculation. By having a dollar denominated currency, that meant that the best place for everybody to spend those dollars would be in the US, and there was a big need to have dollars to buy oil. If you look at the extent Japan was coerced into purchasing large amounts of US money instruments and goods because of US petrodollars, as well as the MASSIVE AMOUNTS OF PETRODOLLAR INVESTMENTS from Saudi Arabia, Kuwait and other Middle Eastern countries into the US economy. Where do you think that all of that Saudi money goes? Into US banks, stock and bonds. Without that, the dollar would take a big hit. That's what petrodollars represent. And that's why it is not negligible.
And the size of Venezuela's oil reserves mean a lot to the value of the dollar. Because if Chavez decided to switch to the Euro with the world's largest oil reserves being a Euro traded asset, the value of the dollar as the international currency of trade would be finished. It would have a lot to do with Venezuela's oil capacity.
It's not Venezela's reserve amounts as such that have to do with the value of the dollar. It's whether there would be dollar valuations (and hence dollar purchases) for the entire value of Venezuelan oil reserves which would place demand on the dollar or not as the currency of such trade. If the entire amount of Venezuelan oil were priced and traded in Euros and not dollars, there would be much less DEMAND for dollars, hence the VALUE of dollars would fall, because of the greater DEMAND for EUROS to conduct such trade, meaning greater SUPPLY of dollars, hence reduced VALUE.
Selling a hundred billion of reserves would primarily hurt the US because it would then have to redeem that much money to pay back the bonds, meaning that because it is running a defecit means that it would have to raise more bonds to get the money, meaning that the interest rate on those bonds would have to be higher, meaning that this would place additional pressure on interest rates generally, which would then heighten an already bad credit crunch, risking defaults on mortgages and credit cards, car loans, ect., and the value of the dollar would fall as the redemption of the dollars would mean that there's less demand for them (hence the need to place a higher interest rate). China meanwhile would simply have accumulated the interest on its bonds, would be able to pump that money in other valuable investments (such as European bonds, for example), and still have an export based economy that is clearly integral for American consumptive needs. China right now can hurt the USA far more than vice versa. China's goods are demanded by the entire world. The US is limited to making bombs, bombs and other killing machines. Defense is essentially our only domestic heavy industry in which we have a comparative advantage. American automotive market share is dwindling every year.
Grunt was right.
Weaz,
You're only half right. Foreign reserves are used to deal with speculators, but not as a hedge against changes in import prices. They are used to stabilize the local currency when it is attacked by speculators.
Consider that most imports and exports are done my private companies (or at least not the central bank, even if the companies are state-owned) and they can hedge against currency fluctuations changes using options. The central bank isn't needed here.
The reason countries like China have accumulated large dollar reserves is because 1) they've been tying their currency to the dollar, so buying dollars is the most effective way to maintain the peg, 2) in the past the U.S. dollar has been the best bet for a currency that will keep its value. Not true today, but this situation didn't develop overnight.
Venezuela doesn't currently have the wealth to attack the U.S. currency, given that China and Japan both have an interest in propping it up. Maybe in the future if those oil reserves are properly developed, but not in the next few years.
As for China attacking the dollar by selling bonds, yes, they could do it. But 1) they would lose massive amounts on their remaining reserve holdings, 2) although they do export all over the world, all of their export markets would be hurt by the fall in the dollar as well - sort of a domino effect. Europeans aren't going to start buying more stuff overnight.
Like it or not, these guys are forced to play the game for as long as possible. As I said, China is trying to defuse the bomb without it going off, and has let its currency appreciate slightly. As long as idiot U.S. legislators don't force matters they might be able to pull it off.
... Ami.
If you're into the workings of central banks Brad Setser's blog is pretty good.
Today's post happens to deal with China's options if it wants to stop accumulating U.S. dollar reserves:
http://www.rgemonitor.com/blog/setser/123833
Look through his archives for tons of commentary on this issue.
... Ami.
"Venezuela doesn't currently have the wealth to attack the U.S. currency."
If Venezuelas's reserves prove as large as is speculated, this statement is incorrect. Plus, it is the weakening (rather than the wrecking) of the dollar that is at issue. The confluence of factors portent grey clouds over the dollar's future. Venezuela is more than happy to contribute to this.
If China were to sell bonds, they would "lose on their reserve holding" only to the degree that they sell. There is no end in sight to the favorable balance of trade that China enjoys, so the "loss", especially when holding zero interest bonds, is almost entirely non existent.
"Idiot" legislators cannot touch China economically. The only thing that can hurt China is through oil. Hence, Iraq, Afghanistan and hopefully (in their minds) Iran.
The whole thing is about China. The "idiot" legislators know the game is over, and hence try to use America's military superiority to compensate for being destroyed economically.
Weaz thinks you consider the American policymakers far more intelligent than they deserve, and that you consider the American economy far less vulnerable than is wise.
But it is a pleasure having you contribute, and weaz appreciates your insights.
Weaz,
As an aside, and as evidence that paper losses on reserve holdings do matter, you might be interested in the story of Li Fuxiang. Poor guy jumped out a seven story window.
Also from Setser's blog:
http://www.rgemonitor.com/blog/setser/113651/
"'Li had a strong expectations for the euro and purchased lots of European currencies even before it euro was formally launched'"
"'But the euro fell significantly against the US dollar to a low point of 0.81 and that caused enormous losses for China's foreign exchange reserves and put huge pressure on Li personally.'"
"'It is the lesson that China's foreign exchange reserve managers won't forget'. Li committed suicide in May 2000."
... Ami.
If he'd have stayed alive he would have made a killing. The Euro rose sharply from that point and outvalued the dollar in dramatic fashion, going from .81 of a dollar to 1.37 at it's height.
Even now at 1.21 or so, he would have been fine. And so long as China didn't sell those Euros, they should put more flowers on his grave.
The lesson that money managers should thus remember, is:
stick to fundamentals,
and
stick to a plan in the face of losses (so long as the fundamentals are intact).
As a personal note, weaz wanted to jump out of a window on gold holdings when weaz bought significant amount in bull run up in December 2004 only to lose 25% of value. Weaz held on and the value has DOUBLED since low point.
Second lesson for Li Fuxiang: always have a diversified portfolio, no matter how attractive any single investment opportunity.
Resist temptation.
;-)
I don't do the day trading thing. Prefer to go mid term periods. Used to use this timingcube service, which was okay, but nothing special. But it had the advantage of signaling only twice, three, four times a year, which is about all I wanna do. I've been long on energy, but think it might be time to make a trade as the warmongers get a little dose of reality shoved up their throats. Energy prices may recede with news that no imminent interruption is on the way. Gold will probably take a hit soon too.
Ouch. ;-) (I may now short gold. I guess you can't reveal your ticker , hunh?
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