Defending the Dollar

Back in January 2005 Seymour Hersh also provided a very detailed, credible account of US plans to attack Iran. It didn't happen. Something else didn't happen in 2005: the opening of an often re-scheduled Iranian market for oil and oil products, which they are calling the Iranian Oil Bourse. Now, the IOB is re-rescheduled to open in March 2006 and it plans not to trade in dollars, at the moment the standard currency of the international oil market, but in Euros. In other parts of the world this is big news (see here, here, and here). Combined with recent Venezuelan moves towards the Euro, the 64 trillion dollar question is, if significant parts of the oil market shift to the Euro could that become the catalyst that causes foreigners to reassess whether they really want to hoard heaps of fairly useless greenbacks in their vaults? A major shift out of the dollar as the world's reserve currency would spell disaster for the US economy.

Project Censored puts the Iranian Oil Bourse at #9 in its list of top stories not covered by the mainstream media in 2005. The Daily Kos recently picked up the IOB connection with sabre-rattling over Iran. And William Clark takes on the question in a thoughtful, detailed essay. Back in 2004 a former senior British civil servant, John Chapman, also posits the dollar as the real reason for the US having attacked Iraq. Otherwise commentary is fairly sparse. It's probably reasonable to suppose, nevertheless, that if the Bourse's opening were re-re-rescheduled, to 2007, chances are good that the US won't attack Iran. If the Bourse does open in March all bets are off.

I hasten to add that I believe the US war on Iraq and now potentially Iran is motivated by a combination of factors – which in other notes and podcasts I'll discuss in greater detail.

Finally, here's my brief summary of the economic problem: We're running a huge, exponentially growing deficit in our current account balance. The only thing that allows US consumption to continue on its current path is the willingness of foreigners to buy dollars. If foreigners were to sharply cut back their dollar purchases US interest rates would have to be jacked up for the federal government to finance itself, and the US as a whole would have to actually sell stuff abroad to pay for the stuff we import (to buy Euro-denominated oil we'd have to sell stuff to get Euros), either that or we couldn't import so much, in which case inflation would rise, and combined with the aforementioned higher interest rates (which slow economic growth) we'd face a rerun of the stagflation 1970s. Now add oil. Because the world oil market is denominated in dollars, foreigners, in addition to simply hoarding large dollar reserves, have a real need for a lot of dollars. They are aware, however, that converting their own currencies back and forth into dollars for oil purchases involves a lot of inefficiencies and transaction costs. From their point of view it would be far more practical for the oil market to use a different currency, like the Euro, or a basket of currencies. What keeps them from switching is fear that an American economic collapse would bring everybody else down with it. Yet at the same time it's clear that nobody wants to continue subsidizing American consumption, at an increasing price to them, forever. Some adjustment must be made. Logically, for the most important foreign holders of dollars the best solution is to gradually let the air out of the American balloon. Whether that will be possible remains to be seen.