Tuesday, October 6, 2009

U.S. facing a bigger threat than terrorism - Oil trade moving to other currencies

There can be little dispute that in the post WWII world, the United States has been the world's preeminent economic power. Its no coincidence her economic strength came in tandem with military might, empowered to ensure the protection of American business interests around the globe.

Living in the shadow of the world's only current superpower, (with China quickly gaining ground) our news often lacks a truly global perspective. Such is certainly the case with reports about Arab nations teaming secretly with China, Russia and France to move away from the US dollar for trading in oil. You can read about it HERE in the UK's Independent, I haven't seen anything on CNN, ABC/NBC/CBS or CBC/CTV.

Those who might be quick to dismiss such news don't fully grasp the significance of global money markets and the potential for a seismic shift in the world's balance of power should such a move come to fruition.

Because almost all of the world's buying and selling of oil is transacted in US dollars, the greenback's valuation has an almost iron clad backstop against catastrophic devaluation. Countries trading in oil must keep huge deposits of US dollars in reserve. Moving to other currencies, (the Euro, Ruble or Yuan) would mean nations divesting themselves of Benjamin Franklins on a massive scale...in the trillions of dollars.

What effect would this have on the US dollar?

The results would be devastating. Contrary to the knowledge of many, there is no gold or silver standard backing up the valuation of America's currency. There are no underground vaults with stores of precious metals, no concrete tangible commodity...nothing holding up the currency's valuation aside from the normal pressures of supply and demand. The U.S. dollar, and the Canadian dollar for that matter, are "fiat" currencies.

With just about all the world's oil trading being conducted in the greenback, this assures there is always plenty of demand for American money.

It should be noted that prior to the invasion of Iraq, Saddam Hussein had started demanding payment for Iraqi oil in Euros or Rubles, not US dollars. Iran as well has announced that it is moving its cash reserves from dollars to euros, this after opening their "Oil Bourse" for the trading of petroleum products based mostly in the European currency.

For those who believe that almost all conflicts between nations are borne out of economic considerations, this should provide extra food for thought with respect to both the Iraq war and the current sabre rattling in the direction of Tehran. It certainly lends credence to a view expressed very well by Eric Margolis, that the U.S. is being less than honest about the discovery of Iran's "secret" uranium enrichment plant near Qum, a plant that has been a known quantity for more than two years. (READ ERIC MARGOLIS' COLUMN HERE)

The economy of the United States is already under severe stress, a mass dumping of U.S. dollars on the world's currency markets could very well be seen as a fatal blow. With a massive trade deficit, all the products Americans currently import would very quickly succumb to hyper-inflation. Of course the products Americans sell abroad would dive in price, but therein lies the problem...the U.S. has not been a net exporter for ages.

This is definitely something to keep an eye on, but it requires looking beyond corporate American media. A quote from the above linked article by a Chinese bank official says all we need to know about the significance this move could bring:

"America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

The denials are already out, here's one from Bloomberg.

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