How close are we to 'Sudden Disorderly Adjustment'?
Margaret Legum
This article was published in the Business Report on Tuesday, 23 May.
http://www.businessreport.co.za/index.php?fSectionId=553&fArticleId=3263480What are we to make of the growing chorus of fears about the possible collapse of the dollar? Is it a case of crying wolf again?
Those fears link four elements: Iran’s stated intention soon to open its own electronic International Oil Bourse; its resolve to sell oil there in euros, not dollars; the expectation that the price of oil will rise to over $100 a barrel, triggering world recession; and the demand for gold, rather than dollars, as a store of value.
Since the US is deep in debt, nationally and internationally, the dollar’s value depends entirely on the fact that it is a reserve currency for other nations. We all have to keep reserves in dollars for two reasons. First, by an agreement made in the 1940’s, the oil producing countries of OPEC agreed to sell oil only in dollars. That meant everyone had to hold dollars if they wanted to buy oil, resulting in two-thirds of all central bank reserves being in dollars.
That in turn means that the Americans have the privilege of producing the international currency. Creating money is nice work if you can get it. It is the equivalent of having a mint in your backyard. You can buy what you want with the new money, without having to supply the equivalent value of goods. America has been financing its annual deficit with the rest of the world – it borrows over $2 trillion a day - by simply making new money and spending it into circulation.
They will not be able to do that if we no longer have to buy our oil in dollars. Its value would fall as nations switch to other currencies to buy oil or to gold as a reliable store of value. The creation of dollars would not be available as a mechanism to cover the huge international debt. If that process began, there could be the kind of flight from the currency that has wrecked the economy of many nations within the past decade.
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http://www.sane.org.za/docs/views/