Mike Whitney: 'How Iran's oil exchange threatens the greenback'

[phantom power]

This "petrodollar warfare" theory keeps cropping up every so often. Opinions seem to vary widely about how valid it is, but I can never think of any compelling argument against it.

The Bush administration will never allow the Iranian government to open an oil exchange (bourse) that trades petroleum in euros. If that were to happen, hundreds of billions of dollars would come flooding back to the United States crushing the greenback and destroying the economy. This is why Bush and Co. are planning to lead the nation to war against Iran. It is straightforward defense of the current global economic-system and the continuing dominance of the reserve currency, the dollar.

(...)

There are no nuclear weapons or nuclear weapons programs, but Iran's economic plans do pose an existential threat to America, and not one that can be simply brushed aside as the unavoidable workings of the free market.

America monopolizes the oil trade. Oil is denominated in dollars and sold on either the NYMEX or London's International Petroleum Exchange (IPE), both owned by Americans. This forces the central banks around the world to maintain huge stockpiles of dollars even though the greenback is currently underwritten by $8 trillion of debt and even though the Bush administration has said that it will perpetuate the deficit-producing tax cuts.

America's currency monopoly is the perfect pyramid-scheme. As long as nations are forced to buy oil in dollars, the United States can continue its profligate spending with impunity. (The dollar now accounts for 68% of global currency reserves up from 51% just a decade ago) The only threat to this strategy is the prospect of competition from an independent oil exchange; forcing the faltering dollar to go nose-to-nose with a more stable (debt-free) currency such as the euro. That would compel central banks to diversify their holdings, sending billions of dollars back to America and ensuring a devastating cycle of hyper-inflation.

http://www.smirkingchimp.com/article.php?sid=24530&mode=nested&order=0

[phantom power]

1. It just occurred to me that this explains a couple things.

It offers an additional explaination for America's amazing stubbornness in clinging to an oil economy, resisting Kyoto, etc. If the world moves away from oil, then that also threatens the "pyramid scheme," since it's another sufficient condition for dumping American dollars. The less oil a country needs, the fewer American dollars it needs to keep around.

It also explains why the dollar has been so resilient, in spite of America's untenable debt, trade deficits, etc.

[ken_g]

2. Wow. Seems obvious now that you mention it.

I must have been over complicating the issue. Damn.

[NNadir]

3. All pyramid schemes ultimately collapse though.

[phantom power]

4. Yeah. That's a real shame, considering that...

we happen to inhabit the particular economy that's been built on this particular pyramid scheme. We Americans, that is.

[Dover]

5. Forgive my naivite, but a question about higher interest rates...

On the one hand the dollar will be dramatically devalued by inflationary measures but interest rates will shoot up. So if you have a savings account with $500 dollars in it, will those higher interest rates/inflation cause that money to increase or decrease in value?
Or does one cancel out the other?
Right now the interest rates offered by banks is almost nonexistent, so wouldn't higher interest be better...at least for savings accounts?

[phantom power]

6. Well, the bank always makes a bit more money than you do.

If they are giving you, say 4% on your money, it means they're making at least a bit more than 4%, loaning it to somebody else. Just earning interest on your money is usually about neutral, relative to inflation, but it pays to watch, since interest rates can often spike higher than inflation, or go lower. In the 80s, you could get a 15% CD, although inflation was also very high back then. The last few years, interest rates on a bank account were pretty terrible. lower than inflation. But they're going up now. Then again, so is inflation.

Buy some gold and silver. Don't put all your money in it, but seriously, get some. Silver is probably the best, especially if you don't have a whole lot of dough.