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Opinion How Close Are We To ‘Sudden Disorderly Adjustment’? Margaret Legum (SANE, South
Africa) © Copyright: Margaret Legum 2006 What 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. Even more alarming
are suggestions that to avoid this possibility the American government is
planning to invade Iran. The fact that the invasion of Iraq was preceded by
unwarranted accusations of weapons of mass destruction, and that Hussein had
threatened to switch sales of oil from dollars to euros, gives credence to
such fears. The fact that Iraq’s current chaos makes it a net importer of oil
seems not to deflect American resolve. What is the evidence
for the possible imminence of this scenario? Associated Press on May 5 quoted
top Wall Street analyst Bill O’Grady of A.G. Commodities: ‘If one day the world’s largest oil
producers allowed, or worse demanded, euros for their barrels, it would be
the financial equivalent of a nuclear strike.” On May 8, an
editorial in right-wing Forbes Magazine, written by Bush supporter Jerome Corsi, predicts: “If
Iran wants also to seriously threaten the dollar’s position as a dominant foreign
reserve currency, a war becomes almost certain. The Iranian oil bourse may
never be mentioned by US policy-makers as an official reason the US decides
to go to war with Iran, but it may end up being the straw that broke the
camel’s back.’ A UK network on
sustainable development (localsustuk@yahoogroups.com)
has collected the evidence that this scenario may be round the corner. It claims
the Western media has up to now self-censored on the issue – sounding alarm
bells as the gold price soared to nearly $700. It records Al-Jazeerah, on April 30, reporting that ‘Oil producing countries such as
Venezuela…and a few of the larger oil consuming countries, notably China and
India, have already announced their support for the Iranian bourse’ An
article : Petro-Euro: a reality or distant nightmare for
US’ quotes US security expert William Clark saying ‘If Iran threatens the US dollar in the international oil market, the
White House would immediately order an attack against it’. Gold is now at a
20-year high against the dollar, and the dollar at a one-year low against the
euro. The Financial Times of May 16th,
under the headline: “Fears
for Dollar as Central Banks Sell US assets” reported that ‘central banks sold a net $14.4 billion
during the month, the largest sale since August 1998.’ At the opening of the
IMF meeting on April 21, Russia’s Finance Minister
said his country ‘could not consider the dollar a reliable reserve currency
because of its instability’. The same day the Swedish Riksbank
halved its dollar holdings to buy euros. At that IMF meeting the 2006 World Economic Outlook was launched,
warning of a dollar collapse – due to global trade imbalances, spiraling US debt and the demise of the petro-dollar reserve standard. In the language beloved of
obfuscating economists who hope thereby to soften the truth, it stated: ‘Global current account imbalances are
likely to remain at elevated levels for longer than would otherwise have been
the case, heightening the risk of sudden disorderly adjustment.’ ‘Sudden disorderly
adjustment’ is the current bankers’ euphemism for the consequences of a
dollar collapse. Others, including Morgan Stanley economist Stephen Roach, as
well as financiers Soros and Warren Buffet, refer
to it as ‘economic Armageddon’. How close are we to that? Margaret Legum is Chairperson on the Board of The South African
New Economics Network (SANE) |