[GoIllini]

All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse...

Well it’s not really the fact the EU needs additional Euros for the IOB. The EU already buys most oil on the international market in dollars. This basically creates an excess of dollars globally, which allows for both cheap credit in the US and the ability for the US to continue its fiscal obliviousness. The EU buys oils in Euros, which it must convert to US Dollars – thereby incurring transactions costs (of converting currencies) in addition to the currency fluctuations of the dollar versus euro.

It would eliminate a variable for the EU in purchasing oil if they could deal directly with the oil suppliers and also be less expensive. It’s a win-win situation for all parties involved except the US, as the dollar is propped right now due to its petrodollar role.

Yes, this would cause a huge shock throughout the world, but primarily and ongoing in the US: the US would lose its dominance as the premier reserve currency – not overnight, but eventually due to the US’ irreversible spending habits (form the federal level down to Mr. & Mrs. Consumer) that are unsustainable both intermediate- and long-term.

Again, the question remains, how will the US stop the IOB from operating? Whether it is this March or in five years, transferring from dollar-based oil sales to another form is the greatest threat to US dollar hegemony. One would think militarily, but Iran will not be a walk in the park like Iraq was (supposed to be). Especially since Iran is increasingly aligned with Russia, China, the EU, the ’Stans, etc.

I'm suprised to see someone who appears on the surface to understand currency to be advocating such a stupid view about it.

The bottom line is that the market is generally pretty conservative. If I convert USD into EUR to buy a barrel of oil from Saudi Arabia, and Saudi Arabia then converts that EUR back into USD, that's the same effect on the market as me paying for the oil in USD. For large countries like these buying on a regular basis, transaction costs should be negligible.

What really matters is what these countries want to do with the currency they get for selling oil.

Just about everyone claiming that a switch from markets trading oil in USD to EUR is going to mean that the EUR will go up against the dollar probably is still struggling to understand economics and the market in general, or at the very least, is too busy looking for the slightest signs of doom to use their brains.

Ultimately, if the Sauds want to keep their oil money in dollars, they'll keep it in dollars. If they want to keep it in gold, they'll keep it in gold. If they want to keep it in Euros, they'll keep it in Euros. Whatever currency they wind up with is the currency that will get propped up. The Sauds have been switching from USD to other assets for a while now, and its effect on the dollar has been very, very minor. That doesn't worry me.

[hull3551]

I'm suprised to see someone who appears on the surface to understand currency to be advocating such a stupid view about it...

Your response has been the most disrespectful I’ve seen on this forum to date.

I’m not going to waste my time responding to you. You sound like an arrogant little prick, and from your post you don’t quite know how oil trading, petrodollars, etc. works, although it sounds like you think you do, Junior.

[Petrodollar]

Here's my 2 cts worth...(and this is a rare comment from Greenspan):

Greenspan Issues Trade Deficits Warning Nov 14, 2005

http://news.yahoo.com/s/ap/20051114/ap_ ... /greenspan


...The constraints on financing the current account deficit are likely to come from "foreign investors' fears" of holding too large a share of their investment portfolios in U.S. stocks and bonds, Greenspan said.

This change in mind-set could already be under way, he suggested.

"Concentration and other risks in holding dollar balances seem to have become a consideration at least for some investors, Greenspan said.

Of the more than $30 trillion in foreign investment tracked by the Bank for International Settlements in the first three months of 2005, 42.5 percent were in dollars and 39.3 percent were in euros, Greenspan noted.

The dollar's share was down by 4 percentage points from around three years earlier, while the euro's share was up by 5 percentage points, he pointed out.

"Although I doubt that the U.S. dollar will lose its status as the world's reserve currency any time soon, there are in my judgment lessons to be learned from the experience of (Britain's currency) as it faded as the world's dominant currency," Greenspan said.

Britain made the mistake of trying to impose extensive regulations to try and support its currency's position on the world's stage, which made Britain's economy too rigid in times of financial crisis, he said.

Any decision of foreign financiers to reduce their investment in the United States "is likely to be readily absorbed by a far more flexible U.S. economy than existed in Britain immediately following World War II," Greenspan said.

Analysts believed Greenspan was sending a two-pronged message.

"He's arguing that the limit may be starting to be reached as foreign investors avoid an over concentration of their portfolios' in dollars, but that the impact would likely not be traumatic," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.


****

Well, Greenspan is trying to rewrite history in that last exert. It was excessive debt of WWI that eroded the sterling pound's status (the debts of WWII solidified the death of the pound's status), along with the subsequent rise of US economic power that defined the post WWII period in the 20th century - not this silly idea of "extensive regulations" post WWII.

Not sure what history book Greespan could possibly be referring to, but he overlooks the obvious issue of debt. Me thinks Greenspan also needs to study the Suez Crisis of 1956 - and Eisenhower's threat to sell off US holdings of the Sterling pound in order to get the British to vacate Egypt...

Nonetheless, I found it surprising that Greenspan would even broach the subject of the dollar potentially losing its status as the World Reserve currency.

So, is Greenspan turning into a closet-'doomer'?

[seahorse]

Greenspan's remarks come on the heels of the Fed Announcing, without any reason why, that they will no longer track/release M3 data.

[DantesPeak]

Based on some comments made above, there is a perception that the dollar or euro, etc., has some kind of intrinsic value. The IMF has outlawed such definitions of currencies. They only have value in relationship to each other and the IMF.

That's why it is inconceivable to me that, in the long run, the dollar will appreciate in value. Dollars are being added to the world financial system much faster than any other currency. It takes just about all the free savings in the world to finance the US current account deficit.

The key point about the switch to Euro pricing is that it marks the beginning of the end to the dollar regime, all that is uncertain is how and when it will end.

[MrBill]

Based on some comments made above, there is a perception that the dollar or euro, etc., has some kind of intrinsic value. The IMF has outlawed such definitions of currencies. They only have value in relationship to each other and the IMF.
That's why it is inconceivable to me that, in the long run, the dollar will appreciate in value. Dollars are being added to the world financial system much faster than any other currency. It takes just about all the free savings in the world to finance the US current account deficit.

The key point about the switch to Euro pricing is that it marks the beginning of the end to the dollar regime, all that is uncertain is how and when it will end.

Umm, not to be disrespectful, but the IMF is now outlawing what? The IMF is an organ of the World Bank which is in turn a branch of the UN. The UN is 'owned' by its member countries. They are not some sort of supranational legal entity with the power to dictate anything to a sovereign government. They are a lending institution. Not even a regulator.

I think Mr. Greenspan is scrambling to protect his legacy, which in this case is somewhat like a life-long sinner on his death-bed asking the Lord for forgiveness? However, he is right to draw parallels between Sterling losing its pre-imminent status as the world's reserve currency due to its policies and the US dollar losing its dominant position to the euro or a basket of currencies if the US does not reign in their fiscal imbalances. The euro is in any case gaining ground as an alternative to the dollar.

[Daryl]

It is certainly possible for the US to lose its reserve currency status to the Euro. Despite the bizarre fundamentals of the US economy, i.e. triple deficit - trade, current account, budget, it remains a tremendously convenient place to invest for large players. Much of this is because of its breadth and liquidity. I used to be an inter-bank liquidity provider for foreign exchange, so I have alot of experience executing trades for large players i.e. George Soros types, foreign central banks etc. While Europe has improved since the introduction of the Euro, their financial markets remain balkanized. Try to buy a billion euros worth of stocks on the French stock market or French government bonds. When market-makers get wind a large buyer is around, they raise prices and pull back. It becomes very hard to even complete the transaction and you have to overpay. It's much easier to get these trades executed in NY and the breadth of investment options is unmatched. For a while I ran a night desk in NY. Trading currencies in Tokyo, Singapore and Sydney was a nightmare. If we had a substantial order we just prayed no news would come out before London opened. As a whole, Europe is a strong number two and improving, but I don't think they are ready to replace the US as a primary financial center yet.

There is also still some safen haven status to the US. It does have global military primacy and protected borders. Despite the demise of the Red Army, Europe is a little closer to trouble. Don't think it is as big a factor as during the Cold War, but still there.

I'm no expert on international economics. Those guys were very unhelpful to me in my job during those days. Still, I am still sceptical of the idea of foreigners taking their money out of the US. Where will it all go? I think it would be highly disruptive to foreign markets, even to the point of shutting them down. People would just be screwing themselves, toward what purpose? In a meltdown, the US might freeze their assets anyway to prevent chaos.

[DantesPeak]

Based on some comments made above, there is a perception that the dollar or euro, etc., has some kind of intrinsic value. The IMF has outlawed such definitions of currencies. They only have value in relationship to each other and the IMF.
That's why it is inconceivable to me that, in the long run, the dollar will appreciate in value. Dollars are being added to the world financial system much faster than any other currency. It takes just about all the free savings in the world to finance the US current account deficit.

The key point about the switch to Euro pricing is that it marks the beginning of the end to the dollar regime, all that is uncertain is how and when it will end.

Umm, not to be disrespectful, but the IMF is now outlawing what? The IMF is an organ of the World Bank which is in turn a branch of the UN. The UN is 'owned' by its member countries. They are not some sort of supranational legal entity with the power to dictate anything to a sovereign government. They are a lending institution. Not even a regulator.

Ok, outlawed is a dramatic term, but I am not sure of the point your are
trying to make here. Currencies in the IMF are technically denominated in units of SDRs for IMF transactions, the SDR is a currency basket heavily weighed towards the dollar.

[Daryl]

Also, Greenspan's comments are nothing new. I bet you could find very similar comments by Paul Volcker in the early 80's after the US government started running large budget deficits, which were on top of the trade deficits the US started running in the mid-70's. And that was after Nixon in 1971 abolished the Gold Standard and the Bretton Woods fixed exchange rate system, allowing the dollar to float freely against foreign currencies. Since then the dollar has not been backed by (convertible to) gold, just the promise of the US government to pay. Not so good, especially since the US proceeded over the next 35 years to manage their finances like a drunken sailor.

The prognistications of disaster have a basis in reality. Responsible central bankers will point these things out whenever they have the opportunity. Still nobody really understands what's going on with the entire global money system. Economists construct really cute models, but they are exclusively after-the-fact explainers. Their track record as predictors of future events is miserable.

[MrBill]

Based on some comments made above, there is a perception that the dollar or euro, etc., has some kind of intrinsic value. The IMF has outlawed such definitions of currencies. They only have value in relationship to each other and the IMF.
That's why it is inconceivable to me that, in the long run, the dollar will appreciate in value. Dollars are being added to the world financial system much faster than any other currency. It takes just about all the free savings in the world to finance the US current account deficit.

The key point about the switch to Euro pricing is that it marks the beginning of the end to the dollar regime, all that is uncertain is how and when it will end.

Umm, not to be disrespectful, but the IMF is now outlawing what? The IMF is an organ of the World Bank which is in turn a branch of the UN. The UN is 'owned' by its member countries. They are not some sort of supranational legal entity with the power to dictate anything to a sovereign government. They are a lending institution. Not even a regulator.

Ok, outlawed is a dramatic term, but I am not sure of the point your are
trying to make here. Currencies in the IMF are technically denominated in units of SDRs for IMF transactions, the SDR is a currency basket heavily weighed towards the dollar.

Sorry, once again, I am not sure of the point you are trying to make? Are you insinuating that the IMF control the world economy or the external value of freely convertable currencies?

The IMF is strictly speaking a development bank consisting of the 184 member countries of the UN. If you look a dispersements, you will see all of them to developing countries. Argentina and Turkey are its largest recipients although Zambia is also a good customer under its poverty reduction & growth facility and heavily indepted poor countries assistance scheme.

The SDR or special drawing rights rate is a book-keeping financial unit. It is composed of

USD 41%
EUR 35%
YEN 12%
GBP 12%

as of today. I do not find this composition particularly skewed in favor of the dollar considering the US accounts for 20% of the world's GDP and is the UN and World Bank's largest sponsor?

However, even if it does, what has that to do with the external value of other currencies? Many countries have pegged the value of their currency to the dollar formally or through informal market intervention by their central banks. Others have currency baskets and crawling pegs. These are individual country decisions made by their governments, finance ministry and central bank and have nothing to do with the IMF.

The financial resources of the IMF, World Bank, EBRD, EIB, ADB and other development banks are again dwarfed by commercial bank lending. Central banks of course are members of the BIS or Bank of International Settlements which is the central bank's central bank. However, even the BIS cannot tell individual countries what to do. Whether to have a fixed or floating currency or something in between.

So I would greatly appreciate it if you could tell me what role the IMF or any other supranational organization plays in controlling currency markets are restricting what type of exchange mechanisms countries may employ? Thanks.

[GoIllini]

I'm suprised to see someone who appears on the surface to understand currency to be advocating such a stupid view about it...

Your response has been the most disrespectful I’ve seen on this forum to date.

I’m not going to waste my time responding to you. You sound like an arrogant little prick, and from your post you don’t quite know how oil trading, petrodollars, etc. works, although it sounds like you think you do, Junior.

Obviously, you haven't been arguing against any doomers, lately. The only thing worse than arguing something obnoxiously is arguing something that's rejected by the vast majority of economists, and something that's taught to the contrary in the most basic of economics classes and being mean about it.

It seems like you're one of those 50 year old doomers who's looking for an excuse to use the spam and bomb shelter he built for Y2K, read a book or two by quack economists, and now consider yourself wiser than everyone who isn't a doomer. On top of that, you're probably on the lookout for any of the tiniest views that the U.S. economy is going to get hurt by something having to do with oil while blatantly ignoring all of the good news for the U.S. markets. For example, a devaluation of U.S. currency will solve our problems with consumer and federal debt.

However, you really seem to lack understanding of the underlying fundamentals of how any market works; especially the commodities markets. Every trader I've worked alongside; every respected economist out there; will tell you that in any stock, commodity, option, bond, or anything else that's traded broadly, it doesn't matter how the stuff gets traded; it matters what currency winds up in the oil exporting nations hands at the end of the day.

At the end of the day, it doesn't matter what the NYMEX or the other exchanges think about the U.S. Dollar. What matters is what Saudi Arabia thinks about the dollar. Ultimately, they, and not the markets, get to decide whether the Euro gets propped up or the Dollar gets propped up. So far, Saudi Arabia has been making very gradual changes in its currency holdings, and it seems highly unlikely that it'll change how it handles things.

When doomers make arguments about exchanges changing currencies, I wonder if they'd argue that the claim that gravity actually makes things fall up means that we'll somehow get hurt even more by peak oil.

[DantesPeak]

Mr Bill - I don't mean to imply that the IMF controls the value of currencies, just that members essentially are not allowed to, simplistically speaking, set their currency in terms of gold, marks, whatever, only SDRs.

The IMF does not usually get involved in the exchange process, except with difficut to convert currencies.

Sorry if there was any misunderstanding.

[threadbear]

All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse...

Well it’s not really the fact the EU needs additional Euros for the IOB. The EU already buys most oil on the international market in dollars. This basically creates an excess of dollars globally, which allows for both cheap credit in the US and the ability for the US to continue its fiscal obliviousness. The EU buys oils in Euros, which it must convert to US Dollars – thereby incurring transactions costs (of converting currencies) in addition to the currency fluctuations of the dollar versus euro.

It would eliminate a variable for the EU in purchasing oil if they could deal directly with the oil suppliers and also be less expensive. It’s a win-win situation for all parties involved except the US, as the dollar is propped right now due to its petrodollar role.

Yes, this would cause a huge shock throughout the world, but primarily and ongoing in the US: the US would lose its dominance as the premier reserve currency – not overnight, but eventually due to the US’ irreversible spending habits (form the federal level down to Mr. & Mrs. Consumer) that are unsustainable both intermediate- and long-term.

Again, the question remains, how will the US stop the IOB from operating? Whether it is this March or in five years, transferring from dollar-based oil sales to another form is the greatest threat to US dollar hegemony. One would think militarily, but Iran will not be a walk in the park like Iraq was (supposed to be). Especially since Iran is increasingly aligned with Russia, China, the EU, the ’Stans, etc.

Ultimately, if the Sauds want to keep their oil money in dollars, they'll keep it in dollars. If they want to keep it in gold, they'll keep it in gold. If they want to keep it in Euros, they'll keep it in Euros. Whatever currency they wind up with is the currency that will get propped up. The Sauds have been switching from USD to other assets for a while now, and its effect on the dollar has been very, very minor. That doesn't worry me.

The Sauds have been cycling out of dollars and propping Wall Street- twin ponzi schemes. As a matter of fact, kind of Siamese twin ponzis. Where one goes the other is sure to follow. It's no wonder that when the Saudis put lipstick on one of the whores it has the general effect of making them both look "good". Wait till they ditch both of these babes, then you'll be singing a different tune, Wise-ass.

[GoIllini]

The Sauds have been cycling out of dollars and propping Wall Street- twin ponzi schemes. As a matter of fact, kind of Siamese twin ponzis. Where one goes the other is sure to follow. It's no wonder that when the Saudis put lipstick on one of the whores it has the general effect of making them both look "good". Wait till they ditch both of these babes, then you'll be singing a different tune, Wise-ass.

That's fine, then. The Sauds aren't stupid, and they won't do it all in a single market-crashing day, week, or month, unless their government has been taken over by terrorists who don't care about their investments.

I had thought that they were diversifying into precious metals and a mix of world currencies, but if they're just pouring USD into the stock market, that's good news. It means that they think U.S. companies are safer bets and have more potential for growth than Asian or European ones.

If they are pouring money into the U.S. stock market, are the Sauds stupid? Or does the family that probably has more experience with oil than anyone else on earth see something in Peak Oil that we don't?

Arguments that the Sauds are one day going to pull their money out of the market are akin to arguments that one day, every investor will pull their money out of oil stocks. While true, I expect it to create a fantastic buying opportunity for U.S. investors if the Sauds are stupid in the way they pull out of the market. Hello, 4.5 P/Es on growth stocks!

[MrBill]

Mr Bill - I don't mean to imply that the IMF controls the value of currencies, just that members essentially are not allowed to, simplistically speaking, set their currency in terms of gold, marks, whatever, only SDRs.

The IMF does not usually get involved in the exchange process, except with difficut to convert currencies.

Sorry if there was any misunderstanding.

No worries. Sorry to beat my point to death!


As for recycling petrol dollars there is a good article in The Economist this week suitably entitled Oil producers' surpluses - Recycling the Petrodollars which is a good primer of what the Sauds are and are not doing with their latest wealth. It seems they are paying-off debts, improving their infrastructure and paying health & welfare benefits to their quickly growing populations mostly, but with the rest they are buying some US treasuries and some euro assets. Very conservative in comparison with previous oil windfalls. If you cannot access this story, you can read it at Survey of the World Economy. Thanks.

[thuja]

Its a great article - I read it when it came out recently... I'm still an absoulute beginner when understanding the recycling of petrodollars but it seems like there will always be investment opportunities in the US in the form of housing, industry, IT, commodities, etc. So my confusion is- even if the Saudis decide to move the bulk of their trading into a euro backed system- wouldn't they still cycle a lot of this currency by investing in US opportunities? And therefore that wouldn't cause a total collapse of the US financial system? Again, I am a beginner, treat me kindly..

[MrBill]

Its a great article - I read it when it came out recently... I'm still an absoulute beginner when understanding the recycling of petrodollars but it seems like there will always be investment opportunities in the US in the form of housing, industry, IT, commodities, etc. So my confusion is- even if the Saudis decide to move the bulk of their trading into a euro backed system- wouldn't they still cycle a lot of this currency by investing in US opportunities? And therefore that wouldn't cause a total collapse of the US financial system? Again, I am a beginner, treat me kindly..

Hello Thuja, yes, I think in general that the Saud's and everyone else who holds dollar assets may be looking at the US' external trade balance and budget deficits and be a little worried. On the otherhand, FED funds are expected to go up to 5% while the core inflation target in +/- 2% indicating a real return of +/- 3%. That compares with euroland inflation of also close to 2% and an ECB rate of 3%. The BoJ is currently running an effective zero percent interest rate. This is obviously going to attract a lot of capital into the dollar. The trade deficit was approximately $66 bio last month while the US attracted a record $110 bio in foreign investment (will check the exact no. later). The Japanese alone have invested $120 bio in US securities this year.

So I think you are right. The Arabs may hedge themselves by buying some euro denominated assets and spread their risks, but the interest rate differentials at the moment favor the dollar and that is why it is hitting 27-month highs against the euro and the yen. Will likely see a test of 1.1250 yet in 2005 ahead of year-end? However, if the US economy stalls and the budget deficit bulges then this same 'hot money' could also just as quickly leave the US zone too. In this case, the deficit would have to be financed by domestic savers via higher interest rates and at the expense of investing in the real economy or the stock market. Therefore, if the Saud's get nervous about the deficit we might see sagging US house prices, a flagging stock market and higher interest rates to make up the short-fall in government revenues.

[Doly]

What I wonder is, if the US $ crashes, how fast is it likely to be?

[MrBill]

This is not a prediction....


Usually the storm clouds are on the hoizon. A lot of rumors. These things don't happen in a vacuum. Markets get jittery. Some see it as a clear signal to get out, others are tempted in by the higher volatility and attractive spreads.

The Russian debt crisis played out over about 18-months. First there was a spiral of ever higher yields in the GKO market which approached 100% per annum in ruble terms. I am no mathmetician but even I know no goverment can afford to refinace their debt at those types of multiples? It requires a doubling of debt every 9-months. Clearly unsustainable. But, the greedy were still piling in. Russia was too big to fail and the IMF kept lending them more and more to prop them up. A fledgling democracy was at stake.

Those in the know who had friends at the Central Bank of Russia or contracts at the Finance Ministry insisted everything was under control. The ruble was steady against the dollar and the government was taking measure to calm the market. We started hearing rumors about off the official exchange foreign exchange trading at much higher rates than the official rate about one month before the actual default. At first we thought the rumors must be wrong?

Never the less we started cutting our positions. You want to be very close the exit when these things happen. The smart money got out just as the rest of the financial world were piling in. We would have cut all our positions, but senior managent could not resist the temptation to buy bonds with a yield of 100%, so when it finally came down we were still long about $500 million including all the NDF contracts which were declared null & void by the courts in Russia.

All in all, about $200 billion in wealth was destroyed. Slightly less than Argentina's larger default. It all happened on AUG 18th, 1998. Just a simple statement by the government that they would no longer honor payments on the GKOs and that they would unilaterally default on all their domestic bonds. The currency collapsed. There were no dollars on offer on the official exchange. NDF contracts sky-rocketed as foreign investors scrambled to cover their FX losses. Ironically, it was a two tier market of Russian and non-Russian counterparts. Smart money bought the NDFs from non-Russian banks at worse rates, but trusting their credit quality more. However, when the government declared default the banks claimed force majeure and none of the NDFs were honored. That one kills me. But, when hundreds of millions are at stake you can bet the lawyers are burning the midnight oil looking for an out clause.

I was trading Ukraine tbills and foreign exchange at the time. We actually made money. Russia proceeded the fall in the Ukraine, so everything was happening in the Ukraine in slow motion, but about a week later. We were able to get all our tbills redeemed at face value and we even bought some distressed structured notes at between 400-2000% per annum from investors who were looking to get out at any price. I also did a lot of hedging in Czech korunas, Polish zloty & gold which was allowed at the time when I could not buy dollars outright due to scarcity and restrictions. However, it did not help us much in the end, as we made $3 million and head office and the bank in Russia lost $500 million, so after the crisis all our credit lines were cut and the market died in any case. I left the following Spring because it looked like the market would be dormant for many years to come?

I was quite surprised how quickly Russia bounced back aided by a weaker ruble, high energy & commodity prices, a haircut on its debt and the short term memory of many banks who got hurt during the default. Now Russia is in better shape than it was. Parts of the economy are booming. Yields on long term dollar debt are below 6%. The Russian stock market is one of the best performing stock markets in the world for the second year in a row. The country even got an investment grade rating. Now banks are falling all over themselves to lend money in Russia again and have completely forgotten the lessons of the past.

So, if you are looking for signs they are there. I said in the spring, that the downgrading of GM to junkbond status was the most significant credit event we would see this year. Not a good bell weather for the economy. However, isolated events do not add up to a collapse, but watch the horizon for more storm clouds. 2006 may indeed be an interesting year and if the 18-month time horizon holds then sometime in 2007 we may be seeing political and economic uncertainty in the twilight months of Georgie's Presidency?

[shakespear1]

Now banks are falling all over themselves to lend money in Russia again and have completely forgotten the lessons of the past.

Yes, it is the desire to get back in the game at any cost so that no one can say that you are not in the game