Re: <nettime> The Oil Thickens...

[Are Flagan <areflagan@transcodex.net>]

Re: 10/20/03 19:44, "Brian Holmes" <brian.holmes@wanadoo.fr>:

> 
> So: news is out that Russia is toying with the idea of trading its
> oil in euros.
> 
> In this context (which has in fact been developing over the past 3
> years, and not only with Russia), the US appears to be playing a
> dangerous, double-handed monetary game whose aims seem to me rather
> illegible, if not confused.

It is not that confusing if one first considers the blinkered unilateral
approach of a global US. If you really, truly think that the world is there
for your beck and call, as an instrument of your will, to provide for your
well-being, it actually makes sense.  But dangerous, indeed, if the world
thinks otherwise, and the good for you and good for me thing of liberation
and democracy goes all topsy-turvy.

> On the one hand, a determinant of the Iraq war seems almost certainly
> have been to deliver a lesson to the Arab world concerning the
> viability of pricing your oil sales in euros, as Iraq had done (to
> its profit at the time, cause they got out of dollars before the
> value fell). Beyond the case of Iraq itself, there was widespread
> speculation concerning the possibility of opting out of the US dollar
> as the undisputed international reserve currency for central banks,
> and shifting to a balance between euro and dollar (China has done
> this to a limited degree, for example). This speculation was
> encouraged both by capital flight from US markets after the krach of
> the US economy frommid-2000 on, and by general repugnance at US
> bellicosity in the lead-up to the war.

Don't forget that most invaluable lesson taught the UN. The UN actually
approved Iraq's oil trading in Euro through its escrow oil-for-food program
in 2000. This action upset the perceived order of the two United acronyms,
and it certainly offers a perspective on the completely useless and totally
irrelevant arguments that flourished around the UN long before the war
started.   

> Now, all of this is worrisome to the US, because the fact of having
> your currency as the international reserve currency has all kinds of
> advantages: not only does it make for seamless transition into your
> financial markets for all international actors dealing in dollars,
> but it literally  means that you can simply print more of the stuff
> and sell the resulting commodity, not for its worth as raw material
> plus labor, but rather for its face value (500 dollar bills are
> relatively cheap to make... but each one is still worth $500! and a
> lot of them could be pumped out in the 90s without causing domestic
> inflation, as the amount of global exchanges in dollars rose, and
> more foreign countries dollarized their economies; those interested
> in this subject can google around under the heading "seigneurage" or
> maybe in English it's "segnioriage" - the technical word for the
> advantages accruing to the soveriegn power emitting a currency used
> outside its borders).
 
Exactly! It's, for real, much like an interest free loan -- unfortunately to
the Pentagon (currently at 3.8% of GDP, like the PNAC asked for, and
growing). No wonder other nations are thinking about cutting back on the
credit line.  

> 
> To this worrying situation the US responded first of all with
> asserting its military might - the old idea that people will be
> confident when you display overwhelming power. But what happens if
> overwhelming power turns into a Vietnam-situation?...
> 
> On the other hand, the typical prewar fall in the value of the dollar
> against other currencies proved extremely popular with industrial
> interests in the US trying to get over a recession. So the US has
> kept the dollar low since then (about .85 euro). This appears to be a
> deliberate US policy, and a barely veiled riposte to the maintenance,
> by the EU central bank, of a high basic interest rate, which the US
> would like to see fall. America of course has cut its interest rate
> in the attempt to keep the economy going. So the US is in a doubly
> unfavorable position vis-a-vis international financiers: its currency
> has dropped 15% or more, meaning that international actors with a lot
> of money in dollars have taken significant losses; and also, those
> looking to earn interest aren't going to do so in the USA, 'cause the
> European base rate is significantly higher. One could say, fine, so
> what? Let those foreign devils go home. But the money of the foreign
> investor devils is basically what balances the books of a US economy
> that has a structurally deficient balance of trade. Only constant
> financial inflow to the US makes it possible for Americans to
> consistently import more than they export. The country basically
> lives on credit furnished either in the form of investment or loans -
> and everyone should remember that the great debt crisis of the US,
> left behind by Reagan, was "solved" by the profitability of the US
> financial markets during the mid-nineties. Now the US has again
> launched on a government borrowing binge to pay for Iraq, among other
> things. (An important detail in this argument: the  currently
> increased trade due to the weaker dollar is not near enough to make
> the balance of trade gap, in my knowledge - but please correct me if
> you have other info).

Spot on in my understanding. And, crucially, a weaker dollar actually makes
the trade deficit that much more costly. Unless it can be substantially
reduced as the result of the competitive edge gained, as mentioned, a weaker
dollar only results in an increased loss; needed goods become more costly to
import for the national economy. My understanding is that the trade deficit
has _not_ been significantly reduced. Another important element here is the
growing yet very fickle export and sale, in dollars, of "immaterial"
IP-related material. Without this, aided as it is by those little DMCA and
DRM helpers, the US trade deficit would have been far more crippling.

> Here is where the dangerous game begins: IF there were a run away
> from the US dollar, triggered off  for example by the shift of a
> major oil producer to trading in euros (and this is considered THE
> shift that could make such an event possible), then you could see a
> middle-term decline in the value of USD (down to, say, .70 euro), as
> the financial advantage which the US has enjoyed through its position
> as reserve currency disappears. All of this would cause a true crisis
> in the US economy, as its fundamental parameters would shift,itsrole
> as a global capital attractor would disappear. But this, in turn,
> would mean that the traditional role of the US as the "locomotive" of
> that horrid reality known as "economic growth" would also be
> compromised... The most likely thing would therefore be to see the
> Europeans lower their interest rate, perhaps even as the American one
> begins to creep up, and the value of the dollar appreciate at the
> same time. Why? Because the Europeans will be terrified at the idea
> that such as huge market as the US could go through a fall in demand,
> hurting their exports as much or more as the weak dollar.
> 
> But the world is complex and turbulent, and there is also a certain
> power-politics worldview holding (no doubt rightly) that Europe would
> really be better off in the long run having the euro at least on a
> par with USD, in a typically European vision of a multilateral,
> codependent sharing of the dominant reserve currency role. A strong
> euro might ultimately attract England (and its North Sea oil) fully
> into the Euroland. A reorganization which, by giving Euroland a major
> financial center, could decisively change the balance of economic
> power in the world.

The big BUT: BUT if the dollar gets way too _greedy_ and _violently_ upsets
the balances carefully worked out, or rather fought over, in the
capital/political markets, emergency measures may be called for (see, for
example, Soros). Enter the oil in Euro talk; it may in the end actually be
the only talk Bush (plus his admin) lends a listening ear to. The question
is if it meets any kind of meaningful resistance before it simply disappears
out the other ear.

> I did all this reading during the war and am just reciting from
> memory as I'm currently too busy to spend 48 hours with the financial
> press. But it's an extremely interesting subject and more news or
> fresh arguments would be welcome.
> 
> cheers, Brian
> 
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