Reconciling assholes for nearly a decade.

Collapse of the Dollar (or Oil by the Euro)

In a separate thread peter said:

"The two countries discussing selling oil in euros are currently being threatened by US military action: Iran and Venezuela. Countries that do no trade with the US are still having to purchase dollars in order to buy oil. Removing the dollar from that equation will cause the dollar to plunge in value."

and Dennis responded:

"The "collapse of the dollar" thing has been debunked countless times. As for Venezuela, despite the dislike between the two countries the possibility of any sort of military action is non-existent. Maybe the CIA would incite some local dissent or something, but certainly no bombers or anything like that."


how has it been debunked? was Venezuela about to deal in the Euro? what would be the effect on the US if Oil began to be traded in Euro instead of USD?
Permalink Jesus H Christ 
January 19th, 2006
http://www.safehaven.com/article-720.htm

That's the first search hit, but there are many like it. Most economists consider it a BFD transition, though of course conspiracy buffs, and those for whom it can be leveraged for their own agenda, like to see tremendous doom in every world transition.
Permalink Dennis Forbes 
January 19th, 2006
Thanks Dennis, still trying to understand it now.

Just a quick question....*do* other countries currently store large quantities of USD? anyone have any idea of how large?
Permalink Jesus H Christ 
January 20th, 2006
I don't know to whom, but the US has $ 8,837,000,000,000 in "public and private debt owed to nonresidents repayable in foreign currency, goods, or services."

http://www.cia.gov/cia/publications/factbook/rankorder/2079rank.html
Permalink MarkTAW 
January 20th, 2006
"*do* other countries currently store large quantities of USD? anyone have any idea of how large?"

Yes they do, and quite large. Any government holds a decent reserve of foreign currency to secure its own currency - if it's dropping, they can start buying it back for dollars, which will make the demand go up (because other players know they can get dollars for it at a favourable rate). It's not a long-term solution, but it is short-term protection against an attack on a currency.

There's talk in Estonia right now about the foreign currency reserves held by the central bank and what will happen to them once we join the Euro. Actually it seems we'll simply hand them over to the European central bank as our share of the Euro backing reserves.
Permalink Flasher T 
January 20th, 2006
It's entirely irrelevant what dollars are priced in, except for US purchases of oil. where the US is protected from exchange rate fluctuations. There is simply a double conversion made, even if dollars are notionally bought at some stage of the transaction.
Permalink Stephen Jones 
January 20th, 2006
Is my memory faulty, or was Iraq selling, or threatening to sell, its oil in Euros before "someone" invaded?
Permalink  
January 20th, 2006
"Is my memory faulty, or was Iraq selling, or threatening to sell, its oil in Euros before "someone" invaded?"

yeah, and by the sound of it both Iran and Venuzuala (sp?) are threatening too at the moment.

the question is whether its all a coincidence.

Im not convinced by the link that Dennis gave me....everything said in the article is perfecetly reasonable but it doesn't cover the fact that there *are* large stores of USD held out there and that they might well be affected and decreased if the oil goes to Euro.

So, assume that the switch to oil by the Euro does occur and those stores are all released, what happens? a sudden oversupply of USD. leading to a drop in the dollar.

would it matter? Im not sure it would. a sudden increase in the cost of imports, is it such a big deal?
Permalink Jesus H Christ 
January 20th, 2006
1) There is no good reason for governments to instantly drop their USD reserves even if oil goes over to Euros. The dollar is not backed by oil reserves, it is backed by the US economy, and as such is still useful as a reserve for backing up one's own currency.

2) The dollar is already very low, and has been for a while - about as low in fact as you can expect it to get considering it is backed by a powerful economy. It's near the bottom of what it's actually worth.
Permalink Flasher T 
January 20th, 2006
It's worth what people believe its worth together with how much is available. There are too many dollars in supply, in the M0 sense of cash, this always creates a downward pressure on the negotiable value.

But because the dollar is negotiable outside of the US more than any other currency restricting the money supply within the US would probably harm the US domestic economy and not effect the external dollar market at all. For that reason dollar enthusiasts should welcome the Euro as a means of taking pressure off the dollar.
Permalink Simon Lucy 
January 20th, 2006
"So, assume that the switch to oil by the Euro does occur and those stores are all released, what happens? a sudden oversupply of USD. leading to a drop in the dollar."

This would hurt all other countries too. If the world were to transition off of the dollar they would need to slowly get rid of their own dollar investments. China, Japan, and many other asian countries every day have to buy and sell billions of dollars to keep their currencies fixed to the USD. If the dollar's value were to plummit, it would take Asia with us, and most of Latin America.  Selling oil in other currencies alone I can't imagine would have a very large effect at all though. The euro looks promising as a reserve currency, but it hasn't been around long enough at this point for countries to suddenly just switch over.
Permalink Phil 
January 20th, 2006
For you who are having dreams of the dollar collapsing, I think the easiest/only way it would happen would be if the US started defaulting on it's interest payments. Or if the US went bankrupt. Which is why our national debt worries many people.
Permalink Phil 
January 20th, 2006
"For you who are having dreams of the dollar collapsing"

Well let's see, it's only down about 30% against most major currencies during the last 5 years. It may not be dropping as fast as the towers, but it's purchasing power ain't what it used to be.
Permalink Crazy Old Guy 
January 20th, 2006
Your data is about a year old, it gained on most major currencies last year. Maybe you are not aware of this though, but a 4 or 5 years does not equal a long term trend.  The GBP lost 20-30% on the dollar from 1990-1995 but it didn't collapse.
Permalink Phil 
January 20th, 2006
But we did have interest rates of 15%.
Permalink Simon Lucy 
January 20th, 2006
"Well let's see, it's only down about 30% against most major currencies during the last 5 years. It may not be dropping as fast as the towers, but it's purchasing power ain't what it used to be."

The drop of the US dollar has been entirely beneficial to the American economy, and has started putting significant pressure on China as an added benefit.
Permalink Dennis Forbes 
January 20th, 2006
"The drop of the US dollar has been entirely beneficial to the American economy, and has started putting significant pressure on China as an added benefit."

And it was in fact done on purpose. There was a deliberate effort almost as soon as Bush got into office of talking down the economy and letting go of the "strong dollar" policy the US had for many years. The aim is to cripple China with inflation, and force them to float their currency.
Permalink Phil 
January 20th, 2006
As an aside, the statement I was refuting (quoted in the original post) was speculation that the US is paranoid that oil trade will move to Euros/gold/PayPal, and conspiracy theories that the US moved on Iraq because of a conversion to the Euro for oil trade (and correlating speculation about Iran and Venezuela. Venezuela is ridiculous to lump in there, but anyways). Per the linked article, and many like it, the money supply doesn't work like it used to, and virtual US $ in transactions hardly prop up the dollar to any significant extent.

The US government has the ability to dramatically boost and sag the dollar - Cut the deficit, the dollar goes up. Raise the central rate, the dollar goes up. Give a public statement about fiscal constraint, the dollar goes up. Of course on the flip side sometimes there's a desire to push the dollar down, correcting trade imbalances.

Oh, and one more thing (from that thread) - France said that if anyone screws with strategic supplies (which could only mean oil), they'll nuke them.

http://english.aljazeera.net/NR/exeres/789F2532-A266-468D-BCD2-46010F2261C1.htm

Little old France. Tell me again how Iran is going to cause $1,000 ppb oil. The point, of course, is that worst case "Iran will disrupt the world" if her weapon's program were attacked presumes that the rest of the world sits around sucking their thumb and holding their blankie.
Permalink Dennis Forbes 
January 20th, 2006
France suffers from having a Presidential system in much the same way the US does. Everyone believes that because the President says something it actually means something. Generally it means very little.
Permalink Simon Lucy 
January 20th, 2006
"France suffers from having a Presidential system in much the same way the US does. Everyone believes that because the President says something it actually means something. Generally it means very little."

You think what Bush says means very little? While he sometimes goes off script occasionally, the words he's speaking are the policy and direction of a lot of people in the administration. In France I hardly think the President suddenly decided that he wanted to talk about how they'd use their nuclear weapons - It most certainly was an intentional, well thought-out message.
Permalink Dennis Forbes 
January 20th, 2006
>I think the easiest/only way it would happen would be if the US started defaulting on it's interest payments. Or if the US went bankrupt. Which is why our national debt worries many people.

The 14th Amendment to the constitution forbids defaulting on public debt. That inability to default on debt is partly why so many people in the world purchase t-bills/bonds/notes. Some of the folks here wish to abolish most government departments. Even if their wish magically happened, some agencies are spending 25% of their budgets on pensions: even if the departments poof, their pension obligations remain, and those cannot legally go away without another constitutional amendment.

"Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. "

http://www.law.cornell.edu/constitution/constitution.amendmentxiv.html

""Yes, Iran has started withdrawing money from European banks and transferring it to other banks abroad," said a senior Iranian official, who asked not to be named."
...
"Iran has bitter memories of its U.S. assets being frozen shortly after the 1979 Islamic revolution."

http://www.swissinfo.org/sen/swissinfo.html?siteSect=143&sid=6396013&cKey=1137769543000

Sanctions against Iran will also require other countries to stop importing Iran's oil and natural gas. The US has had an embargo against Iranian products since their revolution, so while the US imports almost nothing (legally) from Iran, if Iran's oil were cut off from the market, everyone else in the world would be scrambling for the same oil supplies, thus driving up the cost.

There were several instances last summer of oil tankers hanging u-turns in mid-Atlantic because someone else offered more money for the cargo.

Dennis, could Chirac be threatening to nuke America if we cut off France's "strategic supplies?"
Permalink Peter 
January 20th, 2006

This topic was orginally posted to the off-topic forum of the
Joel on Software discussion board.

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