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The worst has yet to come - Part 2

By Chris Clancy
web posted October 8, 2012

Let's continue the story with yet another quote from Marin Katusa, not only someone who knows what he's talking about, but someone who can actually write:

"Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars."

This was not only the first direct revolt against the petrodollar system but also something which started a ball rolling:

"In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela."

When the invasion did happen, the reason given was Saddam's alleged possession of Weapons of Mass Destruction.

As we all know now, this was a complete fabrication.  In reality, the invasion was supposed to accomplish two things. First, to undo any damage done to the petrodollar system; and second, to act as a deterrent to others who tried to break away.

As things turned out it failed in both respects. It was too late. The cat was out of the bag..

The next four quotes come from this article.

"The system would be [directly] challenged a second time, this time by Libya. In February of 2009, Muammar Gaddafi was elected the chairman of the African Union and would continue the effort to create the United States of Africa, which among other things, would include a unified currency, a dinar based on gold. Gaddafi went so far as to suggest that the African nations' oil trade would be switched from the dollar to this new gold currency."

This challenge was far more dangerous than the first. Had he been allowed to go ahead the USD would almost certainly have collapsed. Like Saddam he also got the treatment – only this time it was far more swift – and far more brutal. The excuse for the intervention was another lie – i.e. "humanitarian" reasons – go here for the background.

The third challenge actually started in 2003 - when Iran announced its intention to abandon the petrodollar system - and has been ongoing ever since.

"Early in 2008, Iran launched a new commodity exchange known as the Iranian Oil Bourse. The intent was to allow for Iranian oil to be priced and traded with multiple currencies. As the system was ramped up, initially the exchange limited its trade to secondary petroleum products, with crude oil to be added "when the system was ready." Iran … announced it would be ready on March 20, 2012.  This was a declaration of war on the petro dollar!"

In response:

"The U.S. along with the EU then implemented a defense. Just prior to the expansion of the Iranian exchange, on March 17, the EU carried out orders to expand sanctions against Iran by removing Iranian banks from the international bank-wire transfer system known as SWIFT.  Furthermore, any banks caught doing business with Iran would be sanctioned as well.  It seems Iran's entire international commerce engine has been halted and its oil industry crushed."

However:

"Japan, China, India and Turkey are among the countries who've been dependent on Iranian oil to some degree.  Various discussions have been taking place between Iran and its trading partners on the possibility to enlist trade for other commodities such as gold or grain."

One cannot help being cynical about the timing of the sanctions and the reason given – Iran's nuclear ambitions.

Be this as it may, the history of sanctions is that they never work as planned – if at all. Those against Iran will go the same way. Further, there's little doubt that many other countries will be encouraged to also find other ways of paying for their oil.

Which brings us to something else which has been going on increasingly over the previous ten years or so.

I refer to the growth in "currency swap" agreements – especially in the last two years. Not only a quicker and cheaper method of doing things but also a way out of America's stranglehold on international trade and everything else to do with the USD.

This trend is not going to change. Which brings us to the heart of the matter.

The only thing which keeps the American economy going is debt. The only thing which attracts lenders is the strong dollar. The only reason for the strong dollar is the petrodollar system.

As demand for the USD drops, the government won't receive enough money to pay all its bills, interest rates start to rise and then all sorts of horrible things begin to happen.

That the dollar will collapse is inevitable. But what will it mean?

Marin Katusa, ending on an optimistic note, does not consider its demise will be such a disaster. As I've already stolen so much from him in this essay I see no reason to stop now.

So here's some more:

"2012 might end up being most famous as the year in which the world defected from the US dollar as the global currency of choice. Imagine the rest of the world doing the math and, little by little, beginning to do business in their own currencies and investing ever less of their surpluses in US Treasuries. It constitutes nothing less than a slow but sure decimation of the dollar.

That may not be a bad thing for the United States. The country's gargantuan debts can never be repaid as long as the dollar maintains anything close to its current valuation. Given the state of the country, all that's really left supporting the value in the dollar is its global reserve currency status. If that goes and the dollar slides, maybe the US will be able to repay its debts and start fresh. That new start would come without the privileges and ingrained subsidies to which Americans are so accustomed, but it's amazing that the petrodollar system has lasted this long. It was only a matter of time before something would break it down."

The key point in this quote is where he writes about, "a slow but sure decimation of the dollar". If this indeed is what happens we are left with some hope – not much – but at least a glimmer that the road ahead will not be quite so bad.

However, if this is not what happens – and the dollar collapse is sudden – then the future is grim.

And there's no way of sugar-coating it.

But, as mentioned, there is still a glimmer of hope.

To understand what and why, we need to take a few steps back in time; to something which happened back in the 1980s – on September 22nd 1985 to be precise - in the Plaza Hotel in New York City. ESR

Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.

 

 

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