“The demise of the dollar“, Robert Fisk, The Independent, 6 October 2009 — “In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.”
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within 9 years.
This is unlikely for many reasons. A few quick ones…
- Some of these nations have no reason to risk destabilizing the USA. Esp the Saudi Princes.
- Some of these nations have no reason to risk destabilizing the global financial system. Esp. Japan.
- Many of these nation have leaders who are some combination of cautious, slow, reactive, and incrementalists.
- Something of this scale would be almost impossible to keep secret 2 days after the first discussions.
- If multiple Hong Kong banking sources knew it, their fingerprints would be all over the US dollar — as they shorted it to the max.
The only thing giving pause is Fisk’s reputation. While strongly anti-American, he is no pilgrim — and he’s well-wired in the Middle East.
(2) Memos from the 1970’s, similar fears
At Zero Hedge are two memos from the Carter Administration discussing the possibility of oil being priced no longer in US dollars, but the IMF’s special drawing rights. The authors:
- Henry D. Owen, Special Representative for Economic Summits
- Anthony Solomon, former Undersecretary of the Treasury and President of the New York Fed
During this period there were concerns that the US debt could no longer be financed in dollars, but that (like 3rd world nations) we would have to borrow in real money.
(3) Recommendations
- Watch for further developments.
- Watch for analysts that take this story seriously; scratch them from your reading list.
- Mark your calendar check to back with Fisk in 2018.
(4) Articles on this topic
- “The Case for Exchange Rate Flexibility in Oil-Exporting Economies“, Brad Setse, Peterson Institute for International Economics, November 2007
(5) For more information
To read other articles about these things, see the following:
- About the Financial crisis – what’s happening? how will this end?
- About the End of the post-WWII geopolitical regime
Reference pages about other topics appear on the right side menu bar, including About the FM website page.
Posts about the US dollar:
- A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
- Economic Warfare, 10 November 2007 — Welcome to the post-war (b. major states) world.
- We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007
- Our metastable Empire, built on a foundation of clay, 3 March 2008 — The US dollar is a big chunk of this clay.
- Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ, 14 July 2008 — Very pertinent to this post!
- Two essential texts in the theory and practice of financial warfare, 11 September 2008 — It’s coming.
- Rumors of financial war: Russia vs. US, 22 September 2008
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008 — Speculation about the birth of the new world order.
- A look at the new world – after the downturn, 19 March 2009 — And what role the US dollar has in it.
- Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009 — The truth is there, but we cannot see it.
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FMs implicit assumption is that the American economy is fundamentally sound and once the crisis is dealt with we can all get back to 2006. But those invested in it think the game is coming to a close. Since the US seems incapable of structural reform, managing it’s decline is a prudent thing for these people to do. The idea that they are just locked into a death spiral with the US economy is quite unrealistic.
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Fabius Maximus replies: On what basis do you make this remarkable (and false) claim? Esp given the posts listed in the “for more information” secton? Esp since this series is called “end of the post-WWII geopolitical regime.” That could mean things get even better for superpower USA, but it doesn’t.
This is a conspiracy theory and because Robert Fisk writes it it doesn’t mean it has to be true. Some countries – like North Korea – might really want to bring the United States down, others – like Russia and China – would like to limit its influence. I have great difficulties in imagining a concerted move to end the American superpower.
There is – however – something else that makes this scenario not entirely unlikely: While it is difficult for me to imagine a group of powerful nations would conspire to bring down the United States as a superpower it is not unlikely that some will come to the realization that one way or the other the United States will end as a superpower in the coming years. Everybody wants to be prepared in such a case to limit the damage. It is one thing to say “too big to fail”, but something entirely different to say “too big to save”.
One way to say that the United States is about to end as a superpower will be when we see countries get aligned with each other without the involvement of the United States. We have seen some moves, like the creation of the SCO between Russia and China, the almost universal refusal by several countries to support the war in Iraq and perhaps also the “no” to Chicago as a host for the Olympic Games in 2016. But if this is true we will see much more in the coming years.
1. Do they have no reason to take part in talks that will shape a future they might see inevitable? Or maybe the Saudi want out on a deal that forces them to buy treasuries or are starting to loose confidence in the dollar.
2. Check with the newly elected government of Japan for their comment on the US dollar and US debt (“Samurai-ed: Japan ‘would avoid dollar bonds’“, blog of the Financial Times, 13 May 2009)
3. Can’t comment.
4. Sounds about right for the U.S. Does it mean it’s impossible for those other countries? Or for central bank (I’m no “central bank is evil kind of guy, but I recongnize that they are not the most public of entity)?
5. Can’t commnent.
No. The building is not about to collapse.
But I think we did hear a distinct groan.
You forgot to add 6: For this to work without blowing up in everyone’s faces it would require the US to have a seat at the table! Sooner or later the dollar hegemony must end. It is in everyone’s interests to make the transition period as orderly as possible.
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Fabius Maximus replies: For more about this scenario, see Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008 — Speculation about the birth of the new world order.
That story doesn’t make much sense. Most oil is sold on long term contracts. Here it’s perfectly possible to demand payment in other currencies than the dollar. There is no law requiring a prices to be in dollars.
And finally, if one has received payment in dollars but prefer Euro or Yen. Then sell those greenbacks immediately. I wonder who would like Fisk to write such a piece. Speculators?
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Fabius Maximus replies: It makes no sense in terms of trading oil. It makes much sense if they seek to damage the US by attacking a vulnerable point: the US dollar.
And #7: Oil is a de-facto currency of its own, who cares what it is measured in?
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Fabius Maximus replies: The status of reserve currency is an intangible thing, damaged by loss of confidence. Trillions of dollars are held outside the US as a store of value, a key role of the reserve currency. Some large fraction of that would come home if it was no longer the reserve currency.
They would not send the dollars by parcel post, in bails. They would want goods or services in exchange, which we could not provide. That would bring down the curtain hard on the post-WWII era. Nobody knows what would happen next. See the links at the end of the post for more about such scenarios.
The “basket of currencies” idea has been floating around in the media. I think it was the Chinese pushing it. There is every reason for the countries listed to seek something other than the dollar as the international currency of choice. That reason is the governmental and private mismanagement of the American fiscal sector. It is possible that these countries think they can build some sort of fiscal firewall as a protection against further mismanagement.
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Fabius Maximus replies: The Chinese push it the most strongly. They’ve accumulated almost 2 trillion US dollars as an inevitable side-effect of their mercantilest policies (strong exports based on an undervalued currency). Now they face the prospect of massive losses on those dollars (most in US treasuries). A conversion to special drawing rights or some basket would share those losses — mostly among the nations that have suffered from China’s policies (i.e., Japan and Europe). Needless to say, China gets no sympathy for this problem.
The other party pushing this is Russia, standard great power rivalry. Such a change would not benefit them, just hurt the US — which seems to be enough for them to favor the change.
Re #7 — I care because I fill my gas tank and heat my home in dollars. We who are living in the U.S. also care because this would hasten the end of the dollar as the world’s reserve currency (no more free rides).
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Fabius Maximus replies: Weaver’s point in #7 is that trading oil in other currencies has no inherent effect on the US, or oil prices. All other things being equal. But if it helps end the US dollar’s role as a reserve currency, the USD probably will fall in value. That would represent a loss of purchasing power by US households and businesses.
It is however, probably a necessary step to putting America on its feet again. Making our goods and services competitive on world markets, allowing us to earn the foreign exchange needed to begin paying our foreign debts.
“FMs implicit assumption is that the American economy is fundamentally sound”
FM: “On what basis do you make this remarkable (and false) claim?”
Based on you own list of reasons why it’s unlikely.
1,2 If the world thinks that the US economic bubble isn’t going to reinflate then yes they will be willing to risk destabilizing it to salvage what they can.
3,4,5 No doubt making sure decline did not become collapse was a big part of the meeting. The basket of currencies would no doubt include the US dollar so that change could be brought in gradually and speculators couldn’t destabilize things.
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Fabius Maximus replies: You make too many assumptions, esp about a scenario that is probably false (at this time). History is filled with national leaders who made bold moves, often war, during unsettled periods — hoping to profit from the resulting chaos. Your latter assumptions are even more speculative guesses, without any knowledge of the leaders’ motives.
Does sound like a conspiracy theory and not a very credible one. The Euro currently represents the most likely alternative to the dollar, but European central banks are even more over-leveraged than American central banks. The City of London is today a larger financial trading center than Wall Street and its banks are in worse shape than Wall Street’s.
Presumably the participants would want a more stable reserve currency than the dollar, but if not the Euro, what? Not the Yen, surely, given Japan’s economic collapse, so what else would qualify? Certainly not the Chinese currency, given the lack of transparency of that economy and its penchant for massive corruption.
It all seems unlikely especially inasmuch as many foreign investors fled to the dollar when the financial crisis hit as the last safe haven. Middle Eastern countries have vast investments in the U.S. and thus would be extraordinarily unlikely to want to undermine the dollar’s value as the world reserve currency.
I read about the potential for the U.S. Dollar to lose reserve currency status, I know neither what the chances are nor what the implication to the U.S is. I read gurus and opinion-hawkers discuss it, but there is another level that the U.S. Dollar works at, other than explicit international trade, that is never discussed.
My wive and I are fortunate to be able to travel frequently to third world countries and we always do so as indepedent travelers. Almost invariably, tours, bus and boat tickets, and hotels arranged on the spot are priced in U.S. Dollars. While English is the common denomination language, the Dollar (or the Euro) is the common exchange unit. Maybe commodity/oil dealers and sellers of food, clothing and toys may want to hedge their losses when they are negotiating slim margins with a less volatile averaged currency, but the use of the Dollar as a common bartering unit amongst us peasants will most likely stay around for a while longer.
English is a language the rest of the world is learning as a common communication means to allow free travel across borders. Likewise, the Dollar is a common currency means to allow free ‘barter’ independent of borders and local fiats for those of us who explore on our own. (Having written this, we do, out of respect for our host country, try to use the local currency as much as possible, yet sometimes the Dollar is preferred.)
My point: The U.S. Dollar has seeped so deeply into the interconnected world economy that a few commodity exchanges may not have the broad reaching or sudden influence we anticipate. The Dollar has become “The People’s” currency.
FM, I noted from your response to Nicholas Weaver’s comment #7 that you still believe that foreigners would hold dollars in exchange for anticipated US exports. If that were true, what would prevent the US from exporting to the global market accordingly?
Foreigners hold dollars at great expense to their domestic economic development because they have no choice. The very survival of the foreign sovereigns has depended, at least since WWII, to a large extent, on improving their external financing position by holding dollar reserves.
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Fabius Maximus replies: I don’t understand your question; what is the scenario about which you are asking? For example, about the situation if the current global financial regime changes, with the US dollar no longer the reserve currency?
American workers ARE OVERPAID. Here’s some comments from reminbi:
It all depend how you live. If you leave as a foreigner then forget it. But if you try to live more like a Chinese then it is OK. With 15 yuan to eat everyday you can afford a restaurant for lunch and dinner ( provided you are alone ). A Mac Donald meals is about 22 yuans / a noodle soup 5 yuans / a can of Coca Cola 1.5 yuans
This on about a 4000/month … rmb, salary.
The Chinese don’t want to wreck the USA, their best customer, but dont’ want their $2 trillion to devalue from 1.3 trillion Euro to 1 trillion Euro. Best soft landing case for Chinese — stop buying USD, but don’t yet sell, increase Euro (and Yen???) holding.
The US currency will continue to devalue against the ‘best’ other world currencies, until their is more foreign investments INTO the US, or less exports TO the US.
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Fabius Maximus replies: On what basis do you speak so confidently about what “the Chinese want”? Do you distinguish between peasants in western China and members of its leadership?
As for the future, it is more complex than you imply — and forecasts depend on one’s time horizon. A US recession continuing into 2010 might easily mean a strong US dollar, esp if US GDP is slower than global GDP. Exports would be stronger than imports, reducing or eliminating the trade deficit. A global recession (again if the US is weaker than the rest of the world) would boost the dollar, as dollars are sought to repay debt.
One question is what are the world’s best currencies, at least those of large economies?
* The EMU might not survive a long recession — see Can the European Monetary Union survive the next recession?
* Japan’s government has a crushing debt load (a gross public debt of twice GDP), and the nation has near-terminal demographics — see As Japan sails into the shadows, let’s wish them well and wave good-by.
China has a primative financial appartus and as yet a currency with limited convertability. Plus it has its own problems, whose magnitude we do not know:
* China – the mysterious other pole of the world economy, 22 June 2009
* Will China collapse?, 5 August 2009
* A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
“My point: The U.S. Dollar has seeped so deeply into the interconnected world economy that a few commodity exchanges may not have the broad reaching or sudden influence we anticipate. The Dollar has become “The People’s” currency.”
Actually, drug smugglers prefer the euro. They particularly prize the 500 euro note ( worth about $730 ), which is much less bulky than the $100 bill.
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Fabius Maximus replies: That is an important point, and probably one of increasing impact.
Pingback: For Informational Purposes Only | QandO
Look I’ve held the opinion for a long time that a new international ‘trading’ currency was esential (Keynes Bancor would be ideal, but just about anything would be better than what we have right now). And that countries like Suadia Arabia would in the end would ‘have no choice’ but to go that direction for sheer economic survival reasons.
Plus this is the best thing that can happen for the US people. Yes there will be short term pain but in a reasonable period of time the US will come back to balance again … incidently rebuilding its manufacturing and creating jobs. What it will kill is the Military/Industrial/Financial part of the US. GS, the Pentagon, neocons and Lockheed will get it in the neck. The 1,000 overseas bases will go plus all the ‘foreign adventures’ will end.
But you will start making things again. Good for Boeing (if they ever get their act together again .. time I think for a Rolls Royce moment, fire all the current idiots and bring back all the retired guys, they were the best plane builders in the World).
Yes there are geo-political dimensions but … the World is awash with US dollars. Since the collapse of Bretton Woods and the US going off the gold standard sucessive US Govt’s have hit the printing presses to pay for US imports.
Essentially US imports are free for them. While every other country has to earn (or borrow) US dollars to pay for oil, etc, the US can just print it. This, and you would have to be niave not expect this, has led the US to build up unimaginable deficits with the rest of the World.
Fine you might say if you are in the US (though see below for the catch if you are an ordinary person), but for other countries it is becoming economically destablising. Basically if you are (say) China, a suppler gets paid in $US, the central bank then exchanges that for Yuan. It now has the problem of what to do with them. They need some for imports but the rest? If they put them into the domestic economy then inflation, so they have to sterilise them by buying assets, actual and mostly financial. And as it goes on then the US$ becomnes increasingly meaningless … as John Brunner called it ‘tea leaves’.
One very important implication is that all these countries have realised that massive trade imbalances (and speculation) have to end. With a proper international currency then one way or another trade balances will have to even out. Either the deficit country simply cannot import or the circle will be squared by real investment money from a surplus nation to a deficit one (with gold in the equation ponzi loans will not work for very long).
Catch for US ordinary people: this has also enabled outsourcing. Any other counrty who did this to that extent would bankrupt itself, as it would run out of foreign currency to buy products that were originally made locally but are now in another country. So if you are US Joe Soap then the US$ being a reserve currency has been horrible for you. Great for the military boys and the financial elite though.
From a Joe Soap point of view, it doesn’t matter that cars made in the US are by a company owned by Japan, China or even (heaven forbid) Russia. You still have a job and the country is in trade balance.
So this is a good and my view inevitable development. Actually it’s overdue, we should have had this 20 years ago.
“allowing us to earn the foreign exchange needed to begin paying our foreign debts.”
We have no foreign debts, at least not any denominated in any foreign exchange that we would need to earn.
I’m sorry, but you still have no understanding of the modern monetary system. You are stuck in a gold standard framework which has no applicability to a fiat world. The treasury securities held by foreigners are in no sense “debt” in the ordinary sense of the word. A currency issuer does not need to “borrow” it’s own currency of issue.
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Fabius Maximus replies: “Foreign debts” in the standard jargon refers to the holders of the debt (unlike “domestic” debt”). It does not refer to the currency in which the debt is denominated, which might be that of the issuer or a foreign nation. For example, much borrowing by folks in eastern europe was done in euros — pushing them near or to bankruptcy when their home currenies depreciated vs. the Euro.
Large foreign debt demoninated can be problematic even if denominated in one’s own currency, as holders can exchange it for goods, services, or assets on a destabilizing scale. This is the major exception to the ability of a central bank to monitize debt without practical limits, as printing to finance flows to foreigners can depress one’s currency — causing rising import prices and other adverse impacts.
As discussed in this wiki on Reserve Currencies:
The advantage of being a reserve currency is not that great. Meanwhile, being beat up by trading partners to maintain purchasing power of their reserves of our currency, which they built up initially for mercantilist advantage in trade by and large, strikes me as disingenuous. If rational internal analysis dictates we print money and inject it into our economy, for example, to increase employment, and we overshoot, causing inflation, I mostly say, “Tough Noogies”.
“The advantage of being a reserve currency is not that great”
I’d have to disagree with this. Exports are a cost, imports are a benefit. Having the reserve currency allows us to import a lot without having to export to pay for it, since other countries would rather accumulate dollar assets than buy U.S. goods (and thus deprive U.S. residents of them). If being “beat up by our trading partners” means they give us something for nothing, I say more power to them!
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Fabius Maximus replies: Mercantilism still lives! Richardo trashed this concept in 1815 (in this chapter, describing comparative advantage), but failed to put a stake though its heart.
Worse, the critics of free trade might be right. See Globalization and free trade – wonders of a past era, now enemies of America, 16 March 2009.
Re 21:
No, being beat up means them saying they won’t buy our debt, or demanding higher interest to induce them to buy, and them saying they might go to another currency as reserve. These are all bad things, no argument from me, but compared to 10% unemployment, cascading debt-deflation, and maybe soon, riots in the streets, I advise focusing away from these minor concerns with our trading partners.
We don’t need them to buy our debt. Unfortunately, the people who run our financial system don’t understand that, so the other stuff you mention could come true…
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Fabius Maximus replies: Can you provide some citations to support your theory?
Agreed. And if you want to see firming asset prices here,and employement driven by export trade, start printing money and injecting it into our economy (personally I like injecting it by funding a tax holiday while also running a deficit, but that’s just me), and watch those trillions held by foreign central banks come gushing in here as increased trade and asset purchases. This whole thing reminds me of the “Blazing Saddles” routine where the new black town sheriff holds a gun to his own head and warns the angry mob “Hold it right there or the N… gets it!”. By making threats, the dollar holders hope we’re too stupid to pursue our own interests, and listen to them.
“Can you provide some citations to support your theory?”
Sure. Here’s a good summary by Randall Wray: “Professor L. Randall Wray responds to a question“, L. Randall Wray (Prof of Economics at the University of Missouri-Kansas City), 21 June 2009.
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Fabius Maximus replies: This is a statement of standard economic theory. The US government can print money at will, limited only by the risk of external currency collapse, or internal loss of confidence leading to hyperinflation, or both (these are of course the extreme end states; unpleasant things happen before these points). Hyperinflation is a commonplace in history, from the Assignats of the French revolutionary government to the Weimar in 1923 and most recently in Zimbabwe. You need not worry, “the people who run our financial system” understand basic economics quite well.
Please focus discussion on this thread to this specific post. You might find the issues in which you’re interested discussed elsewhere on this site, such as the 10 articles listed at the end of this post. Click here to see all posts discussing the US dollar.
All of those episodes were caused by significant supply shocks, not merely by “money printing”: “Zimbabwe for hyperventilators 101“, Billy Blog, 28 July 2009.
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Fabius Maximus replies: Of course. Most events — wars, hyperinflation, revolutions — have causes. Nations do not decide to destroy their currency for fun, or on a whim. Friedman said “inflation is always and everywhere a monetary phenomenon.” While that describes the dynamics of hyperinflation, its cause is more accurately explained by “hyperinflation is always and everywhere a fiscal phenomenon” — which focuses attention on the reasons why the government took these actions.
As stated at the end of every post, please focus your comments on the specific post. This is not an open thread about economics, or a forum to display your theories. For more details see the Comment Policy.
I think the thing we citizens aren’t getting is the fact that mostly the problem we (our Fed, Obama, Larry Summers, even the new management at GM) have is a “Psychological Sloshing” phenomenon. Like water in a shallow tray (I believe FM has actually used this metaphor), everything we do to solve each immediate crisis tends to induce a destructive self reinforcing result elsewhere.
We let Lehman fail to avoid moral hazard; result: markets wig out and freeze up, all hell breaks loose. The automatic stabilizers kick in, social safety net spending increases; result: deficit spending is automatically induced. Deficit spending puts upward pressure on interest rates; result: unthinkable right now to raise rates, ARM’s will explode, so we print money instead. Printing money worries our trading partners and other T-bill holders; result: they complain, threaten to adopt a new reserve currency. If we keep printing money, dollar holders will eventually undergo a psychological shift. They will come to believe dollars may soon become worthless. If that happens, Katy bar the door, you have hyperinflation feeding on itself. Trillions come gushing in seeking any hard asset they can buy. No matter how high the price, owning “something real” is better than owning dollars. The biggest “sloshing” of all, and a nasty end game will have begun.
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Fabius Maximus replies: I have not used that metaphor. But I will — it’s excellent!
There are far more issues than just the economic issue here. Ending the US$’s reserve status means that all those foreign ‘adventures’ and bases (all 1,000 of them) end.
But there must be a lot of side deals here. What was Japan offered to come to the party?
Saudi Arabia must have been given security deals, as it would fear an US/Israeli air attack or a hundred thousand US soldiers going South from Iraq (and if you don’t think that could happen you are very naive)
Then we have Saudi Arabia purchasing Russia’s s-400 air defence system (“Russia to sell advanced defense system to Saudis“, WorldnetDaily, 6 October 2009 — “Deal deters Moscow’s sale of missile shield to Iran”) heck they were only reported as ‘evaluating’ it on the 1st of October (http://www.google.com/hostednews/afp/article/ALeqM5gLdYdQ1huG2IQfXrnA7mek5LrKlg).
The s-400 system is a rare thing in the military world, it is a game changer. You have it, then if someone sends their airforce in .. they don’t come back. Think of it as an Aegis air defence destroyer, that is on land, mobile and has better missiles (you don’t want to be in an AWAC within 300 miles of the thing .. or you will be dead). Plus with the new L-band and VHF capabilities ‘stealth’ is a busted reed.
Plus S.A. buying a heap of Eurofighters? Arguably the best thing in the air except the Su-30 class (sorry folks the F-22 is a bit of a disaster, the 787 of the military air world and the F-35 is a joke)
Now a conspiracy theorist would say that Fisks’s announcement forced their hand, instead of going through a ‘show comparison’ then ‘reluctantly’ buying to ‘create pressure on Iran’ and all that toss .. straight to the chase now, they think they are (and probably actually are) in the firing line.
Suddenly a lot of what I call’ data points’, oddball over the last few years, start to make sense.
Brazil in a showdown with the US over Honduras, the elected leader is in the Brazilian embassy. While ,what was it, 9 US senators go there and sing the military takeover’s praises, either the US Govt has lost all control over foreign policy or they are there with Washington’s blessing. And Brazil is saying ‘enough’. Their ideal is a South American EU.
China last week showing off some very interesting equipment in their parade. Including the other ‘game changer’, China’s ballistic anti-ship missile. If you are in a carrier 3-5,000 miles away you are just a target waiting to be sunk, and if that doesn’t get you then a sub, plane or land launched sunburst will. Actually this ballistic one is the key. China has a very strong coastal naval defence but it doesn’t have the ‘blue water’ capability to protect its shipping lines to (say) the Gulf. Which is the first place the US would threaten to bring China into line. That missile means ‘checkmate’ to the US Navy.
Iran, why is it so confident with all the virtually daily threats from the US and Israel? There must be deals with Saudi Arabia as Iran is the one nation that can stop US troops going South, plus I suspect that they already have the s-400 or at least an earlier, but still very capable, s-300 version (but very definitely no nuclear weapons or even a program for them).
Unknowns, Japan, why are they onboard, what have they been promised (the new financial centre for the new currency)? And France obviously a big player and, as usual Germany is onboard (typically France and Germany work out what to do together then the French do the front piece stuff, while Germany sits back out of the limelight).
Security guarantees to Saudi Arabia and the other Gulf states? They must exist as everyone knows the US (directly or indirectly through Israel) will bomb and/or invade. How far do they go .. nuclear umbrella from China and Russia? Even France?
This is getting very interesting. Watch for more economic and military revelations as the secrecy has been pierced. Time will compress, since it is in the open right now, things won’t take 9 years .. it will take 2-3 at most.
And if the US is smart (which currently it is not) it will join in, support but make sure the new trading currency has a US$ component. Make a deal with Iran, give security agreements to just about every one (even the Chinese). Just to keep ‘some skin in the game’. .. or it will be sidelined and cut off.
Wow living ‘Great Game’ world changing politics in front of our eyes. Fortunately I live in Australia we win no matter what happens (provided we are smart, though we will, of course, dump the US as fast as we dumped the UK … bye…. and thanks for all the fish).
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Fabius Maximus replies: Note that Oldskeptic’s speculation is the opposite of the pro-war-with-Iran-folks. They say that the Saudi Princes will help us or Israel attach Iran; he says that Iran has alliances of some from with Iran. I suspect that both are just guessing.
My guess is that the Fisk article was poorly sourced, and we’ll look back on it as similar to 19th century newspaper articles about cities on Mars.
The idea behind the Iran-Saudi Arabia link is that, no matter what is said in public, what goes behind closed doors is the key. And Govts will, when their back is to the wall, do anything necessary.
Now SA is not doing this because it hates the US (anything but) it will do this because it has to.
(1) The US doing nothing about Palestine and Israel is becoming ever more hardline and expansionist. From SA’s point of view there is no guarantee that Israel wont go feral and expel all the Palestinians or even attack other ME stats. It is obvious, from the 2006 Lebanon war that the US will do nothing to stop them, actually it will probably cheer them on as happened then.
(2) SA is awash with US$ that hurts it’s economy. As the US$ slides away then they face ongoing and systemic economic damage.
(3) the US is doing nothing about the reasons behind the GFC so another crash is inevitable (this is the equation behind a lot of other countries as well, decouple so they wont be brought down again).
(4) The US is destabilising the ME and there is absolutely no reason to think why they wont continue, Yemen shows that for a fact. Plus that famous map from the Pentagon about a ‘re-modelled and balkanised ME’ may have had little impact in the Western world, but for the Saudi’s it must have been a real wake up call.
(5) They might easily think they are on the ‘radar’ for some future US ‘adventure’. Their own Intelligence will be working overtime on this and, who knows, may even have some data, that map must have been a shock. For US readers, think of the impact it would have if (say) China produced a map from their military establishment showing future plans to ‘balkanise’ the US, Texas goes back to Mexico, the north east to Canada, etc, etc. Yep, it would be a shock.
Come to think of it, China, EU, Russia right now must be thinking that a broken up US would not be a bad idea at all. Plus if I was a Californian I’d vote to pull out of the Union, Texas would be a candidate too.
Anyway….
The logic I follow is straightforward. For SA to join in any currency deal then it must have security guarantees (a) against an Israeli missile/aircraft attack, (b) against 100,000+ US soldiers coming in from Iraq (on some pretext or another, looking for stolen cigarettes or something).
(1) is being taken care of by SA’s purchase of Eurofighters (currently SA and France are holding training exercises) and the S-400 system. Non US equipment is essential as (and we well know about this in Australia) the US leaves ‘holes’ in the weapon systems they sell, even to so called close allies. This does not affect Israel, they either have no ‘holes’ or when they get the equipment or they simply steal the data.
So the SA’s F-15’s, radar systems, etc are very vulnerable.
(2) Means Iraq has to get the US troops out, or at least make sure they don’t head southward, having to travel through Shiite territory to do it. Now no way can SA talk to the Iraqi Govt about this, the US would know immediately. So by simple logic they have talked to Iran. Iran might do this if Russia came to the party with the S-400 for them as well (and other things too, with some stuff from China and maybe even France, plus blocking the UN Security Council).
Plus SA and Iran have too many common security and economic interests as they are, with Iraq being a basket case, the dominant ME powers. Plus SA will need nuclear power soon for the same reasons Iran does, to reduce their own consumption to free up more to sell overseas (the ‘export land model’). Iran would be a natural partner in this. They also both look over their shoulders at Israel becoming even more right wing, aggressive and expansionist.
If I was in the SA Govt I would be creating plans of how to deal with an Israeli attack on Jordan, or worse the expulsion of millions of Palestinians, you would be silly not to have contingency plans for that sort of stuff.
Note also Brazil ‘looking” at the S-400 and the SU-30.
Slowly the pieces are falling into place. Brazil will buy (and make) the SU-30, which is in many ways another ‘game changer’.
Interesting times I say. France’s moves are fascinating, plus we know they would already have agreed this with Germany (based on past history).
Time for OZ to talk to Russia about SU-30’s I think, even if just to have a bet both ways.
OldSkeptic,
There are some weak spots in your datapoints (effectiveness of unproven weapons systems, for example) and many of your conjectures about alliances and the thinking of foreign governments are obviously unprovable at this time.
But I think that the biggest takewaway (that we in the US need to start thinking outside of the Washington beltline or be unprepared for the worst when it happens) is completely accurate.
Pluto: the S-400 and SU-30 systems, like the F-16’s, F-15’s and Aegis and SM3’s are well proven systems. Either in combat or in real (really real, unlike those F-22 or ‘missile defence’ ones) tests. What is not proven is:
(1) the F-22, looks like a dog, smells like a dog, barks like a dog. You get a Toyota Corolla for the price of a Rolls Royce.
(2) the F-35, the joke of the century. In military terms it is the Defiant of the 21st century.
(3) the Patriot system, ideal for shooting down your own planes and not much else.
The rest are logical extrapolation, plus odd, what I call, ‘data points’ that pop up against overall trends. Brazil and the SU-30 is one, SA confirming the purchase of the S-400 literally days after Fisk’s article is another.
Moves are afoot.
Plus ‘the worst’? The US dollar being a reserve currency has not helped ordinary Americans, anything but. Examples:
Just read an article by Mike Moore about talking to some US pilots showing a memo from their management saying that one guy has 3 days sick leave and if he has another he will lose his job (great just what we need, sick pilots flying), or that another was on food stamps because his salary was too low. And both of them had part time jobs. Or the hero of the ‘Hudson River’ was completely ignored when he said that his reward was for him to have his salary cut by 40%! I’m sure the CEO awarded himself millions.
Sorry mate, your oligarchs are out to get your money and the US$ being the reserve currency means they can do it with little pain to themselves in the short term (well the long term actually as they can pass all the pain onto you). Dropping the dollar actually means an advantage for ordinary US people (after an admitted initial period of pain).
Example: Boeing workers are just as good as Airbus ones, though their current management is rubbish. Take away the military contracts then Boeing will become competitive again, fiercely competitive, the current rubbish management will be swept out and (maybe taking a leaf out of Rolls Royce’s 80’s crisis and bringing back the retired guys).
Then watch out Airbus.
Et all, once you sweep away the ponzi nonesense then Americans can compete quite easily with everyone else. Despite the current doom and gloom, the US has such reserves of ability and talent that it is not funny … just got to sweep away the dropkicks first.
I have followed the peak oil discussion for a time now (for example, see http://www.peakoil.net) . If we assume for a moment that oil production will peak within the next twenty years, is it a good thing for the dollar if oil is linked to many currencies? Does it make a differences? Of, course, if peak oil is true, we have huge societal problems on our hands anyway.
Tami, I’d put it peak oil hit somewhere between 2005 and 2009 and that we are on the slippery slope now.
Overall a reserve (or more acurately an international trading) currency that is a basket is a good thing. It means greater stability, countries cannot play funny games with their currencies, speculation is minimised (you’ll never stop it all but it can be reduced to a fraction of what it is now). Long term ‘real’ investment will then dominate, rather than the current short term speculation that is rampant.
There are alternative methods, Keynes famous Bancor was a basket of commodities (inc oil, various minerals, food, some gold, etc). A basket of currencies is arguably technically trickier to manage, but note the proposal that there is a gold component, which would go a long to way to keeping things honest. Note I’m not a ‘gold bug’ and the idea of having internal national currencies tied to gold is now nonsensical (not enough gold basically). But as an international trading currency (which has far lower volumes) the idea has merit, at least as a component.
Personally I prefer Kaynes idea because it is purer, easier to manage and has less room for manipulation, fiddling or just plain stuff ups. It would also have some interesting implications, like a link between food and oil (or phosphorus). Imagine. We hit (have hit?) peak phosphrus, its shortage rises the value of the Bancor (if it was included, as it should be in the commodity basket). Every country then finds imports of everything more expensive, including food of course. This means there would be market pressure to reduce phosporus usage through alternatives (basically sewage) and greater recycling (the majorty now ends up the the seas in the end). The Bancor then drops in value as these innovations kick in.
In this way it works as a ‘leading indicator’ causing behaviour changes long before a shortage crisis, which is the exact opposite of how we work now. Ditto oil.
Therefore there would be a direct link to resource depletion and encourage alternatives, recycling and efficiency much earlier than our current systems do (we can currently mask the symptoms with printing presses for a while).
The key is to pick the right commodities, I’d pick those that are fundemental to life that are not optional: Phosphorus, oil, wheat, rice, etc ….
But in the absence of that a currency basket, with some link to reality (like gold, but it could easily be, say, iron, or phosphorus … I’m a fan of that one) is a fair alternative with the correct checks and balances and commitment. Certainly better than what we have now, with its attendent instability, masking, speculation and manipulation.
In one sense this a return to Bretton Woods, alebit with mutiple currencies rather than just one. Should have been done decades ago.
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Fabius Maximus replies: Putting peak oil in the past is almost certainly wrong. While demand has stagnated due to the global recessino, capacity has continued to expand (even as capital expenditures were slashed). OPEC’s spare capacity is said to be between 6 – 8 million b/day.