Bourse! Bourse! Bourse! Bourse!
Posted by Prof. Goose on January 25, 2006 - 8:09pm
First, we have our colleague James Hamilton over at Econbrowser basically saying "No worries, money is all fluid," versus Kassimir Petrov who has serious concerns about the US economy if the Iranian bourse becomes reality. My thoughts under the fold...
My main question is really about the fungibility of oil and how it relates to this bourse, and then how that relates to the oil net-exporting nations realizing, as we approach or pass the peak, how much geopolitical power they actually have...especially against the nation that uses 25% of the world's petroleum resources. Isn't the bourse just another piece of the geopolitical puzzle that can be turned against the already-weakened US in the long-term? Why won't these net-exporting countries keep the resource at home, selectively sell to others, OR make the US pay a petroleum premium?
Yes, this would seem an unlikely occurrence short-term; ending fungibility would require an almost unrealistic cohesion among all oil net-exporting nations that is hard to see right now, especially since the profit motive is always popular, especially among leaders who do not have democratic responsibilities to their already poor peoples and therefore have no need to spread the wealth around. (Exceptions: Russia, Norway, Mexico, and Venezuela...and how many of them are post local-peak?).
However, in the long term (as cloudy as it often is) it also would appear that, geopolitically, fewer and fewer of those oil net-exporting nations, especially the big 'uns, are big fans of US foreign policy. There are others who would also like to have more resources of their own.
It would also seem that many of those net-exporting nations could, hypothetically, be united by a common religious schema (ex Venezuela, who might just like to be a part of the group for power's sake).
This is especially problematic if the regimes we are supporting/creating who have been friendly to us, but are also constituents of this religious schema aren't able to produce as much petroleum as we thought they would due to domestic problems (Iraq), are declining faster than we thought (insert favorite here), have been disingenuous about their reserves (Kuwait and SA, but who knows who else...), or have militant Wahabis who desire to overthrow and take over the oil supply (SA, UAE). (just read John Robb a couple of times to see the global guerrillas argument...)
Just thinking out loud.
Other places and pieces to think about:
http://www.theoildrum.com/story/2005/11/29/20245/881
http://www.theoildrum.com/story/2005/11/8/04355/9945#22
http://www.tcsdaily.com/article.aspx?id=012003A
http://shop.ceps.be/BookDetail.php?item_id=1166
So, those are my thoughts for the day. A little disjointed, but that's because I have to go teach now...so I had to rush this together. Thanks also to Will R for bringing this up in the TOD mailbox. I'll check back in tonight.
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How in hell could a major oil producer like Iran all of a sudden be wielding potentially more power than they already have vis-a-vis exports to competitors like China? Because of the world supply & demand balance being so tight, the influence of any one big producer is large. That is understandable. But this bourse thing? What gives? I am only asking questions. I have no answers.
I'm glad PG posted this and look forward to some straightforward answers to the questions I've posed here.
Those trillions of forex $ trades are mostly just gambling, not transactions that ever directly escape into the real world. Since oil has been almost exclusively traded in $ it behoves countries, corporations, etc to have a supply of $ to buy the stuff that they know they will need. Holding a supply of $ effectively provides a hedge against currency fluctuations adversely affecting the cost of oil (it has been noticeable that the $ price of oil has been very insensitive to $ fluctuations versus other currencies the last 3 years).
The US$ has been the predominant holding in central banks' reserves these last 20 or 30 years, there were few alternatives. Some countries would hold smallish amounts in currencies of countries they did a lot of trade with but otherwise, apart from a bit of gold, the reserves were just about all US$. Now there are alternatives: the Euro is seen as credible and stable and much trade is done with Euroland, gold is becoming seen as another diversification since inflation concerns are rising. Additionally there is growing concern that US deficits are not sustainable over the medium to long term hence the $ is likely to decline.
So, the IOB, while not directly having a significant impact on the $ or US economy, is likely to have an effect. I see that as being twofold. First, it is a symptom of concern over the US$ as de facto global reserve currency, and of the US economy and its unsustainable deficits. Second, it is an opportunity / encouragement / excuse for a diversification from US$ reserves and US$ denominated assets.
That effect is likely to be slow. One does not wish to crash the $ while one has $ assets one wishes to convert, diversification will be a steady trickle - unless events force otherwise.
The big risk and question is how the US administration thinks. If it is determined to try to maintain the $ hegemony at all costs it may decide to intervene militarily in Iran. Personally I think that is insane and any who seriously argue for it (on those grounds) or do it, should be immediately deposed and put away for treatment. I don't honestly believe that GW is quite that insane.
Ultimately the US$ must decline, central banks will diversify away from the $. It is pointless attempting to fight that process, only worthwhile managing it the best one can (and it has been managed well so far). The best option for the US is to increase its energy efficiency, reduce its dependence on imported energy and develop its energy and transportation infrastructure appropriately. I see minimal signs of that from this US administration, though several states have started to make progress.
You bet it!
That's exactly what I think will happen.
Am I being naive in thinking that the usa must do well out of everyone having dollars to trade with?
and as the price of oil goes up then the more DOLLARS the rest of the world will spend, I was under the assumption that the US economy was supported by this, I guess the question is how much of a difference will the bourse make?
and will venezuela be trading on the iranian oil bourse? or is it more for local oil producers
I was thinking mabye the nuclear thing is good for Iran because they have chosen to use it as a bargaining chip, they can back down whenever they want, mabye the opening of the bourse in return for no nuclear??
oh its getting late, fuzzy thinking
thanks for posting this
First, about democratic responsibilities, Venezuela is lead by a very popular democratic leader (who even occasionally posts here:)), in elections that were internationally verified, using electronic voting that did print out receipts. True, he is not popular among the Venezuela middle class, but is very popular with the poor, where he is spreading some of the oil wealth.
Second, in the US, you have elections between two parties of millionaires, with results for the last two elections that have been seriously called into question (blackboxvoting.org). The results are a spread between the rich and poor that is second to none in the industrialized world. The oil wealth definitely does not get spread democratically.
Third, both Venezuela and Iran are the victims of US imperial meddling. Iran, in 1953 had its socialist leader deposed with the help of the States, and Venezeula has recently fought off a coup/assasination attempt after the US failed in succesfully backing a party in elections.
Bush has been a disaster for your country not for starting a war of aggression, torturing and running a series of gulags, all things which your government and quite a few others have done for a long time, but Bush's disaster has been in doing it so ineptly that now the whole world is quite aware of the US's imperialism.
But I was bemused this evening to hear Lou Dobbs of CNN refer to Chavez as a "strongman." Ordinarily, I like Lou Dobbs, but a strongman??? That's way out of line. Someone who was democratically elected is not a "strongman."
Castro in Cuba has been demonised by the USA for 50 years, yet he seems to have done a pretty good job compared with similar countries in Caribbean and central america, particularly considering the trade sanctions etc the USA have imposed. Chavez seems to be similar so the US demonises him.
The US supports regimes when it believes they are in its interest, seeks to undermine regimes that it thinks are not, it has been consistent in this. Democracy or what is good for the country has f*ck all to do with how the US behaves.
I despair over the US electoral system. It has served the US and the world ill. Any close election (within 10%) should be considered suspect now that unverifiable voting is used for near 70% of votes. If similar voting methods were imposed in UK we would riot, I am sure of that.
Yes, the US has meddled in Iran, and many other countries closer to home, in illicit ways, but so did the UK in its day. After all, it was UK who invented Iraq back in 1924. global powers tend to behave so.
I agree that Bush has been a disaster for opinion of the US abroad, most US citizens aren't really aware of how bad. Few have any concept of life outside the USA: their media ignore it, very few of them travel. I had visited more countries before I was 18 than GW Bush had when he became president.
He grinned slyly and said,
"Ah, United States of the World, eh mate?"
The US has apparently returned to the concept of colonial imperialism, just under a new guise, while at home we slide ever further to the right, toward the kind of creeping fascism (in Mussolini's sense of the word, the merging of corporate and State) George Orwell worried about.
http://www.chris-floyd.com/index.php?option=com_content&task=view&id=434&Itemid=1
http://www.huffingtonpost.com/gore-vidal/president-jonah_b_14439.html
http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html
This weeks inventories report via Forbes
I don't have a "conventional" reserve estimate for Norway, but based on the other countries, it is probably at least twice what Hubbert Linearization would show. In any case, the "conventional" combined recoverable reserve estimate for the top four exporters--Saudi Arabia; Russia; Norway and Iran---is probably on the order of 465 Gb. Hubbert Linearization shows their remaining combined recoverable reserves to be 169 Gb, and it shows them to be collectively 67% depleted.
BTW, it may be a fluke, but the EIA data show falling imports for the past few weeks. The release from emergency reserves last year may have obscured a developing shortage of net export capacity.
So how do they know what future prices will be? That is what the futures markets are for (one thing they are for, anyway). And what do they see, when they look there? Oil futures over a five year period are generally rising slower than the rate of interest. Therefore oil producers have an incentive to produce at maximum rates today.
If and when we see the oil futures markets showing substantial price increases as we move into the future, only then would I expect oil producers to start holding product off the market. That will be the signal that their oil will be worth more in the future.
The unique thing about the futures market (compared to other predictions) is that it almost doesn't matter if it is right or wrong. You can get the same effect as if it were 100% right. That is, you can lock in the predicted future price right now, today, and buy or sell the commodity years from now at exactly the price that was predicted. You like the idea of $65 oil in 2010? Fine, you can lock in that price, put in a claim (only 10% down!) on a contract and you'll be able to buy oil for $65 in 2010.
In this sense, futures markets give you, in effect, a money back guarantee. You are guaranteed to get the price the market promises. Now, you may not like the price once 2010 rolls around; if Steve Forbes is right and oil falls to $45 you won't be too happy to have to pay $65. But if you think that's a long shot, you would probably be very pleased to be able to insulate yourself from price increases by taking advantage of this guaranteed future price and getting a commitment to $65.
How many people predicting here will give you that same guarantee? Not many. But everyone in the futures markets is making exactly that commitment. This is what makes that institution so much better and more credible as a source of predictions than the pontifications of "experts" or the confident-sounding assertions of Internet chatters.
In any case, in nominal terms, oil prices have been trading at record high levels over the past few months. So, it looks like the markets are trying to tell us something.
"I have to wonder how long it will be before key exporting countries decide that it is not in their long term interest to continue producing at 100% of capacity."
With due respect, and I like your posts a lot, doesn't this assume that these nations will act in a long-term, rational way? I would bet they will produce flat out, even against their own long-term interests, due to immediate pressures for hard cash. Unfortunately, even many private companies behave this way. (Isn't the whole world behaving this way with regard to enviornmental issues such as peak oil and global warming?)
Iran has already said that they will not produce all-out. They don't want to do what Kuwait is doing, letting Big Oil back in to boost production with high tech. They'd rather produce lower but longer, thereby saving some of the petroleum for their children and grandchildren.
Iran has said they want the uranium strictly for peaceful purposes, not for nukes. How credible do you think they are?
But I also believe they genuinely want nuclear energy. They know they are facing depletion and rising domestic demand. They are well aware of peak oil, and have had trouble meeting their OPEC quota lately.
As for whether they will produce all-out...no need to take them at their word. Are they opening their oil fields to international oil companies, as Kuwait is? Are they scouring the world for more rigs like Saudi Arabia is? No. They're living with declining production. The pursuit of nuclear energy is part of that.
The commercial oil companies can't act in that way because they risk supply being hijacked by the country and takeover by other companies. The interaction between those oil companies and the countries they have reserves in may be complicating your perception.
http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm
http://www.iranmania.com/News/ArticleView/Default.asp?ArchiveNews=Yes&NewsCode=28176&NewsKin d=BusinessEconomy
From Iran's point of view, why would Iran want a bourse?
I do set one criteria concerning the person who answers:
He or she should hold the same view as Professor Hamilton. In short, I am looking for a dispassionate assessment from Iran's point of view.
- To obtain revenues from trading transactions
- To avoid the impact of potential future economic sanctions
- To look and feel important
- Send a message to their own people and others that they have some control over what has been (and to my mind still is) a open global market for oil.
- Allah told them to.
The question is akin to why a rice trader would want to set up his own rice market. The farmer couldn't get higher prices or have more market power - but they may feel that setting up a table and having a bit of petty cash lying around is a low cost venture, why makes them look big so why not. Maybe Farmer Brown fancies himself FB Rice Exchange LLC. Maybe Iran wants to look and feel important. An exchange is just a play to sell stuff.I suggest Iran has similar motives.
I would also like to suggest one guideline for the discussion. Let's separate the issue of whether the US "empire" or currency regime will collapse from the IOB question. It is perfectly possible to accept in one but not the other. I have repeated that I do have concerns about the long term strength of the dollar, but think the IOB will play no role in this.
My impression is that many people are so eager to believe the former, that they can't rationally look at the latter.
Fair enough, but then you must also refrain from passages such as
My point, which was inferred and not directly argued, to my discredit, is that if you want to have an ubiased talk on the issue, then you must accept if you already have a bias, as the original post has. I have an anti-US empire bias, though I don't have one against americans in general, just the government. I do try to be up front about that. Prof Goose's appeared to be supporting a good clear rational discussion, yet contained a few statements that immediately coloured the argument.
As far as the Bourse goes, there were arguments/rumours that the first Gulf war was allowed to start because the Iraqi's were about to start their own oilebourse. I don't know if they are credible, but they are worth considering as adding to the equation of how influential an Iranian bourse might be.
A bigger question is how much difference this will make. Are the Iranians fulfilling long term contracts, where payment form is already fixed? If Iran's customes are all in the europe and asia, what currency do they pay in now, even if prices are derived from dollars? What other countries would jump in to use their bourse? What political pressures would other countries find themselves under if they do join in?
Of course, I ask these questions because most of what I've learned about the industry is from this site, and a few others, so I have to say I really don't know how all this works. I am, after all, just a biased musician.
Interesting, I was under the impression that it started because Saddam Hussein invaded Kuwait. But what the hell do I know, I've only read four or five books on the subject and watched the whole thing on TV.
But perhaps you were just watching the war on Fox?
I'm sure I could come up with a list of four or five books that have contrary opinions to yours on the war as well.
I do expect that we'll never really know what happened, and my theories are no more valid than yours, but I do hope that this kind of continued discussion will help us all be a bit more critical of all goverments motives and actions.
However, this does not make the US responsible for Iraq invading Kuwait. We told him to get out in no uncertain terms, but he didn't. Why? Because Saddam always played by his own rules. What Saddam would have done had Glaspie had more of a clue and acted differently is still up for debate.
Why is it that everytime someone disagrees with something somebody is saying here politically, they get accused of watching Fox News. It is getting a little annoying. I watch PBS and Nightline. I listen to the BBC. I read the New York Times, The Nation, and the New Republic. It should be obvious what kind of websites I spend my time on.
The real question is - where do you get your information?
They are not my "theories." It's called history.
However, while the US is not responsible for Iraq invading Kuwait, the question, and theory (only until proven, then its history) is, was Glaspie clueless or was Saddam being set up? Of course my argument is definitely weaker admitting that it was the 2000 invasion that was supposed to be in response to the Iraqi oil bourse, but I still don't think an ambassador could possibly be so clueless as to not recognize the possibility of war over vague comments.
Iraq invaded Kuwait because Kuwait called its loans. As Kuwait and Saudi Arabia financed the First Gulf War (Iran-Iraq) by having Iraq beat-up the anti-monarchist revolutionaries in Iran. The US, Europe and others did well on arms sales to both sides.
Later, the price of oil collapsed, and Kuwait called its loans triggering the Second Gulf War (Iraq-Kuwait). Iraq was broke and at risk of default on its debts.
CBC provides a summary: http://www.cbc.ca/news/background/iraq/
However, as for the Third Gulf War, (Iraq-USA/UK) and subsequent occupation, there is no-consensus on a motive -- oil, euro, strategic bridgehead?
Motives for conflict are interesting--conflict is costly in many aspects so the motives have to carry some greater value with them. I wonder if in the case of Iraq it is not a series of lesser motives that sum-up to a greater opportunity? Could the Euro just be a 'side-benefit' in addressing other more important objects? At any rate, one can keep speculating...but I'll stop here.
Probably the real issue is, can you successfully start up a new bourse and have it be a credible place where people will buy and sell oil? There are a lot of political and financial issues that have to be overcome, especially given how much the "old guard" will fight against any newcomer. Iran is in a somewhat unique position both in terms of having a lot of oil and being an international pariah as far as the U.S. is concerned. They have little to lose and much to gain.
I gather they are planning to sell the oil for e-dinars. This is a gold-backed electronic Muslim currency. So they'd be getting gold for their oil, rather than paper.
I listened to both sides of this, and I guess I'm splitting the difference. I think it will reduce the need for countries to hold dollars, but maybe not by huge percentages. OTOH, it's not clear how much it would take to start a major dollar sell off anyway, so I suppose there is the potential for things to get out of hand.
But it's mainly just another power play, and I think the administration finds it a threat in the general sense - a way to buy oil that is independant of the US. Long term, this has to hurt us. Short term - will we bomb the bourse?
Question for all oil exporting nations - which would you rather have? the dollar or the Euro? because you can now accept either as payment for oil.
i think the answer is obvious here, the Euro has more intrinsic value. it is worth more and will be wanted more. say bye bye to USA economy.
I would note that the Euroland economies have their own problems, though less severe IMO than those of the US economy. Euroland growth is about half of US growth (though the US GDP data is somewhat systematically fiddled upwards) and higher unemployment. The predominant reason for countries' central banks diversifying is more to spread the risk and balance their holdings rather than dump their $.
I do, however, think you will be right in the medium term, since I expect geopolitical events and the probable foolishness of this US administration to precipitate problems for the $ and US economy.
~William Engdahl, "A Century of War"
It seems to me if central banks start to liquidate their dollar holdings and there is no longer a need to buy US debt, our current debt based economy is going to implode. We carry huge trade and budget deficits because nations are "willing" (extorted?) to sell their people into slavery to finance the US debt in order to purchase energy in US dollars. A drastic switch from that system by Iran alone is not the problem. The problem is if the rest of OPEC follows suit once Iran crosses the line. Saddam did it and the result was crystal clear...
==AC
==AC
One possibly relevent thing. The US loaned the UK a lot of money during WWII to help keep it financially solvent during the war. It would not write off that debt thereafter, I think the UK was the only country treated thus. The last payment on that debt was made at the end of 2005 (according to information I've seen). I would interpret that as the US seeking to consolidate its position as the global economic power. Remember, in 1945 a third of this planet was part of the British Empire.
Last but not least, oil producers also put their savings in Uncle Sam. With the "shock" of oil that restored its real price after the dollar valuation had fallen in 1973, ever-cleverer-by-half Henry Kissinger made a deal with the world's largest oil exporter, Saudi Arabia, that it would continue to price oil in dollars, and these earnings would be deposited with Uncle Sam and partly compensated by military hardware. That deal de facto extended to all of the Organization of Petroleum Exporting Countries (OPEC) and still stands, except that before the war against Iraq that country suddenly opted out by switching to pricing its oil in euros, and Iran threatened do the same. North Korea, the third member of the "axis of evil", has no oil but trades entirely in euros. (Venezuela is a major oil supplier to Uncle Sam and also supplies some at preferential rates as non-dollar trade swaps to poor countries such as Cuba. So Uncle Sam sponsored and financed military commandos from its Plan Colombia next door, promoted an illegal coup and, when that failed, pushed a referendum in his attempt at yet another "regime change"; and now along with Brazil all three are being baptized as yet another "axis of evil").
After writing this, I found that the good (hit) man Mr Perkins was in Saudi Arabia too:
Yes, it was a fascinating time. I remember well ... the Treasury Department hired me and a few other economic hit men. We went to Saudi Arabia ... And we worked out this deal whereby the Royal House of Saud agreed to send most of their petrodollars back to the United States and invest them in US government securities. The Treasury Department would use the interest from these securities to hire US companies to build Saudi Arabia - new cities, new infrastructure - which we've done. And the House of Saud would agree to maintain the price of oil within acceptable limits to us, which they've done all of these years, and we would agree to keep the House of Saud in power as long as they did this, which we've done, which is one of the reasons we went to war with Iraq in the first place. And in Iraq we tried to implement the same policy that was so successful in Saudi Arabia, but Saddam Hussein didn't buy. When the economic hit men fail in this scenario, the next step is what we call the jackals. Jackals are CIA-sanctioned people that come in and try to foment a coup or revolution. If that doesn't work, they perform assassinations. Or try to. In the case of Iraq, they weren't able to get through to Saddam Hussein. He had - his bodyguards were too good. He had doubles. They couldn't get through to him. So the third line of defense, if the economic hit men and the jackals fail, the next line of defense is our young men and women, who are sent in to die and kill, which is what we've obviously done in Iraq.
To return to the main issue and call a spade a huge spade, all of the above is part and parcel of the world's biggest-ever Ponzi-scheme confidence racket. Like all others, its most essential characteristic is that it can only continue to pay off dollars and be maintained at the top as long as it continues to receive new dollars at the bottom, voluntarily through confidence if possible and by force if not. (Of course, the Clausewitz and Cromer formulas result in the poorest paying the most, since they are also the most defenseless: so that the ones sitting on/above them pass much of the cost and pain down to them.)
...
So, far beyond Osama bin Laden, al-Qaeda and all the terrorists put together, the greatest real-world threat to Uncle Sam is that the inflow of dollars dries up. For instance, foreign central banks and private investors (it is said that "overseas Chinese" have a tidy trillion dollars) could any day decide to place more of their money elsewhere than in the declining dollar and abandon poor ol' Uncle Sam to his destiny. China could double its per capita income very quickly if it made real investments at home instead of financial ones with Uncle Sam. Central banks, European and others, can now put their reserves in (rising!) euros or even soon-to-be-revalued Chinese yuan. Not so far down the road, there may be an East Asian currency, eg a basket first of ASEAN + 3 (China, Japan, South Korea) - and then + 4 (India). While India's total exports in the past five years rose by 73%, those to the Association of Southeast Asian Nations (ASEAN) rose at double that rate and sixfold to China. India has become an ASEAN summit partner, and its ambitions stretch still further to an economic zone stretching from India to Japan. Not for nothing, in the 1997 East Asian currency and then full economic crisis, Uncle Sam strong-armed Japan not to start a proposed East Asian currency fund that would have prevented at least the worst of the crisis. Uncle Sam then benefited from it by buying devalued East Asian currencies and using them to buy up East Asian real resources, and in South Korea also banks, at bargain-basement reduced-price fire sales. But now, China is already taking steps toward such an arrangement, only on a much grander financial and now also economic scale.
Or what if, long before that comes to pass, exporters of oil simply cease to price it in ever-devaluing dollars, and instead make a mint by switching to the rising euro and/or a basket of East Asian currencies? That would at one stroke vastly diminish the world demand for and price of dollars by obliging anyone who wants to buy oil to purchase and increase the demand price of the euro or yen/yuan instead of the dollar. That would crash the dollar and tumble Uncle Sam in one fell swoop, as foreign - and even domestic - owners of dollars would sell off as many of them as fast as they could, and other countries' central banks would switch their reserves out of dollars and away from Uncle Sam's no-longer-safe haven. That would drive the dollar down even more, and of course halt any more dollar inflow to Uncle Sam from the foreigners who have been financing his consumption spree. Since selling oil for falling dollars instead of rising euros is evidently bad business, the world's largest oil exporters in Russia and OPEC have been considering doing just that. In the meantime, they have only raised the dollar price of oil, so that in euro terms it has remained approximately stable since 2000. So far, many oil exporters and others still place their increased amount of dollars with Uncle Sam, even though he now offers an ever less attractive and less safe haven, but Russia is now buying more euros with some of its dollars.
So also many countries' central banks have begun to put ever more of their reserves into the euro and currencies other than Uncle Sam's dollar. Now even the Central Bank of China, the greatest friend of Uncle Sam in need, has begun to buy some euros. China itself has also begun to use some of its dollars - as long as they are still accepted by them - to buy real goods from other Asians and thousands of tons of iron ore and steel from Brazil, etc. (Brazil's president recently took a huge business delegation to China, and a Chinese one just went to Argentina. They are going after South African minerals too.)
So what will happen to the rich on top of Uncle Sam's Ponzi scheme when the confidence of poorer central banks and oil exporters in the middle runs out, and the more destitute around the world, confident or not, can no longer make their in-payments at the bottom? The Uncle Sam Ponzi Scheme Confidence Racket would - or will? - come crashing down, like all other such schemes before, only this time with a worldwide bang. It would cut the present US consumer demand down to realistic size and hurt many exporters and producers elsewhere in the world. In fact, it may involve a wholesale fundamental reorganization of the world political economy now run by Uncle Sam.
http://tinyurl.com/7zhuj
==AC
I have been coming to the conclusion over the intervening years that the global financial system has a similar basic dynamic, as I attempted to explain on the Friday open thread in response to a comment by Jack on the Iranian oil bourse. No one replied (perhaps because they think I am a lunatic), but I really would be interested to discuss this. This conceptual framework places positive feedback at the heart of finance. Reading Manias, Panics and Crashes by Charles Kindleberger (the standard work on the subject Jack informs me) in the light of this thought makes that extremely perceptive work more accessible in my opinion.
Conventional economic models rely on negative feedback (for instance supply and demand curves), but finance has a very different dynamic. Afterall, who in 1999 would have said that Nortel stock (for instance) was becoming less attractive as the price went up? On the contrary, rising stock prices cause demand to increase and falling prices cause it to decrease in a classic positive feedback spiral. I'm out of time at the moment, but would be happy to discuss this further if others are interested.
When some of you talk about the dollar as an instrument of US "extortion" or "hegemony," it is also true that through this trade regime American companies have built ultramodern industrial sectors in Asian countries: 200 years of progress in 15 years. You can just as easily say that the US has allowed itself to be a patsy in this trade regime, as well as party to the greatest act of charity and economic development that one country has done for other countries in world history.
Now that all this technology has been transferred to Asia, one can expect the Asians (and others too) to slowly unload at least some of the dollars. IOB will be one part of this process.
Japan did likewise but events, getting more wealthy than the US (in per capita terms), and failing to address some deep seated structural and cultural / economic problems has resulted in more than a decade of stagnation. China will face similar problems, it will be interesting to watch how well they deal with them.
Now that there is an uptrend in commodity prices the chinese will steadily reduce (or at least not increase) $ denominated holdings and slowly revalue the Yuan - cheaper commodities will become more important than massive exports to USA. The chinese consumer will slowly be allowed to substitute for the US consumer. Will this become the triumph of managed markets over 'free' markets? Time will tell.
Why hasn't this happened already? That's a very good question and you might well ask it. Keeping oil trade in dollars does help to prop up the dollar and helps U.S. banks. However, I think the principal benefit for the USA is that we avoid any "foreign exchange risk" when we buy oil. So long as oil is traded in dollars, we American consumers are sheltered from the effects of foreign exchange risk (it's a big headache for multinationals who do business in many different countries, for example).
As we import more and more oil, the value of this benefit becomes greater and greater -- as does the potential destabilizing effect of losing it. The IOB is one small step towards ending the exclusive role of the dollar in the oil trade.
No, no, no. Think about it. If the dollar weakens relative to world currencies, the price of oil must rise, and vice versa. You can prove this by looking at the data.
The denomination of oil in any given currency is arbitrary and has no effect. This whole issue of the Iranian Oil Burse is irrelevant. What is relevant is the macroeconomics of currencies and oil supply.
have never taken a human life. I admit that the thought was very intense for awhile. But I eventually divorced the bitch.I wish no harm to anyone anywhere, I have no enemies , other than myself, my friend.
I am deeply saddend by the crimes and suffering my humble taxed earnings have caused, perhaps someday soon I will learn the truth. The best explaination I can see is that the leaders of the world are staring down a loaded cannon. Time is running out and they know it. Debts will never be paid, and desperation is the order of the day. Tomorrow know one knows and today to few care to know.
Again... friends around the world be the peacemakers that only you can see what tomorrow will bring. My faith assures me that right and wrong... the divided house can not stand... will be judged and seperated and kept sacred. If Iran wants to sell its goods and Texas wants to purchase them, let those two arrange an agreeable transaction. If Iran and Indiana wish to communicate and trade let them. But NO business is not this simple... the good people of the world are enslaved by evil, greed, lies!!!
bourse or no bourse with no where to run and hide...sheesh laughing all the way. Prepare to meet your maker or just rest assured that weaponry is the ultimate form of hard currency, Got Gold? Got a BiG Bomb, oh yeah my dads got a BIGGER BOMB!!! Remember i told you so. If I am wrong then whew that was scary.
Think small, think fast...PEACE
What I question is whether the Iranian exchange can be a success. I suppose if oil gets scarce enough, anything's possible, but at the moment, I think people will be nervous about using the new store. Do the Iranians know what they're doing? Can they be trusted? Will the contracts be honored if a war starts or the government is overthrown? Etc.
except by the fool. Iran is in a very enviable position I think. I once sold some bare land and I can tell you that it is much better being on the sellers side of the table.
I have'nt an ounce of pity for the fool.
I am torn on GW and his crowd. It is not safe while they are in place, they should be removed, but it seems they might have to display gross stupidity for that to happen. I want them to be stupid enough to be removed yet not so stupid to trigger significant harm. That best outcome seems a slim chance. I sense where things are going and the ways out feel like very fragile straws just now. 3 years of GW being wise enough to do nothing stupid is currently looking the least worst chance :-((
Enough. That's the most coherent explanation I can give for now, when I can make any more sense I will say, futures are not fixed and can change up to the last moment. I will breathe a big sigh of relief and get very drunk if things remain much as they are by mid April. Best you assume I am mad, I mostly try to.
That's now. Once the dollar really starts sliding, once oil starts zooming, then fungible, schmungible, let's sell first to those whose currency is stable---even if it means a discount. Thereby weakening the dollar further.
Finally, it's not the actual size of the impact that matters, it's the symbolism--and the opeing of the floodgate. Believe me---I'm one that's always said it's about the oil, the oil, the oil. But in this case I think Petrov has made a necessary and important amendment. At the very least, it can't just be blown off.
I do not have any opinions on the subject one way or another. I think it is important for both sides to explain how Iran sees the advantages to a bourse.
Professor Hamilton may be correct in the short run, but he should speak as well to my question.
Professor Goose has an interesting take on fungibility, although I am not sure having your own bourse is necessary in order to address that issue.
Regardless, flip or half answers do not help the uninitiated. Having opinions is easy for us. Having a full and clear understanding of how a bourse works and what its advantages are--both now and in the "peak oil" future is the only way through this discussion. So far, we are short on facts and long on opinions.
If States like the U.S. lose their legitimacy because of their corruption and arrogance, just how weird will the world be if all industrial states are eventually bankrupted by Fourth Generation warfare's death of a thousand pricks?
My mind is a little bit boggled right now thinking about that.
Make no mistake (were have I heard this before?), if IOB was opening 10, 20 years ago, this would be a completely different story.
The major problem today is the US out of control (Greenspan words) trade deficit. In my view this deficit has much to do with energy:
. each year the US consumes more energy;
. each year the US produces less energy;
. each year energy prices are higher.
Other factors can be taken it to account, decreasing productivity, the steel wars, but I won't go into that, mostly because I'm not much of an economist.
In late 2004 the deficit seemed to finally be taking it's toll on the dollar, and for some moments we foresaw 1€ : 1.4$. But of course the Fed still had some margin of action, and the rate hike followed; till now.
Today the Fed cannot increase tax rates much further, because that would most likely drown the US economy, thousands losing their homes, a stock exchange crash and so on. Worse, due to inflation pressures, Trichet has begun his own thoroughly measured rate hikes.
In the long term there's really no big hope of a relief for the deficit, unless a 180º turn is taken in the US policy, towards energy efficiency and productivity increase. All of this makes the dollar a very bad option for mid/long term investment.
Were we in 1996 or 1986, IOB would be no problem, the US would have a more solid economy, and most of all, an embargo could be imposed on Iran without pain to the rest of the world. But today every drop of oil put by Iran on the market will be bought.
Above all, IOB can be the ultimate trigger for a serious dollar fall, a 2/3 month period just like December of 2004.
by Pat Murphy
http://www.energybulletin.net/12271.html
New Solutions #6 summarized a part of the United States' story which is not in our history books. It's the story of a nation that joined Britain and other European powers as an imperial power. We suggested that the U.S. Empire is no longer sustainable and that trying to continue it runs the risk of a nuclear war fought over control of the remaining oil and gas resources.
This newsletter looks at our culture and where it's headed. Evidence suggests that consuming has become our psychological reason for existence as our values have become increasingly materialistic. Just as we threaten the stability of the world with our imperialistic tendencies, we also pose a threat to ourselves as our standards of care and community decline, and it becomes more difficult for average Americans to attain or sustain well-being.
How does this bode for our place in the world? Is the American Century over? When the impact of Peak Oil really hits, how will we deal with it? Will we cooperate with the rest of the world in sharing scarce resources, or will we rely on our status as the only Superpower to try to bully the world? And if the latter, would we survive?
US Tries to Pressure Iran with Attack Stories
The basic idea being that all of these stories about the impending attack/bombing of Iran are all just a way of trying to intimidate Iran in to stopping their nuclear plans. I don't know if I buy that either, but its worth adding in to the equation.
However, what I secretly fear is a bit more sinister.....that they are intentional, but that Iran is not their target audience, the US population is. The intent? To soften the blow, when it comes, to get people to start thinking about military action against Iran, so it does not come as a huge surprise. Indoctrination.
On the other hand, no one in the Bush Administration can seriously believe that even a nuclear-armed Iran would constitute a mortal threat to the existence of the US. While we'd love to get rid of the present Iranian government and install a cooperative Shah-like regime, that is more of a policy goal rather than an absolute national necessity.
Due to the tremendous influence Israel has with the US government, the US will not militarily try to deter an Israeli attack on Iran and may in fact facilitate such an attack if not actually participate in it. Either way, Iran will retaliate against both Israel and the US in whatever way it can.
Israel could probably care less if there is another major oil disruption resulting from such an attack, as it knows full well that the US will always come to the rescue of its 51st state.
One way to see this is to turn the question around. If the world wanted to replace the dollar with another world reserve currency, would it be of value to have an oil exchange that settled in a different currency? In the short run, it wouldn't make much difference, since you could always convert between currencies. Eventually however, it would be desirable to exchange in the new reserve currency, since many (at first, small) countries would exhaust their reserve of dollars and prefer to use the new reserve currency for the transaction to avoid conversion costs.
Why Iran? Is anyone else volunteering? Besides, if they can successfully get the exchange off the ground, they have first-mover advantage. There are fees associated with the transactions, so the first mover to the new currency would expect to see their transaction rate (and fee revenue) increase over time. At some point, the former main exchanges would also make the switch, but they would be unlikely to move until the new exchange became a significant threat.
It seems like there could be other advantages to being a country with exportable oil and gas supplies, in an era of depleting production, and also having one of the main world energy exchanges, but I can't quite put my finger on them. It's probably along the lines that others have said, that having the market near the supplier seems beneficial to the supplier.
http://www.atimes.com/atimes/Middle_East/HA21Ak01.html
The writer of the article, Chris Cook, has been involved in setting up the bourse - it was in fact his idea. He says quite clearly that the main point is not the pricing currency but the trading terms, the role of the trading companies and the price setting system. New York and London, and US and UK companies, are losing their historical position in oil trading. The US and UK were once oil exporters and their internationl oil companies, the 7 sisters, dominated the oil business. But no more.
The new bourse, in fact a Persian Gulf oil exchange, will diminish the profits and loosen the control of Western companies and governemnts in the oil trading. When there are embargos or sanctions, this has added significance.
Cook doesn't think that the oil exchange is the real cause of the tension around Iran, but rather the influence of Iran in Iraq.
http://www.upi.com/InternationalIntelligence/view.php?StoryID=20060118-052333-1392r
He think it could lead to the U.S. dollar dropping 40%, and the kind of economic problems we had in the '70s.
The problem is, apart from the SPR, the United States Treasury doesn't buy oil. It would be great if the Treasury would print some more dollars and give them to you, me and Chevron so we could buy imported oil with them, but I don't expect that to happen any time soon.
Money printed and put into circulation, into the US economy by any means, be it no-bid Halliburton contracts, or no-down-payment home loans, still ends up in the general circulation pool.
More dollars printed means easier credit and more readily available liquid capital, and more incentive to buy and spend. Personal consumption is still at the root to 77% of US economic activity. And that economic activity uses oil, be it Chinese widgets bought at Wal-mart or driving junior to soccer practice in the SUV.
So, indirectly, the US Treasury funds the purchase of oil. Lots of it.
But back to your more poignent points.
1) Why does the US desire to keep oil priced in dollars?
Others have answered this much better than I have already. Basically, for the same reason a casino takes in your currency, and gives you "chips", with no intrinsic value of their own other than the full faith and credit of the casino. Money is only worth what others agree it is worth, and if it is tied to nothing with intrinsic, tangible worth, and the entity backing up the currency with words seems fundamentally on shaky grown, then the currency seems risky, and hence, less valuable. Value is always tied to risk in the economic world. Without petrodollars, US currency becomes a greater risk.
When I have a bit more time, I'll post some pertinent links on this.
2) Why would a treasury continue to spew out money, or why would a government utilize a monitary policy that inflates and devalues it is own currency? Ask Alan Greenspan. Or better yet, ask people who pay off one credit card with another, or take out 2nd (or 3rd mortgages) to finance trips to Las Vegas. Crushing debt. Desperation and foolishness.
When you're walking and you stumble and start to fall, you actually pick up speed, running faster, trying to keep from falling over on your face.
It is a viscious cycle, postively reinforcing, as the US tries to stay ahead of its own debt and the failing economic model in place by borrowing more and printing more increasingly worthless money, just to service its own debt burden. Ben Franklin himself warned of the dangers of such an out of control fiscal policy. It is so tempting to just go out and charge more and more, a never ending party, but the bills are rolling in now, the day of fiscal reckoning is fast approaching.
Again, there have been some very poignant links posted on this in the past here on TOD, that explain it far better than I can. I'll see if I cannot dig some up tomorrow.
1. I am not aware of any evidence, other than rumors culled from conspiracy theorists on the internet, that it is official U.S. government policy to keep oil priced in dollars. If you have any, please let us know.
2. The Fed "spewed out money" so that the tech crash of 2000 didn't turn into a major global recession. It worked. Did the Fed go too far? Probably. We will see. I am afraid, though, that the Fed did not "devalue" the dollar over the past several years. As no doubt you noticed, inflation has been remarkably tame. As for "crushing debt": you are right -- I always advise folks to be debt free, and I too expect there will be a day of reckoning for those who have taken on too much debt.
There are always periods of false hope in a bear market - for instance the 1930 bounce after the 1929 crash, before the market resumed its decline into the early 1930s. It is taking longer to play out this time, but then this bear market is likely to be much larger than the one which caused the Great Depression. This time, the period of false hope has merely allowed the eventual pain to be greater by fuelling a housing bubble to follow on from the stock market bubble. As that bursts over the next few years I see deflation as inevitable.
I also think that deflation is a greater worry than inflation, especially as God-knows how many billions in home equity wealth evaporates into thin air. I expect prices for most asset classes will decline. Cash is king.
"Whoever controls the volume of money in any country is absolute master of all industry and commerce."
~ James A. Garfield
"Let me issue and control a nation's money and I care not who writes the laws."
Mayer Amschel Rothschild, 1790
==AC
<<SNIP>>
The economic impact of the oil shock
The social impact of the oil embargo on the United States in late 1973 could be described as panic. Throughout 1972 and early 1973, the large multinational oil companies, led by Exxon, pursued a curious policy of creating short domestic supply of crude oil. They were allowed to do so under a series of decisions made by President Nixon on advice of his aides. When the embargo hit in November 1973, therefore, the impact could not have been more dramatic. At the time, the White House was responsible for controlling US oil imports under provisions of the 1959 US Trade Agreements Act.
In January 1973, Nixon appointed Treasury Secretary George Shultz to be the Assistant to the President for Economic Affairs as well. In this post, Shultz oversaw White House oil import policy. His Deputy Treasury Secretary, William E. Simon, a former Wall Street bond trader, was made chairman of the important Oil Policy Committee which determined US oil import supply in the critical months leading up to the October embargo.
In February 1973, Nixon was persuaded to set up a special "energy triumvirate" which included Shultz, White House aide John Ehrlichman, and National Security Adviser Henry Kissinger, to be known as the White House Special Energy Committee. The scene was quietly being set for the Bilderberg plan, although almost no one in Washington or elsewhere realized the fact. By October 1973, domestic US stocks of crude oil were already at alarmingly low levels. The OPEC embargo triggered the public into panic purchases of gasoline, calls for rationing, endless gas lines, and a sharp economic recession.
The most severe impact of the oil crisis hit the United States' largest city, New York. In December 1974, nine of the world's most powerful bankers, led by David Rockefeller's Chase Manhattan, Citibank, and the London-New York investment bank, Lazard Freres, told the Mayor of New York, Abraham Beame, an old-line machine politician, that unless he turned over control of the city's huge pension funds to a committee of the banks, the Municipal Assistance Corporation, the banks and their influential friends and the media would ensure the financial ruin of the city. Not surprisingly, the overpowered Mayor capitulated, and New York City was forced to slash spending for roadways, bridges, hospitals and schools in order to service its bank debt, and lay off tens of thousands of city workers. The nation's greatest city had begun its descent into a scrap heap. Felix Rohatyn of Lazard Freres became head of the new bankers' collection agency, dubbed "Big MAC" by the press.
In Western Europe, the shock of the oil price rise and the embargo on supplies was equally dramatic. From Britain to the Continent, country after country felt the effects of the worst economic crisis since the 1930s. Bankruptcies and unemployment rose to alarming levels across Europe.
Germany's government imposed an emergency ban on Sunday driving in a desperate effort to save imported oil costs. By June 1974, the effects of the oil crisis contributed to the dramatic collapse of Germany's Herstott-Bank and a crisis in the D-mark as a result. Germany's imported oil costs increased by staggering 17 billion D-marks in 1974, with a half-million people reckoned to be unemployed because of the oil shock. Inflation levels reached an alarming 8%. The shock effects of a sudden 400% increase in the price of Germany's basic energy feedstock were devastating to industry, transport, and agriculture. Keystone industries such as steel, shipbuilding, and chemicals all went into a deep crisis at this time as a result of the oil shock.
Willy Brandt's government was effectively defeated by the domestic impact of the oil crisis, as much as by the Stasi-spy affair revelation's about his close adviser Gunther Guillaume. By May 1974, Brandt offered his resignation to Federal President Heinemann, who then appointed Helmut Schmidt Chancellor. Most governments across Europe fell in this period, victim to the consequences of the oil shock on their economies.
But the economic impact on the developing economies of the world -- for this time they still could be rightly called developing, rather than the fatalistic term "Third World" which is so much in vote today -- the impact of an overnight price increase of 400% in their primary energy source was staggering. The vast majority of the world's less-developed economies, without significant domestic oil resources, were suddenly confronted with an unexpected and unpayable 400% increase in costs of energy imports, to say nothing of costs of chemicals and fertilizers for agriculture derived from petroleum. During this time, commentators began speaking of "triage," the wartime idea of survival of the fittest, and introduced the vocabulary of "Third World" and "Fourth World" (the non-OPEC countries).
In 1973, India had a positive balance of trade, a healthy situation for a developing economy. By 1974, India had total foreign exchange reserves of $629 millions with which to pay -- in dollars -- an annual oil import bill of almost double that or $1,241 million. In 1974, Sudan, Pakistan, Philippines, Thailand, Africa and Latin America country after country was faced with gaping deficits in its balance of payments. As a whole, over 1974 developing countries incurred a total trade deficit of $35 billion according to the IMF, a colossal sum in that day, and, not surprisingly, a deficit precisely 4 times as large as in 1973, or just in proportion to the oil price increase.
Following the several years of strong industrial and trade growth of the early 1970s, the severe drop in industrial activity throughout the world economy in 1974-75 was greater than any such decline since the war. But, while Kissinger's 1973-74 oil shock had a devastating impact on world industrial growth, it was an enormous benefit for certain established interests -- the major New York and London banks, and the Seven Sister oil multinationals in the US and Britain. Exxon replaced General Motors as the largest American corporation in gross revenues by 1974. Her sisters were not far behind, including Mobil, Texaco, Chevron and Gulf.
The bulk of OPEC dollar revenues, Kissinger's "recycled petro-dollars," was deposited with the leading banks of London and New York, the banks which dealt in dollars as well as international oil trade. Chase Manhattan, Citibank, Manufacturers Hanover, Bank of America, Barclays, Lloyds, Midland Bank, all enjoyed the windfall profits of the oil shock. We shall later see how they recycled their "petro-dollars" during the 1970s, and how it set the stage for the great debt crisis of the 1980s.
~A Century of War
http://tinyurl.com/6j8xc
Very good post!
And a good reminder that all of our problems regarding oil supplies aren't solely the result of bad geology and other physical constraints.
While the financial powers that be wield enormous power and naturally structure things to be in their favor, one must guard against the tendency to drift into the mindset of viewing all occurances to be the result of a conspiracy of 'mysterious elders in black robes'. Chaos is usually a good explanation for much of what happens in the world. Screw-ups are the norm rather than the exception. Having said that, I would be the first to admit that regardless of what happens, TPTB seldom come out on the short end of the stick.
As I think you would agree, there is a growing disconnect between the people who control money and the people who are actually involved in physically getting something done. They don't even speak the same language.
The only energy policy the US has right now is to try to militarily dominate those parts of the world that supply oil. That is a virtual guarantee for global war, but I don't see any sign whatsoever of it changing,
Sometime in 2006 the running total bill for the Iraq invasion and occupation will have exceeded $300 billion. And we're not even getting any more oil as a result of that enormous expenditure. Hell, if we were able to take 100% of Iraq's oil at roughly 2 million bpd and at $60/bbl, we would need to keep doing that for about 7 years before we ever broke even. But we're hardly doing that at all. What a great 'investment'!
==AC
Our corporate controlled media conglomerates paint everything as random occurrences, misfortunes we all have to pull together and deal with. The fact is there is an "Establishment" that has been using their wealth and power to influence as best they can events to move in a certain direction. Carroll Quigley points out is his book "Tragedy and Hope" that they don't always succeed and have had tremendous failures and tremendous successes, but their influence is omnipotent. In the quote below Quigley shows his undying support for the Establishment even though their notable failures have lead to the deaths of millions, their intentions however were most noble. I think of a quote from Gary Web, who wrote Dark Alliance that blew the lid off the CIA selling crack to inner cities, when it comes to their intentions;
"The more I think about it, it's the difference between manslaughter and murder. It's the intent. The intent was not to poison black America but to raise money for the Contras, and they didn't really care what it came from. If it involved selling drugs in black communities, well, this was the price of admission."
Their intent was to create a better world for all of humanity, a world without war; the millions slaughtered was just the "price of admission".
==AC
"This double international network in which the Round Table groups formed the semisecret or secret nuclei of the Institutes of International Affairs was extended into a third network in l925, organized by the same people for the same motives. Once again the mastermind was Lionel Curtis, and the earlier Round Table Groups and Institutes of International Affairs were used as nuclei for the new network. However, this new organization for Pacific affairs was extended to ten countries, while the Round Table Groups existed only in seven. The new additions, ultimately China, Japan, France, the Netherlands, and Soviet Russia, had Pacific councils set up from scratch. In Canada, Australia, and New Zealand, Pacific councils, interlocked and dominated by the Institutes of International Affairs, were set up. In England, Chatham House served as the English center for both nets, while in the United States the two were parallel creations (not subordinate) of the Wall Street allies of Bank. The financing came from the same international banking groups and their subsidiary commercial and industrial firms. In England, Chatham House was financed for both networks by the contributions of Sir Abe Bailey, the Astor family, and additional funds largely acquired by the persuasive powers of Lionel Curtis. The financial difficulties of the IPR Councils in the British Dominions in the depression of 1929-1935 resulted in a very revealing effort to save money, when the local Institute of International Affairs absorbed the local Pacific Council, both of which were, in a way, expensive and needless fronts for the local Round Table groups.
The chief aims of this elaborate, semisecret organization were largely commendable: to coordinate the international activities and outlooks of all the English-speaking world into one (which would largely, it is true, be that of the London group); to work to maintain the peace; to help backward, colonial, and underdeveloped areas to advance toward stability, law and order, and prosperity along lines somewhat similar to those taught at Oxford and the University of London (especially the School of Economics and the Schools of African and Oriental Studies).
These organizations and their financial backers were in no sense reactionary or Fascistic persons, as Communist propaganda would like to depict them. Quite the contrary. They were gracious and cultured gentlemen of somewhat limited social experience who were much concerned with the freedom of expression of minorities and the rule of law for all, who constantly thought in terms of Anglo-American solidarity, of political partition and federation, and who were convinced that they could gracefully civilize the Boers of South Africa, the Irish, the Arabs, and the Hindus, and who are largely responsible for the partitions of Ireland, Palestine, and India, as well as the federations of South Africa, Central Africa, and the West Indies. Their desire to win over the opposition by cooperation worked with Smuts but failed with Hertzog, worked with Gandhi but failed with Menon, worked with Stresemann but failed with Hitler, and has shown little chance of working with any Soviet leader. If their failures now loom larger than their successes, this should not be allowed to conceal the high motives with which they attempted both."
~Tragedy and Hope, page 954
Without having read the entire thread...the general argument against the Iranian bourse are that iran's economy is not big or generally capable enough (technology/outside links etc) to make a bourse work.
It also is not the same as current oil trading as you basically are trading oil + forex, you give yourself another brainache and it would make the whole trade more volatile. Sure, you could be a double winner if you are in the right currency at the right moment but you could also be a double loser...
This TOD thing is getting bigger everyday.
My prediction of war this year still holds.No one knows where it will end
http://www.gold-eagle.com/editorials_05/wallenwein053005pv.html
http://www.lewrockwell.com/paul/paul163.html
http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2006-01-23T093418Z _01_LAE000070_RTRIDST_0_ECONOMY-USA-GEITHNER.XML
http://www.financialsense.com/stormwatch/2005/1028.html
http://www.energybulletin.net/8379.html
http://www.energybulletin.net/5077.html
http://www.energybulletin.net/7707.html
http://www.energybulletin.net/3516.html
http://www.energybulletin.net/3538.html
http://www.energybulletin.net/3237.html
http://www.energybulletin.net/3173.html
http://www.globalresearch.ca/articles/FRA501A.html
http://www.dailyreckoning.com/Media/SmartMoneyReview.html
http://www.kitco.com/ind/grandich/jan102006.html
http://www.gold-eagle.com/editorials_05/willie012506.html
http://www.isecureonline.com/reports/MTR/EMTRG108/?o=332039&u=11650388&l=783716
http://today.reuters.co.uk/investing/financeArticle.aspx?type=usDollarRpt&storyID=URI:urn:newsml :reuters.com:20060123:MTFH57914_2006-01-23_11-15-43_L23657200:1
http://www.energybulletin.net/2950.html
http://www.energybulletin.net/2877.html
http://www.benbest.com/polecon/monetary.html
http://www.zealllc.com/commentary/damnlies.htm
http://atimes01.atimes.com/atimes/Global_Economy/GI14Dj01.html
http://seattletimes.nwsource.com/html/opinion/2002762054_froma26.html
Not in the least is this issue pacific. But I'd like to aknowledge the growing number of people thinking that IOB can bring some sort of danger to the dollar.
However, I think these few are sufficient to cover the basics.
1) Why does the US desire to keep oil priced in dollars?
Best answer:
http://www.dailykos.com/story/2005/12/27/115725/53
2) Why would a treasury continue to spew out money (or create credit, or issue more bonds, all of which are effectively the same thing in a fiat system), or why would a government utilize a monitary policy that inflates and devalues it is own currency?
Best answer:
http://www.financialsense.com/fsu/editorials/willie/2004/0112.html
Needless to say, there will always be disagreement, I am no more trying to convince someone of something than I am trying to convince myself. Read, research, and make your own decisions.
I've noticed a lot of people at dKos have changed their minds about peak oil over the last year. Events have caught up with theory. ;-)
But not the underlying tennants concerning the the linkage between the value of the dollar and oil (or any thing of tangible value), rampant borrowing and debt, credit creation, fiat money, bubble economics, outsourcing, cessassion of published M3 data, caribbean bond purchases, or any of a host of other easily documentable singular facts dealing with the past or present. Those are just as valid.
Yes, I recall your post, Jack.
Here is a key part of the Kos article:
WRT the first point, nobody needs to hold any dollar reserves at all to buy oil; any convertable currency can be exchanged for dollars on the FX market at any time. WRT the second point, this is a truism applicable to all fiat currencies. What's new? And what does the fact that we all use fiat currencies have to do with the Iranian bourse?As for the second link, there are lots of folks on the internet making similar agruments, as you well know. I still stand by the point discussed earlier by Stoneleigh and myself: namely, because the U.S. needs to borrow vast amounts of money, the Fed cannot afford to do anything that will spook foreign investors. So I am not too worried about inflation.
But I suspect otherwise. A trip to the marketplace confirms that my dollar doesn't buy what it did last year, and I am not making more.
And the Fed does not seem to share your optimism, judging from the interest rate hikes.
==AC
"And that," put in the Director sententiously, "that is the secret of happiness and virtue-liking what you've got to do. All conditioning aims at that: making people like their unescapable social destiny."
~Brave New World
They are however the same in relative terms especially if you think of the time between when you earned your money and when you had to use it. One may think that it's not dropping as much as it used by looking at this graph but soem quick checks of dates/values seems to show it truely is.
- The topic of dollars seems to be missing an important point - that is most countries have to provide goods (oil, whatever) for dollars whereas the US has the decided advantage that these dollars are created out of thin air by the fed and the banks. As far as I know they cannot do this without also creating inflation - as they inherently have to do when the gov't borrows to pay for war. Of course, regular folk like us have to earn our money but much of big business finance is through debt and certainly gov'ts do most of what they want via debt.
- I read an article some time back (and I wish I could remember where) about someone who studied the changes made a few years ago to the CPI and how it is calculated. The primary purpose of thoses changes was to alter how inflation would be calculated and his analysis indicated that if we calculated it the way we used to then indeed we'd be seeing much higher figures now. He mentioned that this was in essence a way of cheating wide portions of society out of various amounts due that were tied to the CPI (salaries, pensions, etc), but I think it also works very nicely in making people believe that inflation isn't as high as it is - and so much very critical decision making is made based on what people think inflation is and how it relates to interest rates. What if you could have inflation high in real terms but everyone believed they were low when it came to buying bonds and investing? Sounds pretty deluxe for some bankers I'd say.
I guess my basic point is that when the rules of the system change, when the yardsticks change, and when people ultimately aren't paying very close attention to every detail, then it's extremely hard to know what's really going on and what it means. We all stumble along making assumptions about a level plaing field that I think is far, far from the case. What can you say about inflation when you don't even know how they're calculating it?As far as the bourse is concerned - if countries are holding dollars to be able to buy oil, despite being able to convert currencies, they do it because they believe it has less exchange risk than holding another currency (most likely their own, which they need to control via dollars buying/selling). The fact that the price of oil has gone up in dollars but has been more stable in euros specifically indicates that the dollar is not pegged to oil (or anything else). The very idea of it being pegged would imply that it doesn't change relative to that item. We may in essence be seeing the defacto change that oil is actually more stable in euros, and the desire for countries to therefore trade in euros directly, to hold euros as they reflect less exchange risk. Exchange risk is huge - even for little old me - as I have loans in CND$ and make money in US$ - in the last year or so I've seen my ability to pay my loan diminsh greatly. And that's just my little tiny amount of money.
The opening of the bourse could be seen as the result of countries like Iran, China, Russia, Indonesia, Venezuela, Europe actually wanting to trade in euros now. I would hardly doubt that they'd open a bourse and then wait for customers to come but rather they would pre-arrange and poll their customers and open it because there is a demand. If such is the case then the US govt would know this as well, and hence they would see a stage set where customers are ready to trade in this currently more stable currency - and in that case they would already know that it's a deadly problem and will do whatever they can to stop it.
The question then becomes - how committed are these other countries to having an avenue to trade in euros and to holding euros? Well, that remains to be seen as it in essence also goes hand in hand with: how much would they stand by during military action in Iran.
Perhaps they believed they had other ways to prevent it that were less visible. In any case if they can fiddle the inflation numbers and hide the money supply - then who the hell knows what's going on. It's just another layer of sham upon sham - it will all hold up until the realization that the emperor has no clothes - and I suppose if I were TPTB at that point I'd have safely moved my riches elsewhere. They may already understand that the US is non-salvageable except by implosion and recasting in the preferred format of China.
Money knows no national boundary - never has before at least, why now? Just thoughts as I try to make sense of it as well.
http://tinyurl.com/baque
As long as the current system had continues energy inputs the high priest of this economic religion, like Greenspan, could go on forever preaching their economic dogma. In a closed system "money", at its essence, nothing more than a "marker" signifying what percentage of natural resources and human labor one "owns". The vast majority of us are in the "red" so we are essentially "owned" human resources. It is easy to see why private dynastic banking families are in control of the global printing presses, not governments and politicians. The politician's job is to sell us the "system" and protect who is behind the curtain...
==AC
"Historically, this pattern is a familiar one. Kings and emperors of bygone days were always backed up by priests and religions whose job it was to promote an ideology which served the interests of the ruler. The Roman Emperor Constantine and the English King Henry VIII both replaced state religions so as to better suit their political objectives. Today we don't have royal rulers in the West, but we have a ruling elite. Mainstream economists, trained in business school cloisters, function as a priesthood for this elite - muttering unintelligible technical incantations and then declaring absurdities to be truth. The corporate mass-media reinforces the orthodoxy in a thousand ways every day - in news and commentary and even in entertainment fare. Mumbo jumbo has served rulers down through the ages, and it is still being used today. As science or as common sense, the laissez-faire orthodoxy stands on a par with the belief in a flat Earth."
http://tinyurl.com/a4ls7
The father of modern economics is François Quesnay. Brought to the "new world" by the du Ponts, they bestowed their concept of "Freedom and Liberty" to the "Constitution";
Physiocracy means rule of nature. The term, coined in 1767 by Pierre-Samuel du Pont de Nemours to describe the doctrine of François Quesnay (and his unacknowledged collaborator Victor Riqueti, marquis de Mirabeau), captures the complex ideological character of the first French and indeed the first modern school of economics. Quesnay transformed economics from the role it had occupied from Aristotle to Rousseau as the management of the Social household-first the city, then the state-to its modern role as the science of wealth. In so doing he disengaged economic process from its anthropological role as servant of the sociopolitical order, and established its claim to be the direct manifestation of the natural order. In other words, he argued that economic process itself embodied natural law and should thus dictate the sociopolitical order.
Quesnay had arrived at his theories of a free market and economic individualism by studying the emergence of a national market in England. But he always understood that in eighteenth century France the unfettered pursuit of individual interest might not result in the natural order he sought to establish: men could fail to behave "economically." Quesnay believed that his introduction of arithmetic precision into economics provided a scientific rule that should dictate appropriate political arrangements-and even the obedience of sovereigns.
He was never willing, however, to trust the spontaneous development of the proper
sociopolitical order. Nature required the assistance of an absolute authority capable of forcing natural order upon recalcitrant humans. [pp. 10-11]
Men are different from animals in having immortal souls. God alone ultimately can judge their conduct. But since God is reasonable, conformity with the natural order should ensure salvation. Quesnay has finally assembled all the elements, save the economics, of his analysis of the human condition. Man, a frail creature, can approximate divinity by the exercise of reason. He cannot, however, attain divinity and pretend to centrality in the universe, for his reason does not suffice either to apprehend all reality or to judge himself accurately. Collectively men can arrive at a series of rules to guarantee social harmony and individual existence, but divine sanction, understood as absolute standard, alone can secure the justice of a human community.
[p. 87]
The question of divine purpose matters deeply, but the discussions about divine
purpose, particularly in relation to the affairs of men, have moved so far from the real issues they claim to address that they can no longer offer anything. The important questions, he concludes, "can only be decided by evidence" [p. 88]
The Enlightenment proudly proclaimed the values of rational individualism, and philosophes of all lands joined in constructing the new "science of freedom." Even those who, like Hume, enjoyed the benefits of relative political freedom and representative government enlisted as combatants in the great battle to free men's minds from the ignorance and superstition of religion. They assiduously cultivated the scientific method as their most formidable weapon. Science could demonstrate the true origins of the human species and its myths, explain the establishment of societies, catalogue the phenomena of the natural world, establish the true principles of human perception, chronicle the progress of civilization and the arts, and lay down the rational guidelines for the creation of a more humane society. Science, in a word, would permit men to tailor society to fit their own needs; it would release them from the contorted postures imposed by priests and kings in the name of an irrational higher truth. In this sense, the Enlightenment, despite its diversity, represented an emerging ideology. Man, it claimed, was made for freedom. Established authority had perpetrated inhuman subservience long enough. The ideological chains of the traditional world view within which human society existed to serve the greater glory of God's inscrutable purpose had to be broken. If the concept of God was not banished entirely from the workings of the universe, it was commonly confined to the sphere of general providence; thus the particular regulation of human affairs was left to man. Considered as a whole, the Enlightenment proposed to change the consciousness of man. [pp. 43-44]
Developing an argument enunciated in the section "Liberte" from L'essai physique, Quesnay returns to a discussion of human motives and action, and repeats his dictum that free will resides in the moment of choice. Faith assists the choice by elevating man to the knowledge of moral good and evil "by which he can direct himself with reason and equity in the exercise of his liberty." Quesnay defines both faith and God as "intelligence in essence." To reason intelligently, therefore, is to emulate God to whatever extent possible. Action based on reasonable motives thus merges with action based on faith; it has as its intent sound order and enlightened self-interest. In other words, man's enlightened self-interest merges with the divine order. To act thus is to choose freedom.
Elizabeth Fox-Genovese, "ORIGINS OF THE PHYSIOCRACY"
http://www.theoildrum.com/comments/2006/1/28/01820/6609/26#26
In the first post and scroll down for a later post from me for BLS links.
http://www.financialsense.com/stormwatch/2005/0624.html
And it is very interesting reading indeed.
Are the UK/US media trying to prepare citizens for yet another war?
==AC
The two faces of Rumsfeld
http://tinyurl.com/bdwj
- director of a company which wins $200m contract to sell nuclear reactors to North Korea
- declares North Korea a terrorist state, part of the axis of evil and a target for regime change
"Donald Rumsfeld, the US defence secretary, sat on the board of a company which three years ago sold two light water nuclear reactors to North Korea - a country he now regards as part of the "axis of evil" and which has been targeted for regime change by Washington because of its efforts to build nuclear weapons."Its on the open thread
http://www.saxobank.com/?id=481&Lan=EN&Au=2&Grp=6&NID=181
Member News
Steen Jakobsen comments on Iran Oil Bourse
Member News 26-Jan-2006 17:00
Saxo Bank's Chief Investment Officer, Steen Jakobsen, made a Thursday morning appearance on CNBC Europe's Today's Business show. Speaking live in CNBC's London studio with presenter Louise Bojesen, Jakobsen offered his thoughts on the importance of the Iran Oil Bourse as it relates to global oil policy.
According to Steen Jakobsen, the importance of the oil exchange is twofold. First, as it is priced in euro dollars, it represents a deviation from standard procedure in the market. Secondly, it appears as though Arab nations are keen to support the initiative.
"Gradually we're going to see some interest on the energy markets, which as a macro managers, I think is first, second and third priority this year," he said.
Jakobsen noted the exchange has already secured long-term contracts on the massive energy-consuming markets in India and China , and Russia 's President Putin is already using energy policy to leverage strategy in that country.
"New economic forces are happening, with oil being used strategically and economically [in ways that are] far more important than supply and demand," he said.
Which leads me to the question: has anyone (on either side) tried to quantify what portion of dollar demand is driven by oil sales?
I tried to do this back-of-the-envelope style. The M3 money supply is approaching 10 trillion. Wiki gives the size of the forex markets (via a 2004 BIS study) at a daily value of $600 billion spot, 1300b derivatives, 200b forwards, 1000b swaps, 100b options. 3.2 trillion/day, but only 28% is euro/$ (couldn't immediatley find $ only stats). So even 14% going into dollars makes 448 billion dollars bought, just in euros, every day.
If we take non-US demand as 60mbd, times a conserative $60/barrel, that makes $3600 million/day, spent outside the US, on oil. 3.6 billion out of at least 448 billion (probably very much more w/ other currencies) doesn't seem like the key to world demand.
OTOH, $3.6b every day is about $1.3 trillion/yr, or over 10% of M3. Which way does one look at it?
Anyone more knowledgeable want to take this problem on?
It seems reasonable to say that countries who need to import oil will hold stocks of US$ with which to buy it, particularly if they are in net receipt of US$ through other trade. It would minimise risk due to currency fluctuations. How long a supply of US$ would they hold for this purpose? I have no real idea, perhaps 30 days? That would mean $100 billion in the context of your calculation.
There will also be a tendancy for oil exporters to retain some of their oil revenue rather than immediately convert it to other currencies.
It is almost certainly misleading to consider forex $ transactions as a meaningful figure. Most trades are effectively for gambling purposes only and never spill out into the 'real world'.
I have no doubt that the status of US$ as global reserve currency, in no small part due to oil being traded in $, is significant in supporting the US$, US economy and US deficits. But it would be very difficult to accurately quantify and model these effects. We may well see the status of the US$ as global reserve currency diminish somewhat over coming years, that is likely to be combined with many other macroeconomic effects so, even then, it will be difficult to disentangle the various elements.
There's an article exploring this on EnergyBulletin today:
http://energybulletin.net/12463.html