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Born at the Crest of the Empire

Friday, November 16, 2007

Do I believe the "mic left on" story?

Yeah, our currency is now relying on Saudi goodwill as well.....
The dollar could collapse if Opec officially admits considering changing the pricing of oil into alternative currencies such as the euro, the Saudi Arabian foreign minister has warned....

In an embarrassing blunder at the meeting in Riyadh, ministers' microphones were not cut off during a key closed meeting, and Prince Al-Faisal was heard saying: "My feeling is that the mere mention that the Opec countries are studying the issue of the dollar is itself going to have an impact that endangers the interests of the countries. "There will be journalists who will seize on this point and we don't want the dollar to collapse instead of doing something good for Opec."
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posted by mikevotes at 9:24 PM

10 Comments:

  • Yeah, our currency is now relying on Saudi goodwill as well

    Yeah, and Bahrain's and UAEs. The fed had better show some self restraint in December or it is going to get ugly.

    Capital flight is something you are going to be hearing about soon.

    explaination

    By Blogger Praguetwin, at 5:30 AM  

  • Unfortunately, you don't have to explain.

    By Blogger mikevotes, at 6:26 AM  

  • While this issue is primarily an economic one, we have to wonder how much Bush's "my way or the highway" and "you owe us" approach to the world and its leaders makes switching from the dollar that much easier.

    Even a small decline in the dollar costs these OPEC nations millions every day. I think I've mentioned this before, but there is an eerie correlation between countries that drop the dollar as the default currency and those nations facing U.S. military intervention or mysterious U.S.-backed coups.

    I'm glad you've chosen to include this issue. It has tremendous potential impact on our economy.

    By Blogger Todd Dugdale , at 2:25 PM  

  • It's tough.

    After so many years, the Saudis have so much invested in US dollars, a collapse would hurt them alot.

    The nations pushing for this, Iran, Venezuela, the former Iraq, all suffered under sanctions, etc, and never really had the dollar trade or assets to be hurt by this.

    And, just as a general, I'm a huge strong dollar man.I'm not an economist, but the broader benefits of being the world's stable currency outweigh any gains we might see on the trade deficit.

    By Blogger mikevotes, at 2:46 PM  

  • "the broader benefits of being the world's stable currency outweigh any gains we might see on the trade deficit."

    If by "the world's stable currency" you mean "the default currency" or "the reserve currency", then I'd say you're absolutely correct. There's no way we could finance the Iraq effort if the majority of the planet didn't have to buy dollars to denominate their purchases or pay their debts.

    By 'forcing' the world to buy dollars to pay for oil, the demand for the dollar is kept (hugely) artificially high. The world would yawn if Madagascar, for example, dropped the dollar as its reserve currency. But if the Saudis do it, it's potentially lethal.

    The issue is do these oil-producing countries slowly lose big money as the dollar drops, or do they take a short-term hit and switch to a more stable and strong currency like the Euro and preserve their long-term wealth.

    As an aside, debtor nations would love to see the dollar drop, since their debts are almost entirely denominated in dollars. If you owe someone $100 and the dollar gets cut in half, you now owe them the equivalent of $50. On the flip side, the countries that have loaned us money gets screwed, too. If we pay them a million a month on installment, and that million is really only worth half a million, they lose. Put China in this camp. Maybe that's why they're backing away from buying more US bonds.

    I'm not cheering for the collapse of the dollar, but I can put myself in other countries' metaphorical shoes and see why it looks appealing.

    I think the Treasury's talk of improving the trade deficit is just putting lipstick on the pig. They know it's bad news for us.

    By Blogger Todd Dugdale , at 5:45 PM  

  • Again, not an economist, but a stable dollar brought tons of foreign investment and US trade because foreign rich people in volatile regions would park their money in US dollars. This led to the foreign investment in US bonds, stockls and businesses as well as financing our debt and consumer spending.

    By Blogger mikevotes, at 9:23 PM  

  • Just to drop two more cents..

    It isn't really a question of dropping all of your reserves, but shifting some and as you say Mike, slowing down on the buying of U.S. assets, which is what the "explanation" was about. Also, dropping the peg becomes more likely as it is getting really expensive to finance the peg regime (which is what the UAE and the Saudis are looking at). But the Saudis won't unload all their dollar reserves: that doesn't help them.

    It is complicated, but the creation of the Euro has been significant in that it provides countries, corporations, and individuals with an alternative reserved currency. Last time I check corporate issuance, the Euro and the dollar were in a dead heat at about 42% each.

    By Blogger Praguetwin, at 3:46 AM  

  • You're right. I completely forgot to mention the dollar fixed currencies which are a big part of this.

    I know a number of them have discussed going to a "basket" (basically, part dollar and part euro, and part other,) but I don't know if anyone's done it.

    By Blogger mikevotes, at 6:39 AM  

  • Qatar did, I believe, and the rumor is that UAE will be next. This is exactly what China did a couple years ago and other SE Asia countries are considering it as well, but I'm drawing a blank on the names.

    It is an interesting topic and I think I'll do some research on it.

    I'll let you know.

    By Blogger Praguetwin, at 11:25 AM  

  • Thanks.

    Again, not my wheelhouse, but it is a big issue with lots of significant indirect consequences.

    By Blogger mikevotes, at 6:13 PM  

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