Wednesday :: Mar 15, 2006

They'd Rather Switch Than Fight

by pessimist

I've been saying this would happen for a while now. It has now come to pass, although the action is being taken by a region that I didn't expect would do so - the Gulf States have had enough, and are actually beginning to convert their forex accounts from dollars to euros:

The United Arab Emirates said it was considering moving one-tenth of its dollar reserves to the euro, while the governor of the Saudi Arabian central bank condemned the decision by the United States to force Dubai Ports World to transfer its ownership to a "U.S. entity," the UK Independent reported. "Is it protectionism or discrimination? Is it okay for U.S. companies to buy everywhere but it is not okay for other companies to buy the U.S.?" said Hamad Saud al-Sayyari, the governor of the Saudi Arabian monetary authority.

The head of the United Arab Emirates central bank, Sultan Nasser al-Suweidi, said the bank was considering converting 10 percent of its reserves from dollars to euros. "They are contravening their own principles," said Suweidi. "Investors are going to take this into consideration (and) will look at investment opportunities through new binoculars."

The Commercial Bank of Syria has already switched the state's foreign currency transactions from dollars to euros, Duraid Durgham head of the state-owned bank said. The decision by the bank of Syria follows the announcement by the White House calling on all U.S. financial institutions to end correspondent accounts with Syria due to money-laundering concerns.

Anything to get George out of the counting house!

Some analysts aren't very worried by the prospect of the dollar being abandoned for the euro:

The argument by those who believe the Tehran oil bourse would be the casus belli, the trigger pushing Washington down the road to potential thermonuclear annihilation of Iran, seems to rest on the claim that by openly trading oil to other nations or buyers in euros, Tehran would set into motion a chain of events in which nation after nation, buyer after buyer, would line up to buy oil no longer in US dollars but in euros. That, in turn, goes the argument, would lead to a panic selling of dollars on world foreign-exchange markets and a collapse of the role of the dollar as reserve currency, one of the "pillars of Empire". Basta! There goes the American Century down the tubes with the onset of the Tehran oil bourse.

Foreign dollar-holders began dumping their dollars as a protest against the foreign policies of the administration of US president Jimmy Carter. It was to deal with that dollar crisis that Carter was forced to bring in Paul Volcker to head the Federal Reserve in 1979. In October 1979 Volcker gave the dollar another turbocharge by allowing interest rates in the US to rise some 300% in weeks, to well over 20%. That in turn forced global interest rates through the roof, triggered a global recession, mass unemployment and misery. It also "saved" the dollar as sole reserve currency. The dollar was not a "petrodollar".

It was the currency of issue of the greatest superpower, a superpower determined to do what it needed to keep it that way.
For that reason, the status of the dollar as reserve currency depends on the status of the United States as the world's unchallenged military superpower.

But there is a small morsel of doubt about this issue which peeks out from beneath the jingoist bluster:

As a small ending note, a good friend in Oslo recently forwarded me an article from the Norwegian press. At the end of December, Sven Arild Andersen, director of the Oslo bourse, announced he was fed up with depending on the London oil bourse trading oil in dollars. Norway, a major oil producer, selling most of its oil into euro countries in the EU, he said, should set up its own oil bourse and trade its oil in euros.
Will Norway - a member of the North Atlantic Treaty Organization - become the next target for the wrath of the Pentagon?

No - not enough oil. The North Sea oil fields are drying up, so there isn't anything to make the effort worth their while. Better to remain in the face of those wealthy Wahhabis!

The UAE needn't fear invasion, either. With George looking into attacking Iran soon, the big Navy base in Dubai is very vital to military plans:

Should the Iranians be convinced that a US invasion is imminent, they could threaten to shut down shipping through the straits, cutting off the flow of oil. They could also use missile sites on their side of the Gulf to hit US bases that are in easy range of their high-speed missiles. While the Iraqi attempt to stop the flow of oil through the straits during the US invasion was more than a little ludicrous (they had men in rubber dingies tossing mines out behind them), the Iranians have much more advanced weaponry. And they have a lot of it.

It's not hard to see the placement of the UAE relative to Iran. It's also well known that the UAE is the site of US military bases in the Persian Gulf.

The US has large bases at Al Dhafra, where the US launches spy planes and refueling missions. Even more important is the base at Fujairah.
Bush uses the UAE as a launching pad for attacks on Iran - and that is why George Bush will not go down on this deal without pulling out every trick available.

One Bu$hCo trick just might be invading Iran before they can act on creating that oil bourse.

Congressman Ron Paul, in a recent speech before the U.S. House of Representatives titled The End of Dollar Hegemony, presented his case underlying with relative precision how if the U.S does not change it’s ways in terms of the economic, diplomatic & military policies in certain parts of the world, the end of dollar hegemony could be on the cards as it is replaced by another currency or gold as the leading standard bearer in the global markets. Paul states that when the wealth of nations had been sapped and gold no longer could be maintained, the military prowess of the empire subsequently also plummeted. Today, the principles are the same but the process is different. Paper money has replaced gold as the currency of the realm, but the goals remain essentially the same, namely to “compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.” [More here])

Dr. Krassimir Petrov - Macroeconomics, International Finance & Econometrics Professor at the American University in Bulgaria - believes that the US will see no other option as time passes and the pressure builds:

"According to the reports I have, there is nothing suggesting at this moment in time that the Iranian Oil Bourse will not become operational from March 2006 onwards. [T]he only viable compromise would be for the Iranian Oil Bourse not to go ahead. At this stage ... pressure is being put on Iran by the UN Security Council and the U.S. Government .... Otherwise, the repercussions as the precedent from Iraq shows is an increasing likelihood of a military reprisal.

"This is further reiterated in the opening statement of W.D. Clark’s article on “Petrodollar Warfare” where he cited the following passage from a speech made by President G.W. Bush:

“This notion that the United States is getting ready to attack Iran is simply ridiculous...Having said that, all options are on the table."

(Al Jazeera puts it this way in summation: "[T]he immediate likelihood is that the neo-conservative U.S. global economic dollar hegemonic project will continue using both political and military pressure to foster this global agenda.")

The U.S. and it’s international allies do not really wish to engage in a military battle with Iran at this juncture in light of what has happened in Iraq.

Conducting a $2 trillion war with a total federal debt (as of 03/13/2006) of $8,270,385,415,129.52 (that's over $8 trillion for you numerically challenged Red Staters - enough for FOUR Eye-Rack Wars! Send Your Sons And Daughters Today!), something has to give.

Confidence in the faith and credit of the United States Government is vital for the current economic structure to function. that confidence has been shaken by the action of the neo-confidence (wo)men who infest the White House. When confidence - and the necessary trust it engenders - fail to produce the desired result, then force is the only remaining option:

The US dollar is backed by F-16s and some 130 US bases around the world

[W]ar on Iran has been in planning since the 1990s as an integral part of the US Greater Middle East strategy.

Since 1979 the US power establishment from Wall Street to Washington has maintained the status of the dollar as unchallenged global reserve currency. The role, however, is not a purely economic one. Reserve currency status is an adjunct of global power, of the US determination to dominate other nations and the global economic process.

In a sense, since August 1971 the dollar is no longer backed by gold. Instead, it is backed by F-16s and MI Abrams battle tanks, operating in some 130 US bases around the world, ...

Since the shocks of September 11, 2001 and the ensuing declaration of a US global War on Terror, including a unilateral decision to ignore the United Nations and the community of nations and go to war against a defenseless Iraq, few countries have even dared to challenge the dollar hegemony.
The combined defense spending of all nations of the EU today pales by comparison to the total of current US budgeted and unbudgeted defense spending. US defense outlays will reach an official, staggering level of $663 billion in the current Fiscal 2007 year. The combined EU spending amounts to a mere $75 billion...

So today, at least for the present, there are no signs of Japanese, EU or other dollar holders engaging in dollar asset liquidation. Even China, unhappy as she is with Washington bully politics, seems reluctant to rouse the American dragon to fury.

But as students of the martial arts understand well, direct confrontation - the only form of fighting Bu$hco understands - is the way to sure defeat. Redirecting the strength of one's opponent against himself brings victory, and as the great non-military strength of America is our materialism, that is the pathway to bring us to our knees:

These are the effects emanating from the indirect revolt against the power of the dollar:

Members of the Organization of Petroleum Exporting Countries, of which Saudi Arabia is the biggest exporter, account for 5.4 percent of U.S. bonds held by governments, central banks and international agencies. Adding to pressure on the dollar, Saudi Arabia, which exported crude oil worth about $163 billion last year, said it would repatriate some of its windfall invested abroad to finance petroleum, utility and other expansions at home.

Based on the median forecast of economists in a Bloomberg survey, the U.S. trade deficit widened to $218 billion in the final three months of last year from $195.8 billion in the third quarter.

A wider deficit means more dollars need to be converted into other currencies to pay for imports.

This has a much more direct effect on individual Americans:

The U.S. Federal Reserve is widely expected to hike rates to 4.75 percent at its March 27-28 meeting and then move at least once more in coming months.

Which means this in Red State American:

[I]f you need new financing or have an ARM, what happens overseas is increasingly important to you.

The growing problem that we now face is this: The overseas owners of our debt will only carry us for so long. Like all investors, they are always searching for a better return on their money.

Our dollar is so weak that according to the CIA it's lost value against the Albanian leke and the Vanuatu vatu -- as well as the euro, the pound and the ruble.
[T]he decision to buy less U.S. debt would raise domestic interest rates, including mortgage costs.

[Albania - leke per US dollar - 103.07 (2005), 102.649 (2004), 121.863 (2003), 140.155 (2002), 143.485 (2001)
Vanuatu - vatu per US dollar - NA (2005), 111.79 (2004), 122.19 (2003), 139.2 (2002), 145.31 (2001)
- Historic economic conversion data from CIA Factbook, last updated on 10 January, 2006.]

This shift away from the dollar isn't anything new, it appears - it has been underway for a while now:

According to its data, The Bank for International Settlements says investors from Opec member states have become increasingly sensitive to changes in interest rate differential between the euro and the dollar. Opec deposits favoured the euro over the dollar from early 1999 to early 2004 based on interest rate differentials tilted toward the euro and the depreciation of the dollar.

But the trend reversed in 2004 and 2005 as the exchange rate stabilised and rates began rising in the US, leading to an 8 percentage point decline in the euro’s share. Now that could change again with the US Federal Reserve believed to be close to the peak of its rate raising cycle and the European Central Bank having just embarked on policy tightening.

That 'policy tightening' isn't just underway at the Fed and the ECB:

he US Federal Reserve, The European Central Bank and now even the Bank of Japan all seem to be in a mood to tighten the global money supply. Japan has been a main source of capital and savings for the world. Now that looks like it is going to change.

In short, all three major central banks, and a lot of smaller central banks, are going to either tighten their money supply or continue to raise rates or both. Yet, investors and banks continue to lend money and demand less risk premium. Such a combination does not usually end in happiness.

[T]he Bank of Japan is about to abandon its policy of flooding the Japanese banking system with money so as to create excess balances of ¥30 trillion. Whether the BoJ announces this change at its next monthly meeting on Wednesday, or waits until the April meeting, is of little importance. What matters is that the policy of quantitative easing is clearly at an end.

Reduced liquidity and rising interest rates are slowly being translated into higher mortgage rates, slowing the rise in home prices and cash out refinancing.
Are higher interest rates having an effect on the housing market? The clear answer is yes. RealtyTrac (, the leading online marketplace for foreclosure properties, today released its January 2006 Monthly U.S. Foreclosure Market Report, which shows:
103,540 properties nationwide entered some stage of foreclosure in January, a 27% increase from the previous month and a 45% increase from January 2005.
The report shows a January national foreclosure rate of one new foreclosure for every 1,117 U.S. households, continuing an upward trend in which the national foreclosure rate rose in every quarter of 2005.

This week we learned that both new and existing home sales slowed last month. The inventories of both types of homes are rising to recent highs. Another 50 basis points in rate increases is only going to increase those trends.

Let's recapitulate.

* Cash out refinancing is dramatically slowing down, and as interest rates rise, will slow down even more.
* Home price increases are also going to slow down and stop.
* The Fed is going to continue to increase rates until that trend is well and truly broken.
* Rising rates make homes less affordable so fewer homes will be sold.
* Since much of the recent growth in the US economy relates directly to housing, that growth is going to slow down. * Consumer spending is also slowing as a result.

And then along comes Japan and suggests they are going to start to take away the world's liquidity punch bowl. They will not do so rapidly, but do it they will. This will eventually have an effect on financing costs world wide.

And we wonder why Ford and GM are still not understanding why their profitable SUK-Vee sales are declining!

SUV sales are down about 7% for the year to date, according to Ward's Autoinfobank. Oil prices remain high, and doomsayers still fret about further gas-price rises, hardly what GM needs. [Wall St. Journal]

So any way you look at it, everything is going to cost more at a time when individual wages have been stagnant until just recently. But each time wages rise, a recession is engineered to put it back in place through the mechanism of the Fed raising the interest rate, something we know from the links above is already planned.

It's a shame that the Prime Rate doesn't affect prices like it affects employment and wages, but I digress.

The more we owe, and the lower the confidence in our ability to repay goes, the quicker our creditors seek reimbursement. As our money isn't as good as it used to be (or the euro wouldn't be of such interest to so many national banks!), there is only really one way to repay our debts, and that would be through the transfer of tangible valuables.

And everyone wondered why Dubai wanted that port management contract so badly!

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pessimist :: 2:30 AM :: Comments (14) :: TrackBack (0) :: Digg It!