Re: <nettime> The Oil Thickens...

[Brian Holmes <brian.holmes@wanadoo.fr>]

So: news is out that Russia is toying with the idea of trading its 
oil in euros.

In this context (which has in fact been developing over the past 3 
years, and not only with Russia), the US appears to be playing a 
dangerous, double-handed monetary game whose aims seem to me rather 
illegible, if not confused.

On the one hand, a determinant of the Iraq war seems almost certainly 
have been to deliver a lesson to the Arab world concerning the 
viability of pricing your oil sales in euros, as Iraq had done (to 
its profit at the time, cause they got out of dollars before the 
value fell). Beyond the case of Iraq itself, there was widespread 
speculation concerning the possibility of opting out of the US dollar 
as the undisputed international reserve currency for central banks, 
and shifting to a balance between euro and dollar (China has done 
this to a limited degree, for example). This speculation was 
encouraged both by capital flight from US markets after the krach of 
the US economy frommid-2000 on, and by general repugnance at US 
bellicosity in the lead-up to the war.

Now, all of this is worrisome to the US, because the fact of having 
your currency as the international reserve currency has all kinds of 
advantages: not only does it make for seamless transition into your 
financial markets for all international actors dealing in dollars, 
but it literally  means that you can simply print more of the stuff 
and sell the resulting commodity, not for its worth as raw material 
plus labor, but rather for its face value (500 dollar bills are 
relatively cheap to make... but each one is still worth $500! and a 
lot of them could be pumped out in the 90s without causing domestic 
inflation, as the amount of global exchanges in dollars rose, and 
more foreign countries dollarized their economies; those interested 
in this subject can google around under the heading "seigneurage" or 
maybe in English it's "segnioriage" - the technical word for the 
advantages accruing to the soveriegn power emitting a currency used 
outside its borders).

To this worrying situation the US responded first of all with 
asserting its military might - the old idea that people will be 
confident when you display overwhelming power. But what happens if 
overwhelming power turns into a Vietnam-situation?...

On the other hand, the typical prewar fall in the value of the dollar 
against other currencies proved extremely popular with industrial 
interests in the US trying to get over a recession. So the US has 
kept the dollar low since then (about .85 euro). This appears to be a 
deliberate US policy, and a barely veiled riposte to the maintenance, 
by the EU central bank, of a high basic interest rate, which the US 
would like to see fall. America of course has cut its interest rate 
in the attempt to keep the economy going. So the US is in a doubly 
unfavorable position vis-a-vis international financiers: its currency 
has dropped 15% or more, meaning that international actors with a lot 
of money in dollars have taken significant losses; and also, those 
looking to earn interest aren't going to do so in the USA, 'cause the 
European base rate is significantly higher. One could say, fine, so 
what? Let those foreign devils go home. But the money of the foreign 
investor devils is basically what balances the books of a US economy 
that has a structurally deficient balance of trade. Only constant 
financial inflow to the US makes it possible for Americans to 
consistently import more than they export. The country basically 
lives on credit furnished either in the form of investment or loans - 
and everyone should remember that the great debt crisis of the US, 
left behind by Reagan, was "solved" by the profitability of the US 
financial markets during the mid-nineties. Now the US has again 
launched on a government borrowing binge to pay for Iraq, among other 
things. (An important detail in this argument: the  currently 
increased trade due to the weaker dollar is not near enough to make 
the balance of trade gap, in my knowledge - but please correct me if 
you have other info).

Here is where the dangerous game begins: IF there were a run away 
from the US dollar, triggered off  for example by the shift of a 
major oil producer to trading in euros (and this is considered THE 
shift that could make such an event possible), then you could see a 
middle-term decline in the value of USD (down to, say, .70 euro), as 
the financial advantage which the US has enjoyed through its position 
as reserve currency disappears. All of this would cause a true crisis 
in the US economy, as its fundamental parameters would shift,itsrole 
as a global capital attractor would disappear. But this, in turn, 
would mean that the traditional role of the US as the "locomotive" of 
that horrid reality known as "economic growth" would also be 
compromised... The most likely thing would therefore be to see the 
Europeans lower their interest rate, perhaps even as the American one 
begins to creep up, and the value of the dollar appreciate at the 
same time. Why? Because the Europeans will be terrified at the idea 
that such as huge market as the US could go through a fall in demand, 
hurting their exports as much or more as the weak dollar.

But the world is complex and turbulent, and there is also a certain 
power-politics worldview holding (no doubt rightly) that Europe would 
really be better off in the long run having the euro at least on a 
par with USD, in a typically European vision of a multilateral, 
codependent sharing of the dominant reserve currency role. A strong 
euro might ultimately attract England (and its North Sea oil) fully 
into the Euroland. A reorganization which, by giving Euroland a major 
financial center, could decisively change the balance of economic 
power in the world.

I did all this reading during the war and am just reciting from 
memory as I'm currently too busy to spend 48 hours with the financial 
press. But it's an extremely interesting subject and more news or 
fresh arguments would be welcome.

cheers, Brian

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