massornament

A couple of days ago, my radio alarm went off and I immediately heard the news announcer state that Saudi, Chinese, and European officials were vehemenetly denying that their governments were discussing the replacement of the U.S. dollar with a ‘basket of currencies.’ The very next news item was that gold had, that morning, reached an all time high. Hmmm.

I tend to think that when government spokespeople ‘vehemently’ deny something, it often means that it is something they actually want to keep quiet. And the new prices for gold (which also set new highs each of the next two days, but has slipped a little since then)? Well, that’s ‘explainable’ by the fact that investors and speculators tend to panic.  But when I had some time this morning and during lunch (which I ate in my office), I decided to look up what specifically was going on.

I tend to think that what we are witnessing right now is the gradual decline of the U.S. as global superpower and, similarly, the deflation of the the long-standing financial bubble created because of inexpensive (oil) energy. So, perhaps, I am more than most not surprised by a subject like this. At any rate, I began reading many articles (most from U.K. newspapers since this is a subject that barely registers with North American news organizations). Here are a sampling from The Independent and The Guardian:

Robert Fisk, “The Demise of the Dollar,” The Independent, October 6, 2009. http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

“Leading Article: The End of the Dollar Spells the Rise of a New Order,” The Independent, October 6, 2009. http://www.independent.co.uk/opinion/leading-articles/leading-article-the-end-of-the-dollar-spells-the-rise-of-a-new-order-1798200.html

Graeme Wearden, “U.S. Rivals ‘Plotting to End Oil Trading in Dollars,” The Guardian, October 6, 2009. http://www.guardian.co.uk/business/2009/oct/06/oil-us-dollar-threat-to-america

Stephen Foley, “Dollar Tumbles on Report of its Demise,” The Independent, October 7, 2009. http://www.independent.co.uk/news/business/news/dollar-tumbles-on-report-of-its-demise-1798713.html

Robert Fisk, “A Financial Revolution with Profound Political Implications,” The Independent, October 7, 2009. http://www.independent.co.uk/opinion/commentators/fisk/robert-fisk-a-financial-revolution-with-profound-political-implications-1798712.html

…and here’s two slightly older opinions:

Nick Dearden, “Time to Ditch the Dollar,” The Guardian, Septemebr 2, 2009. http://www.guardian.co.uk/commentisfree/2009/sep/02/dollar-world-reserve-curreny

Heather Stewart, “U.S. Dollar Set to be Eclipsed, World Bank President Predicts,” The Guardian, September 28, 2009. http://www.guardian.co.uk/business/2009/sep/28/us-dollar-usurped-china-euro-world-bank

…and here’s an older article:

Faisal Islam, “When Will We Buy Oil in Euros?” The Guardian, February 23, 2003. http://www.guardian.co.uk/business/2003/feb/23/oilandpetrol.theeuro

In the last article, the author makes an important point and one that is important to remember at this particular time when the U.S. is suffering under very dire financial circumstances:

Dollarisation of the oil markets is one of the key drivers for this, alongside, in recent years, the performance of the US economy. The majority of countries that require oil imports require dollars to pay for their fuel. Oil exporters similarly hold, as their currency reserve, billions in the currency in which they are paid. Investing these petrodollars straight back into the US economy is possible at zero currency risk.

So the US can carry on printing money – effectively IOUs – to fund tax cuts, increased military spending, and consumer spending on imports without fear of inflation or that these loans will be called in. As keeper of the global currency there is always the last-ditch resort to devaluation, which forces other countries’ exporters to pay for US economic distress. It’s probably the nearest thing to a ‘free lunch’ in global economics.

So, one can see why any move away from the U.S. dollar will severely hurt the U.S. economy (and any other economy, like Canada’s, that is reliant on U.S. (over)consumption). Of course, this will have to happen over the long term since (as is stated in many of the articles), many of these countries cannot precipitate a sudden collapse of the U.S. currency since they hold so much U.S. debt. But it is interesting to ponder the possibilities.  Will Saudi Arabia’s ruling Al Saud family seek Chinese or Russian military protection instead of that provided by the U.S.? And how will Canada position itself?

Interesting times.

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