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Calling Larry Kudlow: Peters on Iranian Oil and Currency Dangers

There is very real cause for economic concern regarding Iran, and it has less to do with the availability of their oil than most would think.

Did you miss the latest from Alan Peters: Can The USA Avoid Attacking Iran? Can We Attack Successfully?

In this, he posits the dangers of not simply access to Iran's oil, but the currency the world currently uses as the basis for global oil transactions...US Dollars. His scenario is worthy of attention, especially noting that Iran has already changed the currency they use away from dollars. His scenario, in part:

One of the major uses for the Dollar is to pay for oil, which is still bought and sold in Dollars and all other currencies are converted at the ongoing rate of exchange into dollars to finalize payments of transactions. For instance German Deutschmarks have to "become Dollars" to pay for oil, which gives the Dollar a reason to exist as the primary currency of the world.

For example, suddenly, because of Iran's Oil Bourse (and as previously intended by Iraq and some OPEC countries plus Russia), sale of oil is no longer in Dollars but in "pesos", even tiddlywinks, or anything but dollars, then the dollar has less and less reason to be an important currency. Pesos or tiddlywinks rapidly become the prime "form of payment". The world will need tiddlywinks more than dollars and will start buying and using those and sell off the now less useful or even useless dollar.

The drop of the Dollar as a value pulls down all other currencies - far beyond the ability of any country or group of countries or central banks to intervene and prop it up.

All the "useless" dollars crammed inside the banks plummet in value and one country, bank, business after another will discard them ASAP, putting them up for sale and creating a glut of dollars being sold with the consequent drop in value -- simply to try to salvage anything before the value goes so low as to be almost nothing. Again SUPPLY AND DEMAND considerations - not oil, not Euros.

Where is Larry Kudlow?

Reference

Listed below are links that reference Calling Larry Kudlow: Peters on Iranian Oil and Currency Dangers:

» Oil Costs go up as Iran Pursues Nuclear Program from The Staunton News Leader
The cost increase for oil is not a surprise, as Iran pursues their nuclear program. Iran said Feb. 4 it would resume uranium enrichment, a process that can be used to develop a nuclear bomb, just after the country was referred to the UN Security Council. [Read More]

4 Comments

The amount of dollars is only an electronic construct.

Neither the Europeans, Chinese or Japanese benefit from an overly weak dollar. A weak dollar kills their exports and strengthens our exports.

I am no economist, but I would venture to say that it is logical that the gains to the Euro would far exceed any direct negative impact from a global en-masse switch from the Dollar to a Euro standard for oil transactions...Residual impact from adversely affected economies notwithstanding.

I tend to agree with you, 'Dad', that there are adverse consequences for far more than just America if there was a major shift. How much that serves to cancel or minimalize the threat (it is a real threat, just a matter of determining the degree) is the question, IMHO. The most 'popular' stances are obviously the extreme predictions and discussions. The most likely reality is, as usual, probably somewhere between them. In the case of the scenario Allen Peters describes, we should hope so.

This is not a new topic of discussion, by any means, just one that I have chosen to posit for discussion here. Iran poses an economic threat, and this is a large part of that. I also (obviously) mispoke when I said that Iran is curently using the Euro. They will begin using the Euro in conjunction with the opening of the new oil market.

As far as calling for Larry Kudlow, there are many qualified out there to educate and opine on the economics of the issue. Any and all feedback/input is welcomed, whether via comments here or e-mail.

The article contains several errors. First of all, this is a standard-issue leftist conspiracy theory. Secondly, the currency of Germany is not the Deutchmark, but the Euro. The Iranian oil bourse is planning to accept payment in Euros instead of dollars. Which means nothing but that the Iranians will be holding a currency valued less than the dollar. All the currencies of the world are traded based upon the perceived value of that currency. This value is determined by the strength of the economy of the given state. The US dollar remains the "currency of choice" because of the size & strength of the US economy. Meanwhile, the flight of capital out of Iran continues as businesses fail & the Tehran stock market crashes. Oil bourse or no, the Iranian economy is weak and getting weaker and trading oil for Euros is not going to change that. For example, China will trade US dollars for Euros, and then buy Iranian oil. The Iranians will hold fewer US dollars, and more Euros, which is a weaker currency. Does this make Iran wealthier or poorer? Poorer. Does this boost the value of Euros? No, because it changes nothing about the fundamental monitary policy of the EU.

Good observations, Kenneth. I will add, however, that the focus of the article was not its impact on the Euro or even Iran, but rather the effect on the Dollar and the US/World economy if nations and banks began dumping their surpluses.

Regardless, that an Iranian Oil Burse would have this effect (lessening the perceived need to hold Dollars) is not the question, in my mind. It would/will.

The question is 'to what degree'? The article linked clearly is a worst case scenario. The value of the Dollar (as you clearly and rightly, IMO) is not exclusively hinged on its use as the principal oil exchange currency. That is but a factor.

Some consider that factor so minor as to disregard the article altogether.

When I asked the question privately of an economist who is widely published, he responded and suggested that the Treasury could absorb such a hicup caused by an OIB with relative ease. As a matter of fact, he concluded that people might spend their time more productively worrying about the meaning of the eye-in-the-pyramid that appears on the back of the dollar bill.

Either way, a threat's a threat, and the goal is to discern degree.

For what it's worth, at ThreatsWatch, while we collectively and individually have views, we claim no intellectual superiority. We are four citizens paying attention and attempting to communicate what we observe concisely and in proper context in order to assist and encourage public awareness of the various threats we face.

Active reader discussion is a major part of that process. I think this post and its feedback stream (both seen and unseen) demonstrates that perfectly.

We thank and respect ThreatsWatch readers for your contributions. After all, ThreatsWatch is about the public and the public's awareness, not the indivduals who populate the site with news, views and analysis.

Thanks to all for taking the time to weigh in.