Three Letters Re: Abandonment of the Dollar is a Premature Rumor

James Wesley,
Regarding the oil-denominated-in-dollars flurry, two important points must be noted. First, dollar denominated contracts can be immediately hedged in foreign exchange markets (FOREX) even before the oil is pumped out of the ground. The oil barons aren’t stuck holding their dollars any longer than they can call a FOREX desk or sovereign Treasury department (3/4 of the world’s oil is owned by governments, not Exxon/Chevron/etc.)

The more important point of dollar-denominated oil contracts is dollar prestige. Documents from the Federal Reserve show that Arthur Burns not only was interfering with the gold markets three decades ago, but the level of cloak-and-dagger efforts to keep the dollar as the world’s reserve currency for political power.

Dollar-denominated oil contracts purposes are to preserve hegemony, not prop up foreign central banks’ currency reserve. Godspeed, – Brian in Wisconsin

The current situation with the US Dollar is best described as a near perfect case of the Prisoner’s Dilemma. The best thing for big holders of US Dollars to do is get rid of dollars as fast as is possible without tipping any other significant holders off that they are doing it. Otherwise their best bet is to get rid of their dollars before anyone else does. If someone did that, it would trigger a crash. The only thing stopping everyone right now is that a dollar crash would likely tank the global economy as well. It is beginning to appear that the carry-trade being funded in US Dollars could be the tipping point for serious action as it is relentlessly driving the value of the dollar down. Just look at a chart of the Dollar Index over the past six months. It is clear that the Federal Reserve has no stomach to raise interest rates to stop this progression of events since that would crash our own economy. It would not take a large event to bring the dollar crashing down any time now. – Mike B.

First, as other people have pointed out here, Iraq provides very little US oil due to its geographic location. The war in Iraq is in no way related to the US oil market. Rather, Iraq is a prime supplier to Europe, in which case a switch from Dollar to Euro was perfectly reasonable (and suited Saddam’s temperament). It would be ridiculous to start a trillion dollar war over such a trivial item. There were much more significant reasons, which I’ll offer in a separate post for discussion. However, the overall global trend is to diversify from single currencies, which I regard as a healthy movement. A great many of our current global economic problems stem from overemphasizing the paper dollar. The former USSR had the same problem–consider what the Ruble is worth now, versus what the USSR claimed it to be worth (About $5 US, in their over-inflated opinion). Personally, I’ve never been one for paper money. I prefer to convert it to capital, such as inventory, home equity, useful vehicles and food. You can always trade food. You cannot eat money. – Michael Z. Williamson, SurvivalBlog’s Editor at Large