Last week I read the news of Iran moving it's crude oil trade completely to Euro and Yen and exited Dollar. This is indeed a predictable news and was coming for sometime now.
Lets understand why.
The dollar derives it's strength and demand from being the base currency for International Trade ( and sometimes national as well!) across the world and main contributor to this is crude oil trade. US itself runs huge trade deficits ( now at record Levels) which essentially means it buys more goods and services than it sells. Part of this deficit( and hence US consumption) is funded by the rest of the world itself in the form of purchase of US treasury bonds and capital and other investments.The rest of the world also maintains $ as Forex Reserves .The world $ Currency reserves are estimated at about 10,000 billion.
Hence an important fact: The rest of the world needs to sell goods and services to the US and it not necesasary for the US to reciprocate the same . It can simply do by printing Dollar . The rest of the World needs to maintain the vaule of $ as they have invested heavily in terms if $ bonds , reserves and other $ assets. This means US literally gets a lot of products and services for free . This is an amazing free Lunch that every Great Power aspires to have.
Of couse govermenets and monetory authorities across rest of the world know about this fact.
Now imagine rest of the world for some reason stops trading Crude Oil in Dollars. The demand for Dollar slumps so does the value of the dollar .As the Dollar value dips ,more countries move their curde oil trade on other currencies which effects further sharper slump in Dollar.
Such doomsday scenario thinking has prompted the hostile nations (to US) like Iran to move oil trade to Euro and Yen.( Many infact attribute this kind of fear led US to undertake it's Iraq adventure as late Saddam planned to move Iraq's oil trade to Euro before US invaded Iraq and there's a lot of credibility to such an argument.) This may prompt Saudi Arebia and Russia and many others to follow suit . The only issue here whether Euro/Yen or any other currency have the mattle to prove effective alternative to Dollar.I think Euro has a much better chance given the size and stability of the European Economy.
Lets understand why.
The dollar derives it's strength and demand from being the base currency for International Trade ( and sometimes national as well!) across the world and main contributor to this is crude oil trade. US itself runs huge trade deficits ( now at record Levels) which essentially means it buys more goods and services than it sells. Part of this deficit( and hence US consumption) is funded by the rest of the world itself in the form of purchase of US treasury bonds and capital and other investments.The rest of the world also maintains $ as Forex Reserves .The world $ Currency reserves are estimated at about 10,000 billion.
Hence an important fact: The rest of the world needs to sell goods and services to the US and it not necesasary for the US to reciprocate the same . It can simply do by printing Dollar . The rest of the World needs to maintain the vaule of $ as they have invested heavily in terms if $ bonds , reserves and other $ assets. This means US literally gets a lot of products and services for free . This is an amazing free Lunch that every Great Power aspires to have.
Of couse govermenets and monetory authorities across rest of the world know about this fact.
Now imagine rest of the world for some reason stops trading Crude Oil in Dollars. The demand for Dollar slumps so does the value of the dollar .As the Dollar value dips ,more countries move their curde oil trade on other currencies which effects further sharper slump in Dollar.
Such doomsday scenario thinking has prompted the hostile nations (to US) like Iran to move oil trade to Euro and Yen.( Many infact attribute this kind of fear led US to undertake it's Iraq adventure as late Saddam planned to move Iraq's oil trade to Euro before US invaded Iraq and there's a lot of credibility to such an argument.) This may prompt Saudi Arebia and Russia and many others to follow suit . The only issue here whether Euro/Yen or any other currency have the mattle to prove effective alternative to Dollar.I think Euro has a much better chance given the size and stability of the European Economy.
Most probaly if dollar slumps , it's be a gradual process over years and not a sudden phenomenon.
We in fact have the example of UK which lost it's superpower status in 20th century as it was unable to maintain the value of Pound sterling after second world war as the demand for Pound slumped after Bretton Woods Accord.
We in fact have the example of UK which lost it's superpower status in 20th century as it was unable to maintain the value of Pound sterling after second world war as the demand for Pound slumped after Bretton Woods Accord.
1 comment:
I completely agree Tushar. The world is pretty much like a shopkeeper who pays the (US) customer to purchase goods from his grocery shop! In fact the moment the US Dollar does not remain the de-facto trading currency worldwide in trade, the dollar will continue to slide...in fact drastically...than anyone can possibly expect. There is no saying what repercussions this can have.
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