Dollar Barrels, Shukran wa good night - Tuesday 6th October

Neither bills nor cents….
The beginning of the end? The breaking of a news story (still heavily rumour driven at this point) describing secret meetings held between Russia, China, Japan, Brazil and Gulf States (the oil producing ones in case you were wondering) discussing a tentative plan to move away from accepting the long-standing world currency for commodity payments and (very) arguably, the ultimate demise of the US Dollar. By allowing a move away from pricing oil and gas in the most militarily powerful nation’s currency, a significant mind-shift in the future of political relationships may have just shown off its first glimpse-of-skin ahead of a full undressing down the road.

The US has enjoyed two of the most sought after weapons in the battle of global dominance since the end of the second-world-war – nuclear might, and more potently, control of the global financial system. Both, historians would suggest, were imported by expertise hand-picked from defeated enemies, but both have been ruthlessly despatched as and when required to further US dominance. Witness the two occasions (as noted in Fisk’s article below) when Saddam (so infamous now I don’t have to add the surname) threatened to stop accepting payments in Dollars for his sought-after oil in 1991 and then again in 2003 (where he wanted to move to Euros only) – military might was deployed to “dissuade” such a move under other certain pretences and despite pre-arranged agreements – such as promising Kuwait to him for help during the Iran-Iraq war (now that’s controversial right there) – the outcome of the might of the US (not to mention the finances of Saudi) ensured the dominance of the US$ continued unabated. Now however, an enemy far mightier than even Iraq’s “Chemical Ali”, in the form of mortgage-backed-securities and capitalist-greed, has banged against the might of US financial super-powerdom and threatened to flick-over the first domino in a potentially de-toppling sequence.

Slipping away…
Recent spikes (i.e. in the last 12mths) in the price of Gold, the strength of the Euro and the importance of China’s Treasury reserves ($2.2trn est.) may in part be explained away by the gradual reserve building by those nations involved in the secret (clearly not anymore) discussions – even at the same time as retail and other institutional investors were heavily piling into US Treasuries during those uncertain times post-Lehman, accumulation in anticipation of an eventual re-basing may have been taking place – certainly explaining recent hikes in Yen (10% vs USD since July ’09) and Euro (+18% vs USD since November ’08) strength, not to mention Gold which we have closely watched here and commented upon its scarcity and conspiratorial safety. If we were to return to a barter system – may disappoint a few wives to suddenly discover their “pure gold” necklace received from their loved one was merely gold-platted and hence only worth one handbag rather than the two desired – the ability for nations such as Brazil (rich in agriculture), China (rich in accumulated Gold reserves presumably) and India (a host of natural commodities) would trade quite merrily with Gulf states. What would the US offer? - once their Gold supply had run-out, currently the largest known-horde of any government in the world - Big Macs and a dream? Hmmm..I wonder which is more valuable…

So how new is this? Talk of pricing energy commodities in a different currency has existed for many years, with even Russia’s Putin just a couple of years ago touting his desire for Russian oil and gas to be priced in Roubles and an exchange established in Moscow rather than New York or Chicago. Even Japan, not totally officially, has paid for Saudi oil in Yen for quite some years – explaining the extremely large JGB (Japan Government Bond) reserves the Saudi Central Bank holds. JGBs and Roubles aside, if Saudi were truly to have the guts to fly-in-the-face of long-standing US ties and protection (more self-preservation of the House of Al Saud than anything else) it would signify the most potent shift in geo-political-ties in the last 60yrs – and we all know what happens when big changes to any scenario occur right? Those most engrossed and comfortably benefiting from the status-quo are loathe to any disruption – especially when vast amounts of money are concerned –resulting in often aggressive knee-jerk reactions.

The article announcing this latest and most serious sounding concerted effort by the widely considered nascent global powers (link below) was penned by Robert Fisk - a renowned Middle Eastern affairs writer, slightly tainted in that he has been accused of being too close to the Arabs, and especially vocal on the Lebanese front – this has of course brought allegations of bias from certain other camps. Nevertheless, he writes for a UK newspaper that brings enough credibility to its decision to even publish the story. The most questionable part in my opinion, the Hong-Kong based sources apparently providing information from a Gulf perspective – the abundance of decision-makers sitting outside of the main Gulf capitals is not a normal occurrence – but the interesting link to China’s evolving dominance in these negotiations another possible sign-of-the-times as to where considerable and landscape-altering decisions will be made during the next few decades – if we don’t witness a full-blown war for resources across Africa and the Mid-East first – a scenario no sane national-leader would plausibly desire.

There is going to be plenty of reaction to the claim that the end-of-the-dollar-peg is nigh. However, important to remember that if it does indeed take place it would be a long process and most likely complete somewhere around 2018 – there is way too much money at stake ($2.1trillion in Gulf US$-denominated assets alone), and questions over the single-currency across the GCC, with the debacle over the location of the GCC’s Central Bank in the first place (noted here in several pieces back in May) providing a clue as to the difficulties that would encompass any attempt to fully slip-away from the US$-peg.

Origins of the word “Dollar” range from a German unit of currency, the “Thaler” - used in the 16th Century – and the equivalent English name provided for Colonial currencies, particularly in North America at the time of those colonies’ revolt. The question now is just how tightly the US is going to fight to maintain the monetary hegemony they have enjoyed in correlation with that of their military, and whether another revolution has just announced its intentions, bidding the heavily-indebted US$ adieu, dosvidanniye, sayonara and maybe most notably shukran wa good night.

Original Robert Fisk article in The Independent - http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

Best Rgds,
Hani