How close are we to 'Sudden Disorderly Adjustment'?

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Vol.6 No.18, 24 May 2006

How close are we to 'Sudden Disorderly Adjustment'?
Margaret Legum

This article was published in the Business Report on Tuesday, 23 May.


What are we to make of the growing chorus of fears about the possible
collapse of the dollar? Is it a case of crying wolf again?

Those fears link four elements: Iran¹s stated intention soon to open its own
electronic International Oil Bourse; its resolve to sell oil there in euros,
not dollars; the expectation that the price of oil will rise to over $100 a
barrel, triggering world recession; and the demand for gold, rather than
dollars, as a store of value.

Since the US is deep in debt, nationally and internationally, the dollar¹s
value depends entirely on the fact that it is a reserve currency for other
nations. We all have to keep reserves in dollars for two reasons. First, by
an agreement made in the 1940¹s, the oil producing countries of OPEC agreed
to sell oil only in dollars. That meant everyone had to hold dollars if they
wanted to buy oil, resulting in two-thirds of all central bank reserves
being in dollars.

That in turn means that the Americans have the privilege of producing the
international currency. Creating money is nice work if you can get it. It is
the equivalent of having a mint in your backyard. You can buy what you want
with the new money, without having to supply the equivalent value of goods.
America has been financing its annual deficit with the rest of the world ­
it borrows over $2 trillion a day - by simply making new money and spending
it into circulation.

They will not be able to do that if we no longer have to buy our oil in
dollars. Its value would fall as nations switch to other currencies to buy
oil or to gold as a reliable store of value. The creation of dollars would
not be available as a mechanism to cover the huge international debt. If
that process began, there could be the kind of flight from the currency that
has wrecked the economy of many nations within the past decade.

Even more alarming are suggestions that to avoid this possibility the
American government is planning to invade Iran. The fact that the invasion
of Iraq was preceded by unwarranted accusations of weapons of mass
destruction, and that Hussein had threatened to switch sales of oil from
dollars to euros, gives credence to such fears. The fact that Iraq¹s current
chaos makes it a net importer of oil seems not to deflect American resolve.

What is the evidence for the possible imminence of this scenario? Associated
Press on May 5 quoted top Wall Street analyst Bill O¹Grady of A.G.
Commodities: ŒIf one day the world¹s largest oil producers allowed, or worse
demanded, euros for their barrels, it would be the financial equivalent of a
nuclear strike.²

On May 8, an editorial in right-wing Forbes Magazine, written by Bush
supporter Jerome Corsi, predicts: ³If Iran wants also to seriously threaten
the dollar¹s position as a dominant foreign reserve currency, a war becomes
almost certain. The Iranian oil bourse may never be mentioned by US
policy-makers as an official reason the US decides to go to war with Iran,
but it may end up being the straw that broke the camel¹s back.¹

A UK network on sustainable development

yahoogroups.com has collected the evidence that this
scenario may be round the corner. It claims the Western media has up to now
self-censored on the issue ­ sounding alarm bells as the gold price soared
to nearly $700. It records Al-Jazeerah, on April 30, reporting that ŒOil
producing countries such as VenezuelaŠand a few of the larger oil consuming
countries, notably China and India, have already announced their support for
the Iranian bourse¹ An article : Petro-Euro: a reality or distant nightmare
for US¹ quotes US security expert William Clark saying ŒIf Iran threatens
the US dollar in the international oil market, the White House would
immediately order an attack against it¹.

Gold is now at a 20-year high against the dollar, and the dollar at a
one-year low against the euro. The Financial Times of May 16th, under the
headline: ³Fears for Dollar as Central Banks Sell US assets² reported that
Œcentral banks sold a net $14.4 billion during the month, the largest sale
since August 1998.¹

At the opening of the IMF meeting on April 21, Russia¹s Finance Minister said
his country Œcould not consider the dollar a reliable reserve currency
because of its instability¹. The same day the Swedish Riksbank halved its
dollar holdings to buy euros.

At that IMF meeting the 2006 World Economic Outlook was launched, warning of
a dollar collapse ­ due to global trade imbalances, spiraling US debt and
the demise of the petro-dollar reserve standard. In the language beloved of
obfuscating economists who hope thereby to soften the truth, it stated:
ŒGlobal current account imbalances are likely to remain at elevated levels
for longer than would otherwise have been the case, heightening the risk of
sudden disorderly adjustment.¹

ŒSudden disorderly adjustment¹ is the current bankers¹ euphemism for the
consequences of a dollar collapse. Others, including Morgan Stanley
economist Stephen Roach, as well as financiers Soros and Warren Buffet,
refer to it as Œeconomic Armageddon¹. How close are we to that?

© South African New Economics Network 2006. Page generated at 12:49; 31 May
2006 --

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