American Decline

[mbarrick]

_disdain_ made a post earlier today about the Canadian dollar being on the "rise" against the U.S. dollar. He rightly points out that it isn't our dollar rising, but the U.S. dollar falling. The graph above uses the Euro as a baseline indicator of this: Note that the red line is relatively level - that's the what the Canadian dollar is worth in Euros, and it is a relatively stable value. The green line is the value of the U.S. dollar in Euros. Note the decline. The blue line is the value of the Canadian dollar in U.S. dollars. As the value of the U.S. dollar declines against the Euro while the Canadian dollar remains relatively steady , we see the value of the Canadian dollar approaching that of the U.S. dollar. This graph is just for the trend this year, but this is not a new trend. I looked at this a couple years ago and the value of the U.S. dollar has been dropping against world currencies steadily since - no surprise - George W. Bush was elected. For the last six years countries around the world have slowly been dropping the U.S. dollar as a reserve currency and moving to Euros.

Comments

[heevoling.livejournal.com]

http://feeds.bignewsnetwork.com/?sid=9b6a1c22154c3bcf

[mbarrick.livejournal.com]

Yup.

[seymour-glass.livejournal.com]

you know i read something pretty interesting about oil and euros...something about how iraq switched selling oil to euros, this decision was made in 2000...and because traditionally oil has been sold in dollars only a switch by such a large producing country hurts the american dollar...and if all OPEC countries did it that would really kill the dollar...here's an interesting article on it, though there are many more...then iraq was contemplating it as is venezuala...

some salient points follow:

[seymour-glass.livejournal.com]

This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.

There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don't have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars - the US.

If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidiser of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.

The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily endebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East's main trading partner. And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil. Furthermore, if OPEC were to convert their dollar assets to euro assets and then require payment for oil in Euros, their assets would immediately increase in value, since oil importing countries would be forced to also convert part of their assets, driving the prices up. For OPEC, backing the euro would be a self-fulfilling prophesy. They could then at some later date move to some other currency, perhaps back to the dollar, and again make huge profits.

Gabon

[sovietnimrod.livejournal.com]

And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil

Actually there is one former OPEC country whose currency is actually fixed to the euro. Gabon uses the Central African CFA franc which is set to a fixed rate against the the euro. Originally the CFA franc was pegged to the French franc but was then pegged to the euro when the franc was made obsolete