Dollar Dominance Threatened

As big as the sub prime problem is, and as large as the derivative debacle will become, the bears are missing something. The accounting schemes like Level 3 are just a series of tools to AVOID marking to market instruments that ultimately didn't have a market anyway.


DeJure: Latin for lawful, as distinguished from de facto (actual)

De facto: Latin expression that means "in fact" or "in practice" but not spelled out by law

Dejure Accounting would make certain that level 3 would not exist. But we live in a world of de facto accounting... and market players ultimately know this.

Now, the more pointed question, is what is to happen to the dollar. In my research - it seems as though the dollar MUST enter a period of falling values in order to create the SYSTEMIC problems the bears are looking for, not the actual subprime issue. So lets take a trip down history to see a few of the things that could hurt the dollar in the near term (besides monetary policy initiating more dollar inflation)

Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies. The key word here is DOLLAR.

Until recently, most of this occurred in dollars. But the fastest growing world currency today is the Euro. If the EU replaces the dollar as the reserve currency, a whole host of issues will arise for the US Government, its citizens and American Based corporations who use its value for competitive advantages. Question, are these intruments that are blowing up denominated in dollars, Yen, or Sterling?? Exactly....

There is a trend to using Euro's as the currency of choice for selling petroleum. You stand to gain more if you sell in a strengthening currency. Think of it as extra profit.

This happened in Iraq, before the United States took it over...

U.N. to let Iraq sell oil for euros, not dollars

October 30, 2000
Web posted at: 8:45 PM EST (0145 GMT)

UNITED NATIONS (Reuters) -- A U.N. panel on Monday approved Iraq's plan to receive oil-export payments in Europe's single currency after Baghdad decided to move the start date back a week.

OF course, in May 2003, the Iraq oil complex was back to selling crude in dollars. And recently, this trend has started to mount its head yet again...

Archived on 11 Jan 2004.

OPEC mulls move to euro for pricing crude oil


More ominous for the greeback is what is actually being organized by a group of Arabic countries today

Iran is planning to open a commodity exchange, variously referred to as the Iran Petroleum Exchange, International Oil Bourse or Iranian Oil Bourse. The acronym IOB has been used as it can be interpreted as either "International Oil Bourse" or "Iranian Oil Bourse", but it has no official status. It would be a Petrobourse for petroleum, petrochemicals and gas in various non-dollar currencies, primarily the euro. If successful, it would establish a euro-based pricing mechanism for oil trading, or oil marker as it is called by traders.

Suppose for a moment this trend continues? What would be next? Gold, Agricultural futures? Financial Futures? Its this sort of DE FACTO move that would ultimately hurt the dollar the most. What would be the need to hold dollars, when the most important commodities in the world is priced in something else? This is what causes systematic risk.

More classes tommorrow............

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