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On the other hand, after reading the article above, there are a few interesting points.
America's currency monopoly is the perfect pyramid-scheme. As long as nations are forced to buy oil in dollars, the United States can continue its profligate spending with impunity. (The dollar now accounts for 68% of global currency reserves up from 51% just a decade ago) The only threat to this strategy is the prospect of competition from an independent oil exchange; forcing the faltering dollar to go nose-to-nose with a more stable (debt-free) currency such as the euro.
In other words, America uses the association of the greenback with international oil trading to achieve additional leverage for their currency over and above what their economy would provide on its own. They have already made use of the extra leverage in order to finance their war in Iraq and are now in a precarious situation where a competitive market might pull the rug from under them.
In the long-run of course, a falling American Dollar would be seen as a "correction", and US exports would pick up, imports would cut back, the system would come back into balance. However... we all know that financial markets don't withstand large shocks gracefully and they often "bounce around" a bit before settling down again. Often a shock will trigger off an overreaction which becomes self-fueling and leads to outright market panic. Much more likely, we would see overshoot, with the US dollar falling even lower than its "ideal" price then bouncing back, then falling again as speculators try to jump into the game. The end result would be a few really rough years for American citizens (and just around election time too).
The effort to keep information about Iran’s oil exchange out of the headlines has been extremely successful. A simple Google search shows that NONE of the major newspapers or networks has referred to the upcoming bourse. The media’s aversion to controversial stories which serve the public interest has been evident in many other cases, too, like the fraudulent 2004 presidential elections, the Downing Street Memo, and the flattening of Falluja. Rather than inform, the media serves as a bullhorn for government policy; manipulating public opinion by reiterating the specious demagoguery of the Bush administration. As a result, few people have any idea of the gravity of the present threat facing the American economy.
Humph, I can resist anything except the challenge of a google search. Here's what I found:
Candidly stated, "Operation Iraqi Freedom" was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil, and to reconvert Iraq back to petrodollars while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency (i.e. "petroeuro").
On the other hand, other articles give reasons why the issue won't blow up as big as one might think. In particular, the Euro traders will deliberately ensure that it does not.
A full challenge to the domination of the dollar as world central bank reserve currency entails a de facto declaration of war on the `full spectrum dominance' of the United States today. The mighty members of the European Central Bank Council well know this. The heads of state of every EU country know that. The Chinese leadership as well as Japanese and Indian know that. So does Vladimir Putin.Until some combination of those Eurasian powers congeal in a cohesive challenge to the unbridled domination of the USA as sole superpower, there will be no Euro or Yen or even Chinese Yuan challenging the role of the dollar. The issue is of enormous importance, as it is vital to understand the true dynamics bringing the world to the brink of possible nuclear catastrophe today.
On the other, other hand... death by a thousand cuts is still death.
None of the traders on their own need make any attempt to dominate the US dollar. Each country that eases itself out of its current position in US dollars will end up making a small profit for itself by avoiding the inflation of that currency and providing that each country has alternative trade options for vital supplies (of which oil is one), the country can continue to ease itself away from US dollars.
Thus, each and every marketplace that is not using US dollars is a small, but nevertheless real, step away from the domination of the US dollar.
Consider this discussion of a Scandinavian oil bourse, centered in Norway which would also trade in Euros. This would offer a price comparison to Iranian oil on a direct Euro-for-Euro basis and the idea makes sense since Norway is a major oil producer and sells most of its oil to European consumers. This would form one additional temptation for major international banks to ease away from their position in US dollars.
Knowing what Chavez is like, we can no doubt expect announcements of an oil bourse in Venezuela pretty soon -- possibly trading in Euros, possibly trading in American votes. At the moment Chavez is finding that he has to give the oil away, and he is getting in trouble just for that. Of course, George W Bush can always print more votes when he needs them.
The slow drift is more realistic. The US is facing a "leaky bag" problem, where they only have so many fingers to plug the leaks in the bag before they have to give up and let it leak. This sort of gradual leak will not cause the market shock that would kick inflation up so it probably won't be such a big issue -- just a gradual devaluation of the US dollar.
This all leaves the question of what would happen to Australia in the most extreme case of a severe drop in the US dollar? Most of what Australia imports from the USA is "intellectual property", in particular movies, music, books, software and high-tech gear (where the key component is usually software). Australia would see all of these things get cheaper. Most of these imports (e.g. music-videos, Hollywood movies, etc) are completely useless to us -- they are just dead consumer spending and entertainment, they do nothing to boost our country. On the other hand, the high tech equipment could make a difference.
Australia imports huge amounts of manufactured equipment and clothing from China. Clothing is now so cheap now that supply price is irrelevant -- clothing in shops sells at what the market will pay, unrelated to what it costs. I bought a pair of sturdy working shirts for $4 each last week. That means I'm paying the equivalent of 75 shirts per week in rent for a very small house. That's more than 10 shirts a day, just for rent. When taxes are taken into account, I would have to produce over 15 shirts a day in order to pay my rent... this includes growing the cotton, spinning the thread, weaving the cloth and sewing the shirt, and that is working 7 days a week.
Manufactured goods are another story, a price hike there would be a big shock to Australians. Would China drop their currency if the US dollar dropped? Probably yes. That would be OK because all that Chinese gear would get cheaper. On the other hand, a falling US dollar might well drag the Australian dollar down with it seeing as our economies are closely tied. China might use the opportunity to increase the prices of its exports. Buying the same gear from Europe would rapidly become impossible as the Euro would be driven up by any oil trading based on Euros.
The big issue for Australia would not be the currency drop... it would be whether the USA decided to increase interest rates in an attempt to prevent currency drop. So many people are in debt right now that we are sensitive to even small shifts in interest rates. Australia's interest rate is completely dependent on the US interest rate because we can't afford to have US investors pull out of this country.
This interest rate pressure is a problem even without a sudden "shock" scenario (which is unlikely). How many "cuts" can the US economy withstand as other countries are increasingly tempted to avoid holding an expensive position in US dollars and move their position over to Euros? It won't happen in one big surge just because of Iran's oil market, but each little step is going to add up over time and each little step puts just a bit more pressure on interest rates.
This is a weird situation, especially when you consider that one thing John Howard has done right (one of the few things) is to avoid excessive spending and to keep our Australian deficit from blowing out. In some ways, the Australian currency should be safely isolated. Unfortunately, the USA is larger than us and our trade is not sufficiently diverse to be able to ride out a US interest rate rise
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