“This notion that the United States is preparing to attack Iran is just ridiculous. […]. That said, all options are on the table.” (President George W. Bush, February 2005)
Who would have imagined it?
Forget the Prophet Mohammed, Islam, the Koran, President Ahmadinejad and his nuclear program, Islamofascism and the whole umpah-pah. The mullahs don’t like US dollars anymore. According to Reuters UK ([http://rtv.rtrlondon.co.uk/2006-12-18/3e56a070.html]) Iran announced that it has ordered its central bank to start using euros for foreign transactions and to transform the nation’s dollar-denominated assets abroad into the single European currency. “The government has ordered the Central Bank to replace the dollar with the euro to limit the problems of executive bodies in commercial transactions,” government spokesman Gholam Hossein Elham told reporters.
Coming from OPEC’s fourth largest oil producer, this is a move that will undoubtedly have profound economic repercussions and serious political consequences around the world. It would certainly seem that instead of ‘wiping Israel’ off the face of the planet, Iran is setting the pace to wipe out US capitalism and its influence everywhere. To understand the implications of such a move in financial affairs, one must first return to the importance of money in our economic systems and the effects that the ravages of inflation have on it.
Money is one of the most amazing inventions of man. Imagine the difficulty of our daily lives without those metal coins and colored paper. To make any kind of transaction, from buying groceries to buying real estate, you would have to find someone who had what you wanted and who wanted what you have, and then the two of you could barter. In a world with thousands of products, one would spend most of their time searching for business partners and spending very little time earning revenue. The alternative to not having to look for business partners would be for each and every one of us to do a little bit of everything for ourselves.
But with money on the scene, everything becomes more direct, simpler and less time consuming, and we can all increase our productivity by specializing, that is, doing what we do best and then trading with our partners. As a direct and proximate consequence of our increased productivity, each of us can become richer. It’s easy to lose sight of the very basic economic point that we all owe much of our high standard of living to the existence of money, its possession, and the purchasing power that comes from it.
But there’s a catch: money works best when its value is stable over time. And this is nowhere more true than in international trade.
In economic terms, the power of the US dollar and its influence on economic and financial affairs around the world was born during the United Nations Monetary and Financial Conference held in Bretton Wood, New Hampshire in July 1944. The Conference was attended by the delegates from the 45 allied countries. nations directly and indirectly involved in the struggle against the Axis powers: Nazi Germany, Imperial Japan, and Fascist Italy, and their socio-economic doctrines. As a result of the Bretton Woods Conference, a system of exchange rates between different currencies anchored in the US dollar was established, which became gold, the common denominator and measure of wealth throughout the world. Thus, the US dollar became de facto the world’s reserve currency, accepted and traded everywhere. This system remained in place until the early 1970s and allowed countries to accumulate reserves in US dollars, as opposed to gold.
When in 1970-1971 an economically resurgent Western Europe began demanding payment of its US dollars, when it became clear that the US government did not have enough gold reserves to buy back all those dollars, the US Treasury under the The Nixon administration, instead of defaulting on its payment, ‘de-pegged’ the greenback, that is, it severed the link between the dollar and gold. However, to prevent an international collapse of the US currency on world markets, the US treasury had to substitute another valuable product for gold in order to entice foreign countries to hold their foreign exchange reserves in dollars and continue accepting US currency.
Thus, in 1972-1973 an ironclad agreement was made with Saudi Arabia to support the power of the House of Saud in exchange for accepting only US dollars for its oil. The rest of OPEC would do the same and also accept only US dollars. Because the world had to buy oil from Arab oil-producing countries, it was now right to have dollars as payment for oil. Because the world needed ever-increasing amounts of oil at ever-increasing oil prices, the world’s demand for dollars could only increase. Although dollars could no longer be exchanged for gold, they could now be exchanged for oil. The Petrodollar was born.
In the year 2000, the first man who really started demanding euros for his oil was none other than Iraq’s Saddam Hussein, and we all know what happened to him. To be more specific, in fact, Saddam Hussein Abd al-Majid al-Tikriti (1937-2006), the former president of Iraq, made two strategic mistakes, the second of which would ultimately literally cost him his neck.
First, on August 2, 1990, it invaded Kuwait, a country that is very friendly to both the United Kingdom and the United States, and which possesses approximately ten percent of the world’s oil reserves. Saddam, moreover, also became a real threat to Saudi Arabia. By invading Kuwait and threatening Saudi Arabia, Saddam violated the Carter Doctrine put forward by President Jimmy Carter in 1980, which states that “[…] An attempt by any outside force to gain control of the Persian Gulf region shall be deemed an assault on the vital interests of the United States of America, and such assault shall be repelled by any means necessary, including military force.” The Carter doctrine was later confirmed by President George HW Bush in 1989 with National Security Directive 26, which states that “Access to Persian Gulf oil and the security of key friendly states in the area are vital to the US national security […].” The Gulf War occurred in January 1991.
Saddam’s second mistake was to start demanding payment for his oil in euros. At first his demand was met with derision, then negligence, but as it became clearer that he was serious, the need arose to make an example of anyone who demanded payment in currencies other than the US dollar. The punishment came with the worsening of the geopolitical situation after the 9/11 attacks on the Twin Towers and heightened awareness and concern about Saddam’s weapons of mass destruction, which he had used extensively against the Kurds and his own citizens. President Bush’s intervention in Iraq followed, bringing about the downfall of the Iraqi dictator.
Contemporary warfare has traditionally involved underlying conflicts related to economics and resources. Today, these interlocking conflicts also involve international currencies and thus add to the complexity. Current geopolitical tensions between the United States and Iran extend beyond publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trading: the Iran Oil Exchange. (‘Bourse’ is the French word for Stock Exchange). The proposed Iran Oil Exchange means that without some form of US intervention, the euro will establish a firm foothold in international oil trade.
This is so, because the Europeans would no longer have to buy and hold dollars to secure their payment for oil, but would instead pay with their own currency. The adoption of the euro for oil transactions would give the European currency a reserve status that would benefit Europeans at the expense of Americans. Given the levels of foreign debt and the US trade deficit, Tehran’s goal is a clear usurpation of dollar supremacy in crucial international oil markets, and the US can hardly afford to see that happen. It is truly a case of deadly economic terrorism and financial warfare, a matter of life and death.
And speaking of economic terrorism and financial warfare, it is very interesting and worth mentioning the link between oil and euros on the one hand and Iran’s nuclear program on the other hand that Gholam Hossein Elham has made during the aforementioned announcement. He has stated: “They (westerners) they must end their hostilities towards our nation and they must also be aware that we are capable of achieving nuclear technology through very transparent and legal methods, something they must respect. They must not waste their time venting hostility against this nation, otherwise they will be harmed, more than us.”
If Iran continues to intend to charge euros for its oil, the next Iranian Stock Exchange will introduce Petroeuros currency hedging in direct competition with traditional Petrodollars. More than that, in political terms, it will pit the United States, Israel, and Sunni Islam against Iran, Syria, and Shia Islam, and will fundamentally create new dynamics and competition in the world’s largest markets: those of the global oil and gas trade. One of the Fed’s nightmares could well start to unfold if it appears that international buyers will have the option to buy a barrel of oil for $60 on NYMEX and IPE, or buy a barrel of oil for €45-€50 via of the Iranian Stock Exchange. In essence, the United States would no longer be able to effortlessly expand its debt financing by issuing US Treasury bills, and international demand and liquidity for the US dollar would fall. This is a very good reason to go to war.
Welcome to 2007.
