Friday, December 22, 2006


Financial pages

From JP Gundzik, president of Condor Advisers in Asia Times: Instability in the Middle East and Africa is very likely to increase in 2007. Intensification of Iraq’s civil war, conflict between Washington and Tehran, escalating war between the Israelis and Palestinians, and growing domestic pressure on Lebanon’s US-backed government will heighten instability in the Middle East. This instability will help fuel growing unrest in Sudan, Chad, Congo and Somalia, provoking significant military conflicts in Africa. Afghanistan’s insurgency is also expected to become more violent, prompting the gradual withdrawal of NATO forces. ... Unprecedented global geopolitical instability will have its most obvious impact on international commodity prices....The growing use of corn, wheat, soybeans and other grains to produce biofuels is expected to nearly double prices for these commodities in 2007. ... By every measure, inflation in the US has clearly accelerated since 2004.... In 2007, continued energy supply shocks are likely to feed a grain supply shock, stoking a sharp increase in food price inflation and further acceleration of core PCE.... [R]eal yields on US Treasury securities, which are only marginally positive now, are expected to become negative in 2007 as US inflation climbs higher and the Fed begins to cut interest rates.... The dollar is likely to depreciate by at least 20% against the yen, the Swiss franc, the euro and the pound in 2007. The dollar will also depreciate against the currencies of emerging market commodity exporters. Finally, Beijing will probably allow the yuan to appreciate about 10% against the dollar.... Economic growth in Latin America will also suffer from the US downturn in 2007. Mexico, where political and social instability are expected to increase substantially while US-bound exports grind to a halt, should follow the US into recession. Capital flight will weaken the peso, preventing exchange rate appreciation from offsetting the impact of sharply higher corn prices on the domestic food industry... Economic growth in Brazil, Colombia and Peru will also slow sharply in 2007. From Tania Kotsos at Global FX Strategy: Iran was stirring up negative USD sentiment again as an IGM report cited that the world’s fourth largest oil exporter is asking for oil shipments to be paid in EUR or other currencies rather than in USD due to the latter’s weakness. State owned NIOC has said that, acting on the instruction from the Central Bank of Iran, it has introduced a new clause in its oil supply contracts that allows it to request payment in EUR or other currencies. This comes days after the central bank confirmed Iran is planning to shift its FX reserves out of USD.
I've had worries about what might occur when oil is no longer traded in USD. You combine that with Bush possibly reneging on SS debt, and China calling in US bonds, you got an interesting scenario.

Hope that never happens. One nasty financial jolt could irritate the house-of-cards that maintains the American suburban-build-out economy.

Here in Phoenix, one in every three local economic dollars is generated by the housing industry. I don't think commuters from Goodyear truly understand their fragile situation.
I don't think the immediate impact of switching to Euros is large, shrimplate. Both VZ and Iran are a few tens of billions of dollars a year in oil.

My guess is that it's less political than our press seems to think. Oil is often sold as a contract for future delivery. If a currency is expected to undergo serious revaluation, the producer is assuming a currency risk. Sure, he can hedge against it, but it gets complicated. Plus, we burned the Iranians on their US-held assets 25 years ago and they probably don't want any funds held where the US could seize them. And we pulled a coup on Chavez, so he has no reason to trust the USG.

In the larger sense, the use of the Euro is more of a loss of prestige than anything practical. It's one more statement that we are no longer an exceptional economic power. It may, however, exert a small downward pressure on the dollar, since people who buy oil will want to keep Euros rather than dollars in their "checking account." Since the total number of dollars in actual circulation is near a trillion, a few tens of billions won't be a major deal.

But, yeah, the house of cards is waiting for a puff of wind. If Clinton were in charge, I wouldn't worry. These bozos... I worry.

Depends what you mean by "immediate impact". FUBAR @ Needlenose generally covered the bases on this subject in this post:
... in April of this year.

Several links in that article re. the cascading affects of moving oil transactions from Wall Street, among other things, are very real influences. Simeoultaneous events... realignment of global economics as a consequence of GWB's policies have resulted in the US entirely losing Cental/South American economic influence. Oil/Nat. Gas development... refining & marketing contracts that, for decades involved US interests/companies, now are going elsewhere. Much of this activity involves Iran, not just in domestic oil sales, but also in various aspects of developing foriegn oil production.

This activity (eg: Iran's oil Bourse), global economic realignment, and China's emerging clout are all interconnected. Krugman, in May '05 wrote:

Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy.

In other words, we've developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.

(end quote)

Respectfully, I disagree w/your statement that Iran's shift to Euro is mostly symbolic. Rather, looks to me like it's symptomatic of very significant course corrections in global economics.
Thanks for the comment JDMcKay.

I think Fubar did a nice job of it. I may be so favorable because he came to the same conclusion that I did: Iran probably wants to do this for the purpose of hedging against currency shifts. And, in the end, so do you, calling the shift to Euros "symptomatic," meaning that there's a larger problem. That problem is the decay of other "soft power" through abuse of hard power.

I don't want to minimize what a shift to the Euro as a reserve currency means. It is part of the decline of the US as a power. But shrimplate is hitting closer to the main problems: extreme bad faith by the Republicans on taking care of all of us, which leads to national division and drift, and the rise of China, which regards the US as primarily an interloper-- a particularly dangerous one because of the alliance.

One can estimate impact by the size of the change in dollar flows. If Iran and Venezuela shift to euros, very roughly 10 billion dollars will become unnecessary. In and of itself, the bourse is not a major event. But, as you say, it's symptomatic.
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?

More blogs about politics.
Technorati Blog Finder