What should replace the Gulf’s peg to the dollar? More on my Peterson institute policy brief
Oil and the dollar have not consistently moved in the same direction over the past ten years.
- In 1997/1998, oil tanked and the dollar soared.
- In 2000, oil and the dollar both rose – in large part because strong demand growth from the US put pressure on global oil prices.
- From 2003 on, the dollar’s slide has coincided with a huge rally in the world oil price. The inverse correlation between oil and the dollar isn’t perfect. Oil and the dollar both rose in 2005. But recently it has been pretty strong.
- Indeed, during the course of 2007 oil has soared to close to $100 a barrel even as the US economy slowed and the US dollar slid against most currencies.
The combination of a weak dollar and high oil prices poses some problems for the US. Countries with strong currencies haven’t seen a comparable increase in oil prices – or in domestic price pressures from rising energy costs.
This combination also poses rather significant – though self imposed — problems for many of the world’s oil exporting economies. The Gulf is importing both a weak currency and US monetary policy right now. The Economist puts it succinctly in its leader:
The combination of soaring oil prices and the tumbling dollar is distorting their economies and fueling inflation.
Real interest rates in the Gulf are now range from zero (in Saudi) to negative 5 or negative 10 – and those calculations work off the official inflation data, which may well understate inflation. The 3% yield on the two Treasury note is low for the US, though understandable given the weakness in the US housing sector. 3% is way too low for the Gulf. Yet right now Gulf countries are cutting their domestic interest rates to match US rate cuts.
Two years ago, the argument — made in my Peterson institute policy brief – that the Gulf countries dollar peg was an anachronism that is no longer in the Gulf's states interest wasn't generally accepted. It wasn't that wildly accepted twelve months ago. The conventional wisdom – which still crops up in say Lex last week — was that the Gulf countries were a natural part of the dollar block so long as oil was priced in dollars.
Today, however, there is a growing consensus (see the Economist) that the Gulf needs to change in some way. Indeed, there are rumors that the UAE may announce a policy change quite soon.
But there isn’t really a consensus on what should replace the Gulf’s current dollar peg.
One option under consideration (and perhaps the only option acceptable to Saudi Arabia) is to revalue against the dollar. That maintains the link to the dollar, but at a different rate. Arabian Business thinks the UAE will revalue by 3-5%.
Another option is a basket peg. That would allow the Gulf countries to avoid following the dollar down any more, but it also means that they wouldn’t follow the dollar up if it rebounds.
Another option is to both shift to a basket and to allow the currency to appreciate against the basket. Kuwait seems to be doing this in practice.
Another option – suggested by Gerald Lyons and Marios Maratheftis of Standard Chartered (nicely summarized by Mikka Pineda of RGE) – is a large (20%) one off revaluation to correct for the depreciation of the Gulf currencies associated with the dollar’s fall, and then a basket peg. A 20% appreciation sounds large, but remember the dollar now has appreciated by something like 60% against the euro since early 2002. The Economist reports that a big move is under serious consideration:
Someone close to the GCC says that some members are advocating a substantial revaluation—perhaps by as much as 20-30%—if the dollar's slide continues.
Good. A Chinese style 2% revaluation wouldn’t accomplish much.
I suggest two other options in my policy brief –
One is a managed float. Many advanced oil-exporting economies float – Norway and Canada are the obvious examples. This week’s Economist argues that the Gulf should adopt a managed float once it adopts a common currency.
In recent years many emerging economies have shifted from exchange-rate pegs to a “managed float”. Instead of aiming for an exchange rate, their central banks have an inflation target. If the Gulf states move to a single currency, as they plan to in the next few years, that currency should surely float.
Makes sense. The currencies of oil-exporting economies tend to appreciate and depreciate together with the price of oil. The Gulf’s currency would almost certainly move in a similar way.
Another option for those oil-exporting economies is pegging to a basket that includes the price of oil. This idea is derived from Jeff Frankel’s proposal that the oil-exporting economies should peg their currencies to the price of oil. Including oil in a broader basket keeps the currency from moving as much as oil, dampening some of the moves in the oil price. But it still assures that the exchange rate moves with the price of oil.
These proposals are obviously particularly relevant right now.
But my interest in the oil-exporting economies peg to the dollar is long standing. It actually started back in the 1990s.
Back then the oil-exporting economies problem were facing the exact opposite problem that they are facing now. Oil was selling for a price closer to $10 a barrel than $20 a barrel after the Asian crisis. The dollar, by contrast, was appreciating against both Asia and Europe.
That wasn’t a good combination. They oil-exporting economies faced a budget crunch from low oil prices – a crunch that forced spending cuts and introduced deflationary pressure into the economy. Yet their currencies were appreciating in real terms along with the dollar, inhibiting non-oil exports and adding to deflationary pressures (imports were getting cheaper). US nominal interest rates were far higher than they are now. Gulf inflation was WAY lower than they are now. Real interest rates in places like Saudi Arabia were very high when the price of oil was low. They are now very low when the price of oil is high. That is a highly pro-cyclical combination.
I don’t think it is an accident that the Saudi economy was stagnant in the late 1990s – it was going through much of same kind of deflationary adjustment that Argentina experienced. It just had enough funds stashed away that it could ride out dollar strength and low commodity prices.
Other oil exporting economies – Russia most notably, but also Ecuador – were forced to abandon dollar pegs and default on their dollar debts. Ecuador did eventually dollarize – effective replacing a dollar peg with the dollar. But it only did so after first devaluing the sucre in big way. Ecuador didn’t just dollarize. It defaulted, depreciated and then dollarized.
There is growing recognition that pegging to the dollar – and importing US monetary policy – carries large risks for oil-exporting economies. Economic conditions in oil-importing and oil-exporting can economies can differ. Right now the Gulf is booming and needs tighter policy while the US is slumping and needs lower policy.
My policy brief makes another argument for more exchange rate flexibility in the oil exporting economies. Letting the currencies of the oil exporting economies move with the price of oil would help the oil exporting economies better manage the revenue volatility associated with oil price volatility.
Most oil-exporting economies rely on the cash generated by their national oil company (not taxes) – not taxes — for revenue. The Club for Growth can only dream that the US follows their lead. But dependence on a volatile, dollar-denominated oil revenue stream to finance local currency spending can create trouble. So long as the oil exporters peg to the dollar, their government revenues rises and falls in line with the oil price. That works fine when the price of oil rises (so long as spending commitments don’t grow even faster) but creates problems when the price of oil falls.
If the oil-exporting economies let their currencies rise when the (dollar) price of oil increased, the oil windfall – expressed in local currency terms – would be smaller.
Each dollar in oil export revenue would buy less local currency.
But each unit of local currency would be worth more.
The volatility of the oil exporters revenue stream would fall.
That means that the increase in local currency revenues would be smaller when oil is high. But that is actually good. It facilitates a stable budget. There is less need to ramp up (local-currency) spending when the price of oil soars, or to cut spending back when oil falls.
The volatility of the external purchasing power of existing local currency spending would increase while the volatility of local currency revenue from oil falls.
That too is good. The same local currency salary would automatically buy more when oil rises. That would facilitate more rapid adjustment. The lags associated with increasing spending would disappear.
The same process work in reverse when the (dollar) price of oil fell. Each dollar in oil revenue would buy more local currency. That stabilizes the local currency revenue stream from oil. And the external purchasing power of each unit of local currency would fall.
Adjustment – to use a horrible economic term – would be a bit more automatic. The oil exporters wouldn’t face the risk that they face now, namely that they will increase their (local currency) spending too much when oil is high and then find that they lack the funds needed to cover their spending commitment when (or perhaps if) oil falls.
A final issue: Is it in the interest of the US for the Gulf to move off the dollar?
Some worry that any change would eliminate a big source of low cost financing precisely at the moment the US needs financing the most. The GCC countries probably don’t provide as much support for the dollar as in 2004 or 2005 (their investment funds almost certainly have diversified) but they still hold an awful lot of dollars – and probably more dollars than makes sense in a long-term equilibrium. If the Gulf moved off a strict dollar peg, it likely would have a bit more freedom to diversify its “flows” without putting pressure on its own currencies.
Right now I suspect that the dollars the GCC investment funds are selling as they diversify their portfolios are coming right back to the Gulf central banks. The weaker the dollar gets, the more speculative pressure on the GCC currencies. The GCC central banks reserves (which are almost all in dollars) are swelling. In aggregate the gulf isn’t reducing its exposure to the dollar.
That might change with a new policy regime.
However, any gradual shift likely would be associated with ongoing inflows and ongoing dollar reserve growth. Look at China. That limits the risk that the Gulf will suddenly stop buying any dollars.
There are two more fundamental reasons though why the US shouldn’t encourage the Gulf to adopt a currency regime that helps the US finance itself at the expenses of the Gulf’s own economic stability.
The first is that the value of the dollar ultimately hinges far more on economic conditions in the US – and US economic policies – than on what happens in the Gulf.
The second is that the US cannot rely on the cheap financing from the Gulf and China forever.
The easy availability of financing from the Gulf from 2003 on likely contributed to the fact that – through the end of 2006 — the United States external deficit actually rose by more than the United States oil import bill. The US is the only country that can borrow in dollars without taking on a big currency mismatch. The US absorbed not just the Gulf’s growing surplus but Asia’s growing surplus.
That has left the US is an uncomfortable position now, as it has to finance a large – though shrinking — deficit during an economic slump.
But it doesn’t change the basic case that the US ultimately needs to adjust. The equilibrium price of energy likely has gone up. The US is a major net energy importer. No country – not even the US – can adjust to rise in the price of its imports by just borrowing more forever. The US needs to import fewer goods (and export more) to make room to pay for a higher oil import bill without borrowing more.
Adjustment isn’t always easy. But in this case it is necessary: the US is in a difficult position right now in part because it deferred adjustment for a bit too long.
And relying on cheap financing from a region that has adopted a currency regime that no longer serves its interests seems rather risky to me.
The US needing to import less to compensate for the inflated cost of oil is one side of the coin. The other side is with the oil exporters. They need to import more US produced goods and services, for ultimately, that´s all their hoarded dollars are good for.
The current problem of the Gulf oil states is an embarrassment of riches. Their oil revenue is a gusher while their small populations require a relative trickle of domestic expenses. Their local economies simply cannot absorb and efficiently utilize all this excess capital. How many “world’s largest airport” does the region need? There is already a bubble of major proportions in existence, as capital is thrown at anything that moves or, mostly, does not (immeubles, for the French speakers..).
Therefore, it actually matters little what their domestic currencies do, since they invest their excess dollars abroad, anyway. What they should be much more concerned with (and they certainly are) is the USD/EUR, USD/JPY and all other relevant FX crosses. Their FX (and oil) reserve management is much more important to their future than anything else.
Thus, any decision on their part to move away substantially from dollar assets is a vote of no confidence for the USD. This is no small matter: oil forms the backbone of the USD’s fiat status - it is what underpins the so-called dollar hegemony and sustains the US’s ability to hold next to zero FX reserves. Through oil, there is a constant physical demand for dollars - no other currency and no other economy has this luxury.
Reserve “re-balancing” for the Gulf oil states naturally opens the door for pricing oil in other currencies or baskets. Once they do it, it will be open season for everyone else, too: Russia, Mexico, Canada - you name it, they will immediate fall into line. And it won’t stop there, either: all other commodity producers currently invoicing in dollars will join the party, from Brazil and Chile to Argentina and Australia. End of dollar hegemony, writ large.
To put it another way: In the 1980’s the USSR won the sobriquet “Upper Volta with rockets” and it soon became apparent that it was. If the US does not immediately take measures to safeguard its monetary policy it will become Lower Volta with aircraft carriers.
Well is there not the beginning of an adjustment going on right now? Isn’t the decline in the dollar that beginning? Letting the dollar find its own market level, as the US is doing, is about the only possible, because politically feasible and easy, adjustment. And in time it will work; exports will rise and imports will decline. What is interfering with all this is simply the willingness of the Chinese and Gulf States to purchase and hold our depreciating currency. And as long as they are willing to do something that “foolish” can we really object?
“And in time it will work; exports will rise and imports will decline…”
That’s the whole point: the Gulf oil exporters have small local economies and don’t need much in the way of merchandise imports, from the US or anywhere else. They buy investments, and for that “merchandise” a dollar that is constantly depreciating against hard assets is poison.
The US economy and the economy of the US dollar are two different things. The latter depends as much upon USD reserves and foreign currency pegs, as it does US monetary policy.
The US politicians may preach as they wish about absense of inflation in the US, but that’s a bit like my mother-in-law trying to wear a size 8 dress — it better be made of stretchy material.
I think the oil exporters will face the reality and devalue the USD markedly, long before the present administration will face the problem. Then other pegs will reluctantly follow suit.
If the GCC can’t restore the gold standard, no one can.
Any resource exporter with a currency constantly threatening to bust its peg in the upward direction is in an ideal position to terminate the 20th century’s disastrous experiment with open-loop finance.
Any of the Gulf countries could do this simply by establishing a parallel financial system based on maturity-matched, 100%-reserve digital gold. Construct a national gold reserve with a card-based consumer payment system. Peg the legacy currencies permanently to the dollar, perhaps with a revaluation. Accept and disburse all government payments, including resource royalties, only in gold, translating existing contracts written in legacy currencies to gold using rates at time of payment.
Do not attempt to fix any exchange rate between gold and the legacy currencies. Define new currency units as grams of gold. Allow financial calculation in legacy currencies to diminish and disappear naturally over time.
The expected result of this plan is a self-managing, self-stabilizing financial system which holds roughly the same relationship to the dollar and euro blocs that the dollar once held to, say, the Mexican peso. If the existence of such a system does not force the rest of the world back to gold, it will pass the baton of global financial leadership to the Gulf. If it does force the rest of the world back to gold, the Gulf, having started first, will end up with much more of the the gold. Either way, the Gulf wins.
If this seems too drastic, an easy start would be to set up a special economic zone with a gold financial system. With gold appreciating against paper at 20% a year, and (more important) the complete absence of political demand for a Volckeresque counterattack, there must be tremendous unobservable demand among those holding gold “under the mattress” for any financial system that can generate positive gold-on-gold return. For example, the GLD ETF alone holds 600 tons of gold at a present price of $20 billion, earning a negative 0.5% gold-on-gold return.
Granted, in these conditions it is very difficult to generate positive gold-on-gold return. However, gold miners can probably do it. I’m sure that a gold stock exchange in which share prices and financial operations were actually denominated in gold would attract more than a few investors, especially if coupled with a Canadian-style regime of certified resource reporting.
“you know, I am now on the payroll of the CFR not RGE” - I have no idea, but whether in-kind or cash, you are blogging for RGE, very much part of the brand and, in so doing, requiring that participants contribute content to RGE.
Dont need to worry about gold or oil or any other commodity. There is enough of
them. There are enough substitutes for oil. Gold has lost its lustre. Some freaks
and strong demand from india,middle east population is keeping prices high.
With huge increases in gold production coming online in 2009/10, prices are likely to collapse.
Real thing to worry about is the wage inflation that is going to occur after the lewisian movement is complete. That will create a spiral of inflation in this debt and credit driven world.
One thing’s for sure, something has to give. When you have non-organized Bangladeshis striking, as you do in Dubai, under threat of unceremonious deportation to one of the poorest countries on the planet, to say nothing of threats to their person, and all because their wages are being inflated away, you unequivocally have a problem. Short of a significant policy response, as wages give way and inflation expectations digest the concomittant acceleraion in price level rise, that problem will get out of hand, rapidly.
Brad - when you discuss in your paper alternatives that involve pegging to the price of oil, do you implicitly mean the dollar price of oil, or a price that is trade weighted in some sense? The dollar price of oil would get the biggest “bang for the buck” in terms of neutralizing the oil revenue effect, but is that in some sense an extreme approach in its own right?
Further to my 16:04, how about the idea of pegging to an oil price expressed in a currency mix that is also used for FX reserve diversification?
anonymous — good questions, and one that i wish i had thought more about. when i did the calculations, i used the dollar price of oil. but logically it should be the price of oil weighted by the various currencies in the basket (once oil is netted out) i think.
Why peg the price of oil to any paticular foreign currency? In case people haven’t noticed, computers on the internet instantaneously translate the price in question into local prices (yen, yuan, euro, dollar, rial, dirham, dinar, etc. etc.) Currency of payment and f-x risk can be negotiated between buyer and seller, as it is for most internationally traded goods. Foreign exchange rates have floated for decades. Oil prices have, too, but non-dollar nations have had to deal with a combination of oil price risk and f-x risk. There is no reason why dollar consumers can’t learn to deal with the same risks that non-dollar countries have managed for decades.
The whole dollar ‘peg’ is a useless anachronism.
Further to your 17:46
Brad -
Is there any real economic importance to the fact that oil is priced in dollars? If I’m interpreting your paper correctly, you say that the decision to peg, the problem of fluctuating dollar oil revenue, and the nature of reserve diversification by currency are all issues that are essentially independent of the fact that oil is priced in dollars.
My sense is that the pricing of oil in dollars is economically irrelevant, except that a broad movement toward non-dollar oil pricing might correlate with other developments that weren’t so US positive. E.g. is it possible that some future movement toward non-dollar oil pricing might correlate with an increased difficulty to fund the US externally with dollar denominated liabilities? The latter development of course would have real economic substance.
Anonymous — I agree with your sense in full. And you expressed the idea far better than I could. The $ pricing of oil matters a lot less than many other things that attract a lot less attention. But any shift off the dollar pricing of oil would likely correlate with a broader set of developments that wouldn’t be positive with the dollar.
An aside — I understand the need for anonymous comments. But one draw back of comments from “anonymous” is that I have no sense whether there is one source behind a series of multiple anonymous comments, or many independent sources. Either way, the quality of the anonymous comments has been impressive recently.
Should the GCC countries opt to abandon their dollar pegs or move away from the dollar as the basis for oil pricing, for some other currency solution, the immediate effect will be felt directly at the bottom line of Citi and other main money centre banks who derive untold millions (billions?) in fees for clearing international USD transactions. With the Oil SWF’s being actively courted as a bottomless liquid source of support for the sick US banking system, do you see it as even reasonable that thay should blow off their foot for that dubious honour? The GCC countries endured FAR worse pain in the 80’s and 90’s when oil was collapsing and their deficits exploding, albeit raising different problems. Then there was much talk of devaluation and regime change. They muddled through, because of a very simple and fundamental reason- it was in their own best long term interests. Those interests are not always confined to the monetary sphere as 2 Gulf Wars a resurgent Iran and the Al-Quaeda threat has shown them.
I’ll add a few more points relevant to the politics and economics of repegging in the Gulf.
First, there is confusion about pricing oil in dollars and selling oil for dollars. Oil has been priced in dollars since the 1940s, but only since 1973 was it agreed between Kissinger and OPEC that all OPEC oil would be sold only against dollar payment. Changing the reference price of oil to another currency or basket of currencies doesn’t scare the policy wonks in Washington nearly as much as abandoning the Kissinger/Shah/Faisal agreement that OPEC payments must be made in dollars only.
In 1973, much like today, the USA had a huge war debt, high deficits, rising inflation from the OPEC oil shock, an economy on the edge of recession, and a weakened international reputation due to scandals about Vietnam war crimes, CIA assassinations, death squads, coups and other dirty tricks. Ensuring that all oil would be paid for in dollars guaranteed that the USA would never have to borrow in another currency to pay for oil imports, but could instead issue as much debt as necessary to cover its requirements.
It was Saddam’s threat to shift to payment in euro in 2000 that precipitated war against Iraq. It is Iran’s shift this past year to payment in euro and yen which is behind the animus to Iran with similar threats from Venezueala making Chavez a target too.
Dollar hegemony is less about the dollar being the currency of reference price than it being the currency in which actual payments are made. So long as payments must be in dollars, the USA can inflate itself out of any hole and still get its oil. If payments had to be made in another currency, that would require the USA to potentially borrow in that currency or adjust its fiscal and monetary policies against that constraint.
I’ve been told that any repegging will be fought by Washington - even to further military action against Gulf states beyond the usual dirty tricks (note that King Faisal was assassinated in 1974) - if Washington believes it will erode the dollar payment for oil. Given the fate of Faisal in Saudi and Saddam in Iraq, many in the Gulf will be taking the threat seriously.
Second, imported dollar inflation is dangerous because it drives domestic political instability. People who will happily live under a repressive regime with no inflation will riot against the regime when food prices start to spike. China in 1989 is a recent example.
As note above, Dubai is already seeing tensions among its guest workers from the spiralling inflation caused by the dollar peg.
As a result the leaders of the Gulf states are in the unenviable position of having to weigh the threat of assassination or attack by the United States if they do depeg and diversify against the threat of rising domestic unrest and demands for reform from their own people if they don’t.
Finally, any discussion of the peg has to take account of the push for monetary union among the GCC states by 2010 or somewhat after. A common currency would make a great deal of sense and improve the economic security of the region, particularly if the currency is seen as strong and stable and promoting GCC strategic goals in Asia and Africa as the GCC states diversify toward modern service economies as Dubai has already successfully done.
The common currency discussions are intimately tied to the pegging discussions. It was a blow to the GCC common currency when Kuwait reverted to a basket peg earlier this year, but the commitment remains strong. Since the common currency serves many strategic aims beyond maintaining good relations with the USA, it might provide a rational exit plan for depegging in a controlled way without appearing to be dumping the dollar or making any one country or leader a target for violence. I suspect that this is what the Saudis hope, anyway, as they have the most to fear from upsetting their close friends in the White House.
Written by London Banker on 2007-11-29 06:50:06
I assumed a broad event of non-dollar oil pricing would be accompanied by non-dollar oil payment. Wouldn’t make too much sense otherwise, would it?
Further to my 7:10
In other words, the history would seem to suggest that dollar pricing facilitated a subsequent US demand for dollar payment. I can’t see a broad switch to non-dollar pricing facilitating anything other than non-dollar payment.
And I cannot see non-dollar payment having anywhere near the impact London Banker suggests. The dollars that need to be held for transactional balances are small. and frankly it doesn’t help the us all that much that it can borrow in dollars if the dollar price of oil keeps rising and the us has to borrow a lot more dollars to buy the same oil.
I also do not think the US invaded Iraq b/c to head off non-dollar pricing of oil. The reasons for the invasion can be found elsewhere — a hope to remake and transform a dangerous reason, the wmd scare, a sense that the sanctions regime was unsustainable, a set of unfinished business from the previous war and so on. The irony is that higher oil prices have done more to change the region (economically at least) than the whole idea of turning iraq into a model that would influence the entire region (that obviously hasn’t happened).
I am not sure why so many are convinced the US is against any change in dollar pegs. The US Treasury has discussed the Gulf peg in its fx report, and it didn’t say “China’s peg is bad but the Gulf’s peg is good.” The annex to one of the G-7’s communiques (APril 06 I think) included a call for more currency flexibility in the Gulf. Someone should ask the Treasury Secretary directly what his position is, but my understanding is that at the working level there is no objection to change.
obviously, the us treasury isn’t the entire Us government, but if the rest of the government is dead set against a change in the Gulf’s peg, they haven’t expressed that position formally to my knowledge.
@ Brad
I hope you are right that Treasury would adopt a pragmatic and enlightened approach to Gulf depegging. Unfortunately, pragmatic and enlightened have not been descriptive of US foreign policy in recent years. Even if the Treasury supported depegging, the Treasury does not determine foreign policy so much as the Pentagon and CIA in the Middle East. Their agenda for the region is even less transparent than Wall Street’s Level 3 assets.
We know from former Treasury Secretary Paul O’Neill that the invasion and occupation of Iraq was contemplated from the very first cabinet meeting of the Bush administration in January 2001, so all of the justifications you offer seem to me to be “fixed around the policy” to quote the Downing Street Memo - especially once Saddam agreed to exile in January 2003.
Perhaps Berserker at 2007-11-16 03:43:47 on Prof Roubini’s blog had it right. He quoted Ezra Pound: “The purpose of war is the creation of debt.” In that this war has been spectacularly successful.
What we do agree on is that the war in Iraq and the threat of war against Iran has elevated the oil price 10 fold and changed the economic balance of the world by impoverishing the USA and enriching the Middle East. It may further redistribute the world economy if oil insecurity drives innovation and investment in alternative fuels, with China and India leading and more nimble.
Few central bankers in the Gulf had prepared for the imported inflation they must deal with now, having spent most of their careers dealing with deficits rather than surplus. When the issue was first raised last year, many were outright sceptical that inflation was a real possibility or that any social unrest might follow. They are on a steep learning curve and it’s hard to know what actions might be taken as a result.
Conspiracy theories generally exhibit systemic failures of proportion with even a cursory analysis. Of course Iraq was about oil - and related upstream political and military risks. One principle objective was to secure longer-term transport of oil through the Gulf. But to suggest that today’s oil price is primarily due to the result is absurd. Iran is a similar situation before the fact. The geopolitical oil premium reflects the risk in the security objective, although global hedge fund mania determines the premium - not real supply and demand. And the alternative for the US is to ignore the risk in not seeking this stability objective? A number of moderate GCC members share this objective. Finally, the idea that GCC was incapable of following data on the US current account deficit, or deriving logical risks for the dollar, is quite baffling.
@ Guest
I agree that todays $98bbl oil was not intended as a result of war planning in 2001 or 2003. The Bush administration expected a “cakewalk” and even Bill Clinton opined that an invasion of Iraq would be over in a matter of weeks. If that had happened, maybe we would have had $25bbl oil, fat federal budget surpluses and a strong dollar instead of $98bbl oil, massive deficits and a weak dollar.
The reality is that no one likes being occupied by foreign invaders - especially when half the fighting forces are paid mercenaries answerable to no law. The result is a mess - militarily and financially.
I can assure you the Gulf did not anticipate inflation. The Fed lied about what it was doing, stopped publishing M3, assured everyone that financial innovation was ushering in a new paradigm - and sold the story worldwide. Yes, young central bankers in far flung countries were credulous and naive, but so were many old central bankers closer to home.
Written by London Banker on 2007-11-29 10:20:35
Perhaps young central bankers should have been reading the analysis of a young blogger named Setser!
@ Guest
ALL central bankers, young and old, should be reading Roubini and Setser!
i too will continue to read rubini and setser - but i plan to make any replies on the site of fellow bloggers “econobrowser.”
whatever makes posting a reply quick, simple and easy - they have it, but for me at least, rgemonitor doesn’t. i am afraid my thoughts are not so valuable that it is worth 20 minutes to get them on to this blog, brad. if the problem is at my end, how come econobrowser publishes the contribution in 15 seconds ?
@ gillies
My comments are published instantaneously here. I’m not sure the problem is at RGE rather than something your end as your comments are indeed valued here . . . I hope you stick around.
gillies — the posting should be instantaneous — i.e. 15 seconds. once the key word is typed in, it should be posted. if it isn’t these is some problem arising somewhere (either on the rge side or your side) — if you supple more details about your system (browser, etc) I can try to get the rge tech team to figure out what the problem is, tho obviously, I don’t have the internal clout to make it happen in quite the same way as an external contributer. my email is brad underscore setser at msn dot com and I can direct you the rge tech team, or just provide more details in the comments.
Gazprom May Switch Sales to Rubles as Dollar Weakens
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVUb9Bo2Ik4A&refer=home
@gillies,
This could help you, probably:
google a different internet operator’s DNS: name + DNS
Copy a DNS, go to system preferences, to Network, to Ethernet (or your the interface you use) and paste the new DNS number. Then save, and try it again.
It should work, sometime the DNS servers of your internet provider go down, and very strange things happen.
Few days latter, put this new DNS number in second place, after your usual DNS of your internet provider.
Luck!
@ London banker and next Guest.
To LB:
“I hope you are right that Treasury would adopt a pragmatic and enlightened approach to Gulf depegging. Unfortunately, pragmatic and enlightened have not been descriptive of US foreign policy in recent years. Even if the Treasury supported depegging, the Treasury does not determine foreign policy so much as the Pentagon and CIA in the Middle East. Their agenda for the region is even less transparent than Wall Street’s Level 3 assets.” Thumbs up!
I think you are right both, so the answer was given by Cassandra, some week ago, in this blog.
And, Brad, couldn’t it be that the dark mater is bigger than you paint it?
If black money flows wild in Europe (from Russian oligarchs, and ME Sheiks), why should the dark matter of half a century be 300 millions?
Shadow statistics or reckless US centrism, or both?
I agree with London banker paying in dollar does matter.
if you pay in dollar you sustain the debt.
because you have a reason to keep your dollar.
pricing in dollar just set the price but it’s also deadly dangerous, it could trigger a vicious circle through inflation
pricing is a catalyst for a spiralling debt cleaning if you pay in a non dollar currency.
in fact
Since the dollar is floating
(end of dollar-gold parity)
Since the average American is losing purchasing power.
(see Krugman’s great divergence)
Since he can’t be refinanced
(see fed funds “zero bound” problem)
Since the US economy is less attractive
(recovery of asia and post dot-com dramatic outflows)
The dollar zone is bleeding
Heavy trading of large amount of derivatives
was a temporary patch.
The liquidity crisis linked to ABCP paper triggered the sell off in august.
And the dollar falls from the tree but where is the ground ?
The ground is far yet but you can see the future of the dollar in the imports of big dollar holders and oil contracts are huge spendings for any industrialized country so that could change a lot of habits in world trade.
Lonodon Banker wrote:
“Dollar hegemony is less about the dollar being the currency of reference price than it being the currency in which actual payments are made. So long as payments must be in dollars, the USA can inflate itself out of any hole and still get its oil. If payments had to be made in another currency, that would require the USA to potentially borrow in that currency or adjust its fiscal and monetary policies against that constraint.”
Since the US appears to be in a pretty big hole, according to your theory of “dollar hegemony”, shouldn’t the US inflation rate be much higher? Or, like DC, do you believe the US government is conspiring to hide the true inflation rate?
Last Guest,
Read http://calculatedrisk.blogspot.com/
And fotget dollar hegemony, for a while.
Regards
It goes about that?
Now that it’s probably too late for this (massive) round of excessive risk taking by banks, Martin Wolf asks the right questions about how to deal with banks:
“Why does banking generate such turmoil, with the crisis over securitised lending the latest example? Why is the industry so profitable? Why are the people it employs so well paid? The answer to these three questions is the same: banking takes high risks. But the public sector subsidises this risk-taking. It does so because banks provide a utility. What the banks give in return, however, is gung-ho speculation.
(…)
Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies. Since we cannot accept the latter, I suspect we will be forced to move towards the former. Little can be done now. But when the recovery begins, we must impose higher capital requirements.
Banks play strategic functions in our economies, and thus cannot be allowed to fail. Knowing this, they take more risks than they would otherwise (to earn more when things go well, with the certainty to minimize losses when things go wrong). Governments do know that, and do try to regulate banks, but given the potential gains, banks employ legions of smart people dedicated to finding loopholes in the regulation of the day - and who get rewarded handsomely to do so.”
As we know, there is no morality in business. Whatever you can get away with is good - and in banking when you get to keep a good chunk of it, you do whatever it takes…
The New Deal found a solution with unsubtle, strict regulation (notably separating commercial and retail banking from investment banking). These limits have been taken down in the past 20 years, in the name of “efficiency”, and at the obvious cost of resiliency - and at the expense of citizens and taxpayers. They need to be brought back in. Increasing capital requirements is just one small part of it.
Whether US invaded Iraq to maintain the oil that is shipped to fuel Asia and Europe is debatable; as Middle Eastern Oil primarily goes to those regions with the US being far more diversified in its sources (look at the stats). What is not debatable is that Western oil companies are flush with profits for developing new sources or fields; or for redeveloping those that had been unproductive during the times of 10 or 20 or 30 dollar a barrel oil. This might be appropriate when nations manipulate their currencies in the debt for development game of false free market economies that we all extol.
” Whether US invaded Iraq to maintain the oil that is shipped to fuel Asia and Europe is debatable; as Middle Eastern Oil primarily goes to those regions with the US being far more diversified in its sources (look at the stats).”
Oil is a global commodity. The US has an interest in precluding a $ 200 oil outcome, regardless of its own supply sources.
i agree that dr. wolf asks a series of critical questions about banks.
Minimal US Credit Crisis exposure on Chinese Banking system - China PBoC survey
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/28/ccrock128.xml&page=2
The Daily Telegraph has been exclusively briefed on the discussions, which gave a rare glimpse of the workings of the communist regime and its financial operations.
Those present included senior executives from some of China’s “Big Four” commercial lenders, each of which has the government as its majority shareholder. Officials from the People’s Bank of China wanted to know whether the lending banks “had any skeletons in the closet”, according to one person present.
Had they, in other words, bought any Western loan packages whose value could be affected by the global “credit crunch” which had been sparked by America’s sub-prime mortgage crisis?
By and large, the answer was “no”. The insider said: “There was a debate which drew one general conclusion: that China’s capital walls had largely insulated the country’s banking sector from the crises elsewhere.
“There may have been a feeling of vindication, but there was not one of complacency.”
Strict regulations on the flow of money into, and out of, China meant that the contagion spreading across the rest of the world’s financial markets would have little direct impact on the world’s most populous country.
” Whether US invaded Iraq to maintain the oil that is shipped to fuel Asia and Europe is debatable; as Middle Eastern Oil primarily goes to those regions with the US being far more diversified in its sources (look at the stats).”
Oil is a global commodity. The US has an interest in precluding a $ 200 oil outcome, regardless of its own supply sources.
Uh, on top of that is the possibility that the upcoming enormous transfer of wealth flows into extremely unfriendly hands, for example, if there were a Wahhabist coup in Riyadh. Do we want a nuclear armed Israel facing off against determined foes with unlimited financial resources right on top of the world’s oil supply? 9/11 was a wakeup call to the risks, the Iraq invasion was a pretext to relocate large US ground armor and logistic support to the ME in case it’s needed.
Anyway, back to trade. Brian, I wanted ask if you could dedicate a post sometime to analyzing the relative size and nature of US exports. I think there are alot of misconceptions about this, but I’m having a hard time finding a place with the raw numbers ie where the US ranks in term of global export volume, what sectors make up the actual exports etc. I think some of your reader might be suprised at the data.
brian setzer = rock star (I think)
brad setser = author of this blog
best data source for export composition globally is the direction of trade statistics, but it tends to come out with long lags.
what are the common misconceptions in your view
Probably that the US is a larger exporter than most people think. I was wondering just how much the export of manufactured goods has declined, which year it peaked, stuff like that. What are the opportunities to increase our exports ie what sectors in order to reduce imbalances, or whatever other interesting tidbits you might come up with…
“brian setzer = rock star (I think)”
Sorry about that. A Freudian slip I guess. Brian got started doing neo-Rockabilly with the Stray Cats in the 90’s. I think he is still active running an outfit call the Brian Setzer Orchestra, a kind of retro rock/jazz/boogie woogie fusion band. You are not him, although you never know, he could be a distant relation. You ought to look into it.
” Uh, on top of that is the possibility that the upcoming enormous transfer of wealth flows into extremely unfriendly hands ”
Same difference, Jack.