Tuesday, October 6, 2009

Dollar Replacement Rumbles Begin

Wow, what a night. The dollar falls sharply, with gold up up up, all due to the DENIED rumor of Gulf state movement to leave the dollar. The Independent yesterday released a bombshell of a report detailing a secret plot to abandon the dollar in the oil trade (http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html). The process is supposed to take 9 years, but markets reacted sharply in the following 24 hours!

The most amazing part of the story is the American press's complete lack of coverage of it. With today's movement in the dollar and gold, it seems they will have to cover it. We shall see.

Reuters India reports:
"...analysts said that while individual countries would find it relatively easy to stop using the dollar in settling oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort. The newspaper story did not make clear how the change would work, and many analysts doubted it would occur any time soon."

Frankly, this is assurance without substance. Why would it require massive effort? It could be done tomorrow! We are approaching the borderline between orderly and disorderly collapse of the dollar, meaning, how long will it take?

Every major non-NATO country has already come out and said they desire dollar replacement, and the Gulf states have already publicly stated their desire for a regional currency, so the latest denials ring hollow:

But top officials of Saudia Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks. The two countries are the world's largest and second-largest oil exporters. Asked by reporters about the newspaper story, Saudi Arabia's central bank chief Muhammad al-Jasser said: "Absolutely incorrect." He repeated the same response when asked whether Saudi Arabia was in such talks. Kuwait's oil minister made similar remarks, while Russia's deputy finance minister Dmitry
Pankin said: "We did not discuss this at all." Algerian Finance Minister Karim Djoudi told Reuters: "Oil producing countries need to stabilise revenues but...I don't see a need for oil trade to be denominated differently."


Herschel Talker said...

Sorry dude. Contrarian indicator. Debt deflation is king for the time being. Short squeeze on the dollar to commence in 3...2...1...

Jim in San Marcos said...

Hi Herschel

I don't see debt deflation. I see a bunch of people putting money in the banks and consuming very little. Inflation only shows up when people feel free to spend.

T-bone steaks, Potato Chips and Gasoline seem to have a mind of their own. My dollar won't buy as much food as it did last year.

I use food as a gauge of reality.

Justin said...

Interesting idea, Herschel. We shall see.

Justin said...

Jim, food is a very good gauge of reality!

Obviously, in response to Herschel, I understand debt deflation, that's what this blog is all about.

However, the collapsing dollar means inflation, regardless of debt deflation. Or rather, simultaneous inflation and deflation, as we are seeing. Inflation in consumer goods, deflation in debt-based asset classes.

In other words, everything gets more expensive while our net worth is wiped out. Great!

Herschel Talker said...


Great blog you have going. Keep up the great work, in both the content and the style. Your writing is spot on.

Justin: I agree with your last comment. Debt deflation will wipe out everything we want to go up. Meanwhile people fleeing fiat money could shoot up the things we don't want, and we'll get crushed twice. Beautiful. And we thought it couldn't get any worse than than Alan Greenspan.

That being said, I do think the dollar collapse is much further out than people think. It is like overturning the titanic. I don't see a crash, but more a slow erosion over time. It is in no one's best interest for the dollar to get weak, so I don't really see a mass rush for the exits at once, though perhaps I'm wrong and a prisoner's dilemma ensues.

What I really see is the mother of all deflations, perhaps and likely to be followed by hyperinflation. But the hyperinflation could be much farther off than any of us imagine. China can cause deflation by forcing themselves away from an export-oriented economy and going at it on their own. Yes, they would eat it some on their dollar holdings, but in the process they would destroy us via hyperdeflation and they would live to fight another day and prosper. I don't think China has the power to cause hyperinflation, but they most certainly have the power to cause hyperdeflation.

Jim in San Marcos said...

Hi Herschel and Justin

I think we are confusing things by using the words "debt deflation" together. It lends itself to several interpretations. If you have lost your job, you have just undergone severe debt deflation. You can't pay your bills. If you hold the note on a house and the owner walks, I would label that as debt deflation (500k house is now worth 250k).

I do think you will both agree that we are seeing inflation and deflation at the same time only in different areas. Anything that can be financed is in a deflationary spiral. Things that are immediately consumable have doubled or tripled in price.

In my opinion, hyperinflation seems far removed. There is no currency really linked to gold, so every country can print money to keep up with the Jones's.

I think that the thing we need to realize is that the present mode we are now in is not sustainable long term. It is very detrimental to the economy, if not destroying it.

Justin said...

Good points, guys. We can look forward to inflation in all imported goods, at least, as the dollar keeps tanking. Since that includes oil, that includes almost everything, and should show up at the CPI level. I agree with you Herschel, that it should be a fairly slow process.

Severe inflation is also potentially driven by the repatriation of all those foreign dollars. Given that over half of the physical money supply is overseas, if all of that returned, that would be 100% inflation! And that is the kind of paper-dollar based inflation that the central bank cant control through open market operations.