Death of the Dollar

April 17th, 2006
(first posted in 2003) 
Trillions of US$ circulate outside of the US because the United States currency is also the de facto world currency. Your bank loan is based on US$. Australian commodities are traded in US$, and when we buy oil, we pay in US$. This is a happy circumstance for the United States, because they get interest on loans worldwide, and they can print as many as they like without suffering the fate that other countries would if they print more of their currency than is matched by increased production of goods; services or commodities … namely, inflation. This is not to say that these new, offshore US$ are without value, they are very valuable, because without them you cannot buy the world’s most valuable commodity, oil. That is, until now.     

Saddam Hussein tried to break the connection between dollars and oil. Under the UN Oil-for-Food programme, the US took Iraqi oil and paid for it in US$ via the UN. As that scheme neared its end Saddam declared that in future, Iraqi oil could only be bought with Euro. The US and like-minded countries then invaded Iraq, seized the oilfields and listed Iraqi oil for sale in US$. Next to try was Venezuela’s Hugo Chavez. Chavez makes oil available to Latin American nations and Cuba through barter deals. For example Cuba sends doctors to Venezuela; Venezuela sends oil to Cuba.

Next, and possibly most importantly, is Iran’s setting up of an oil and derivatives market, which will quote prices in euro. This market not only threatens the dollar, it challenges the existing oil and options markets which are US-based. The Iranian bourse will begin operating this March.

If, as seems possible, there is a sudden decline in the US$, then the countries which have large holdings of dollars, such as Taiwan; Japan and China, face a problem. China, which is said to have about US$1000 billion, appears aware of the threat. In November 2004, Chinese finance officials announced a sell-off of dollars. The US$ immediately plunged in value on world markets. Within minutes, the officials declared that there had been a misunderstanding, and the dollar recovered. The Chinese then tried to convert their dollars into oil, by making a bid for an American-based oil company with international holdings. This bid was blocked by the US government. The Chinese have since said that they are gradually diversifying their currency holdings away from the dollar, principally to euro. They have large oil contracts with Iran, and have used 2.3 billion of their dollars to buy a 45% stake in Nigeria’s OML130 oil and gas field. China also spent US$275 million for a 12.5 percent stake in Gorgon, Australia’s largest gas field, and contracted to buy, at set prices, 100 million tons of liquefied gas from the field.

What would a collapse in the US dollar mean to Australians? Would we be able to move to euro-based bank loans in an orderly way? Our economy is largely based on commodities, which would retain real value, but are we bound by contracts with prices in US$. Most of our exports go to Asia, not to the US, so in the medium to long term, we should be OK. As for the short term, a collapse of the dollar is certain to have an enormous impact not only on our financial institutions, but also on our political ones. I have a tired old brain, my scrying-glass is dim, and The Voices offer their uncanny advice less frequently, so I do not have a clear picture of the repercussions. You might have to ask the Federal Treasurer, the Hon. Peter Costello what provision he has made for this eventuality.

Click on Comments below for a chronology of reports from international sources and Big Island comments as this story developed …

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