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3 The World Reserve Currency


If a debtor nation has borrowed in their own currency, they can create money to pay off the creditor. However when the created money is spend on the debtor's market it may cause inflation as it competes for the usual supply of valuables on that market.

If a creditor nation has lent in their own currency, the debtor nation can still create money to pay off the creditor but must buy the creditor's currency in the currency markets first. Again when the created money is spend on the debtor's market it may cause inflation as it competes for the usual supply of valuables on that market.

Inflation of a currency is an advantage for debtors, in that currency and a disadvantage for creditors in that currency. Clearly debtors prefer to owe in their own currency while creditors prefer to lend in their own currency.

Which is why a nation that is in debt  like the US prefers to owe US Dollars and pay in US Dollars.

World Reserve Currency

Every currency is controlled by a central bank, it has the sole right to create and destroy money in that currency. (i.e. the Federal Reserve controls United States Dollars USD and the European Central Bank controls the Euro EUR.)

The central bank determines the interest rate which will determine how much money is borrowed by, or lent to, the central bank. So the central bank can take steps to inflate or deflate the currency.

Seeing as the USD is the worlds primary reserve currency it has also been used to pay for many foreign products and in particular oil. These Petrodollars have often been invested, i.e. lent, back to the US where they have fuelled the credit boom. Result, the US owes a lot of dollars. In 2003 some $3 trillion were in circulation outside the US!

While the USD is still accepted in payment for oil etc, clearly the US can manage the USD currency to its advantage. i.e. devalue the currency if it so wishes. However if oil etc. was to be paid for in some other currency such as the EUR then it would have no such control.

In 1999 the worlds currency reserves consisted of  71% USD and 18% Euros, by 2009 this was  62% USD and 27% Euros.

An article in the Guardian in February 2003 titled When will we buy oil in euros? highlighted the threat to the dollar at the time. Here are the main points;

Iraqi oil, two-thirds of which was bought by US companies, could only be paid for in euros. 'It was a political move on the part of the Iraqi government to show that the euro could be a substitute for the dollar in denominating the oil price,' said Fadhil Chalabi of the Centre for Global Energy Studies. Soon after it Jordan launched its own bilateral trade scheme with Iraq, carried out entirely in Euros.

In 2002, in a little noticed Opec speech to a Spanish Finance Ministry conference, Javad Yarjani, a senior Iranian oil diplomat, said: 'It is quite possible that as bilateral trade increases between the Middle East and the European Union, it could be feasible to price oil in euros. This would foster further ties between these trading blocs by increasing commercial exchange, and by helping attract much-needed European investment in the Middle East.'

Yarjani said the 'critical question is the overall value and stability of the euro, and whether other countries within the union adopt the single currency'.

The eurozone was the biggest importer of oil in the world and 45 per cent of Middle East imports were from Europe.

'The Saudis are holding the line on oil prices in Opec and should they, for example, go along with the rest of the Opec people in demanding that oil be priced in euros, that would deal a very heavy blow to the American economy,' Youssef Ibrahim, of the influential US Council on Foreign Relations, told CNN.

In 2002 the former US Ambassador to Saudi Arabia told a committee of the US Congress: 'One of the major things the Saudis have historically done, in part out of friendship with the United States, is to insist that oil continues to be priced in dollars.

At the euro's launch Martin Feldstein, a Harvard economist, pointed to the possibility that the single currency could weaken the status of the dollar to the extent that it 'could complicate international military relationships'.

Feldstein was an outside contender to replace Alan Greenspan at the Federal Reserve. Oil pricing was just the background to a wider issue. The Bank of China and the Russian Central Bank are both rumoured to be waiting for the best moment to increase the holdings of euros. Only 5 per cent of Chinese reserves are held in euros, but more than 20 per cent of its trade is with Europe. Middle Eastern states hold $700bn of US assets, but comparatively little in Europe.

In December 2006 it all got worse for the US and the Times published this Iran turns from dollar to euro in oil sales from which I quote;

The world’s fourth-biggest oil exporter has inserted a clause in its oil contracts allowing it to request payment in alternative currencies. Gholanhossein Nozari, the managing director of National Iranian Oil Company, said that 57 per cent of Iran’s income from oil exports was now received in euros.

The move reflects a political desire for less reliance on the dollar, as well as a need to avoid further depreciation in currency reserves. Iran’s dollar holdings are thought to have fallen from 40 per cent of currency reserves to just a third.

Iran had announced plans in 2004 to develop an Iranian oil bourse, a commodity exchange that would become a Middle Eastern rival to the major exchanges in New York, London and Singapore, which set benchmark oil prices.

The Iranian bourse would also challenge the petrodollar by setting oil prices in euros. However, there has been little progress in establishing the bourse, which failed to launch as planned last March.

And the BBC said in the same year;

"Venezuela mulls euro oil switch - Venezuela's government has expressed interest in an Iranian move to ask buyers to pay for oil in euros rather than US dollars. The oil-rich nation said it planned to see if a similar scheme could be introduced to its crude exports."

It is clear that there are negative forces working against the Euro. Notably on Google finance and on Interactive Brokers trading platform since May until December of 2010 I have noted that any descent in the Euro price was highlighted with a flagged news item while any ascent even of greater magnitude was not.

The weaknesses of the Euro have been highlighted in turn even though these weaknesses should have been obvious from the beginning. The financial news media, which is predominantly controlled by the United States, has failed to highlight the US's Statedebts or municiple debts.

The total debt in a currency may be measured by examining the breadth of the currency, the amount by which broad currency exceeds narrow currency and on this measure the USD supports a far greater debt than the EUR. [TODO put in the figures.]

It seems likely that the CIA would have some soft covert involvement in trying to uphold the dollar and thus bring down the Euro, for two reasons. First their spend on media is ... and second because currency manipulation is part of their remit.

Here is what John Perkins has to say about it in his book "Confessions of an economic hit man";

A final comment on talking down the Euro from Sir Evelyn de Rothschild (born 29 August 1931). Rothschild Says 'It's Wrong' to Wish for Euro's Failure Nov. 23 (Bloomberg) -- Financier Evelyn de Rothschild talks about the outlook for Ireland's banking industry and the spread of the European sovereign debt crisis. He speaks with Bloomberg's Mark Barton during the Bloomberg Businessweek European Leadership Forum in London.

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