My friend asked why this would affect us, and at first I didn't really know. I knew it was bad, but wasn't sure why. I looked it up and found out why it was so bad, and wow is it bad. Here is the response I sent...
> How does oil being traded with Europe based on the euro verses the dollar
> impact the US?
I'm glad you asked.
"Although completely unreported by the U.S. media and government, the
answer to the Iraq enigma is simple yet shocking -- it is in large
part an oil currency war. One of the core reasons for this upcoming
war is this administration's goal of preventing further Organization
of the Petroleum Exporting Countries (OPEC) momentum towards the euro
as an oil transaction currency standard. However, in order to pre-empt
OPEC, they need to gain geo-strategic control of Iraq along with its
2nd largest proven oil reserves. The second coalescing factor that is
driving the Iraq war is the quiet acknowledgement by respected oil
geologists and possibly this administration is the impending
phenomenon known as Global "Peak Oil." This is projected to occur
around 2010, with Iraq and Saudi Arabia being the final two nations to
reach peak oil production."
So that's the war in a nutshell. So how does the currency fit in? ...
"Since 1945 the dollar has been the global oil transaction currency.
These dollars are recycled from oil production to the US as Treasury
Bills and assets in US stocks and real estate, which is a substantial
portion of the financial market. The EURO becomes the alternative
currency to nations wishing to switch."
I'm still not sure that I understand. Break it down...
"Oil can be bought from OPEC only if you have dollars. Non-oil
producing countries, such as most underdeveloped countries and Japan,
first have to sell their goods to earn dollars with which they can
purchase oil. If they cannot earn enough dollars, then they have to
borrow dollars from the WB/IMF, which have to be paid back, with
interest, in dollars. This creates a great demand for dollars outside
the U.S. In contrast, the U.S. only has to print dollar bills in
exchange for goods. Even for its own oil imports, the U.S. can print
dollar bills without exporting or selling its goods. For instance, in
2003 the current U.S. account deficit and external debt has been
running at more than $500 billion. Put in simple terms, the U.S. will
receive $500 billion more in goods and services from other countries
than it will provide them. The imported goods are paid by printing
dollar bills, i.e., "fiat" dollars."
Whoa, so what would happen if we switched to the Euro? ...
"Economist commentator Sonja Ebron wrote, "An OPEC switch from the
dollar to the euro would bring a quick and devastating dollar and Wall
Street crash that would make 1929 look like a $50 casino bet." This
prediction was understood by the Clinton administration, but the Bush
administration took action to boost the petrodollar."
Sources:
http://www.ratical.org/ratville/CAH/RRiraqWar.html
http://www.thinkandask.com/news/thedollar.html
A very easy to read kind of history and explanation of this found here:
http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.html
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1 comments:
I am not a financial wizard here however if the mint prints dollars just to print dollars, that causes the dollars to be worth less, which in turn causes inflation both of which are bad.
Here is an article from businessweek which explains things, Has an author and is a reputable publication.
NOVEMBER 12, 2004
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NEWS ANALYSIS
By Steve Rosenbush
The Pros and Cons of a Weak Dollar
The humbled greenback boosts exports and creates jobs. Further down the road, if the slide isn't reversed, the entire world feels the pain
The U.S. dollar is the benchmark world currency, the standard by which all others are measured. And usually, it's the others that race to keep up with the symbol of U.S. economic might. But of late, the relationship has been reversed. The greenback has been sagging and wheezing and looking a bit soft around the middle. Its value relative to the euro has declined 8.3% this year, to $1.29 per euro on Nov. 11 from $1.17 on Apr. 26. The dollar has lost 21% of its value against the euro since President Bush took office in January, 2001.
The drop reflects the concerns of international investors, who hold 43% of the U.S. national debt, according to Gail Dudack, chief investment strategist at SunGard Institutional Brokerage, in New York. Foreigners have pumped enormous amounts into the U.S. over the past few years, and "now are getting nervous that too much of their assets are in dollars," says David Wyss, chief economist at Standard & Poor's.
VICIOUS CYCLE. The inclination to begin parking their money elsewhere became apparent after the Nov. 2 reelection of George W. Bush. Since then, investors in the Mideast and Asia have gone on a euro buying binge, says Tom Rogers, a currency analyst with Informa Global Markets. They're concerned that the policies Bush has promised to enact during his second term will worsen an already record federal budget deficit. Left unchecked, investors fear a soaring deficit will lead to higher interests rates, lowering the value of U.S. stocks and bonds.
The vicious cycle works like this: As the currency deteriorates, it becomes more expensive to import goods and services from other countries, fueling inflation. In an effort to pull investors back, central banks often raise interest rates when their national currencies lose value. But as anyone who remembers the '70s knows, the combination of rising interest rates and on-the-run inflation can be a devastating economic cocktail.
For now, inflation is under control. It's rising at a 2% annual rate, excluding volatile food and energy prices. Wyss expects it to stabilize at 2.5% next year. "It's not a big increase," he says. The Federal Reserve can continue to raise short-term interest rates at a slow, orderly pace to make sure the growing economy doesn't overheat.
Longer rates will rise slowly, too. Wyss says the 10-year bond will hit 5.5% next year, and that mortgage rates will rise to 6.75%, "still pretty low by historic standards," he says.
PRICIER IMPORTS. Meantime, the weaker dollar has some benefits in the short term. It could lower the trade deficit, which is dangerously high. And it stands to boost job growth, especially in critical areas such as manufacturing. Says Dudack: "The decline in the dollar may not be as onerous as it looks."
But the dangers of a weak dollar aren't evenly distributed, especially this time around. It's mostly a concern for countries in Europe and Asia. A higher dollar makes it more difficult for U.S. consumers to afford products imported from those regions, which rely heavily on exports as engines of economic growth. A weak currency typically leads to inflation, because it prompts companies that export to the U.S. to raise prices.
"Things aren't working that way this cycle, and it's unlikely that will change," Dudack says. Japan and other counties in Asia depend on exports for economic growth. They can't afford to raise prices, because anything that damages the U.S. economy hurts them directly, she says. They're holding the line on prices, taking a hit to their profit margins instead.
RISING EXPORTS. The falling dollar also stands to help the U.S. manufacturing sector produce more domestic jobs. As U.S.-made goods and services become cheaper compared to those of rivals in other countries, demand will increase. That will boost domestic production of machine tools, cars, even the long-troubled textile industry, according to Wyss.
Japanese-based auto makers are already increasing production at their U.S. manufacturing plants, Wyss notes, because these are now the low-cost suppliers, and those cars are being shipped to Europe. Wyss expects job growth to stabilize at about 175,000 to 200,000 jobs a month. As U.S. exports rise, that should help reduce the current-account deficit, which measures the outflow of capital and trade. It's way too high, at a current level that exceeds 5% of GDP.
Europe, which is in much worse economic shape than the U.S., now finds itself in a real bind. Economic growth there will range from 1.8% to 2.8% next year, according to Ronald Simpson, an analyst with Action Economics. Growth prospects in the U.S. are about 3.5%. Federal deficits in Europe, measured as a percentage of gross domestic product, are higher than they are in the U.S.
CHINA'S CHEAP RIDE. The unemployment rate in France is 9.9%, vs. 5.5% in the U.S. As the cheap dollar puts pressure on its export industries, Europe will have to find ways to spur domestic demand for goods and services. The most obvious method would be to cut interest rates, but the European Central Bank, worried about inflation, is nervous about such a move.
Making matters worse for the Europeans, China has pegged the value of its currency to the dollar. Under it's agreement with the World Trade Organization, Beijing doesn't have to let its currency float until 2008. Until then, China also gets to enjoy the economic boost that a cheap currency can bring.
None of this is reason for the U.S. to celebrate its battered buck. In a global economy, the U.S. needs a strong European market that can afford to buy U.S. goods, such as airplanes, to keep its economy going. A weaker dollar may be in U.S. interests for the next few years, but not at the expense of its trading partners over the long haul.
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