The Demise of the Dollar - October, 2009

The Demise of the Dollar

Max Keiser: Dollar to be buried way before 2018:

US dollar to die out in oil deals?

Robert Fisk on the Gulf 'ditching the dollar' in oil trade:

October, 2009

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Report: Secret Plot Against Dollar

A report published Tuesday by a British newspaper sent shockwaves across the world. The Independent story, entitled "The demise of the dollar," claimed that several key governments around the world were conspiring in secret meetings to stop trading oil in U.S. federal reserve notes. Calling it a “graphic illustration of the new world order,” the paper reported that Arab governments, China, Russia and even France and Japan would drop the dollar and start pricing oil with a basket of currencies — the Japanese yen, Chinese yuan, the euro and a new currency being created for members of the Gulf Co-operation Council that includes Saudi Arabia, Kuwait, and Qatar. The report was mostly based on unnamed Arab and Chinese banking sources.

According to The Independent, the secret meetings between finance ministers and central bankers have already been held. The transition should be complete following a nine-year timeline, with a deadline of 2018. And American officials know of the plan and the meetings, though not the details, the paper reported.

"These plans will change the face of international financial transactions," an anonymous Chinese banker told The Independent. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Immediately after the news broke, representatives from at least Kuwait and Saudi Arabia claimed that the report was inaccurate. "At our level, no," said Kuwait’s oil minister, Sheik Ahmed Al Abdullah Al Sabah, according to an Associated Press report entitled ‘Officials deny UK media report on move from dollar.’ "I didn't even dream about it."

Gold hit a record high at over $1,040 an ounce amidst the news, while the dollar fell sharply against world currencies. A Reuters analysis of the report about the secret meetings claimed it was “a potentially major sign of the greenback's fading status.” The research director from called it “another chapter in the plot against the dollar as the world’s most dominant reserve currency.”

This would certainly not be the first call to end the dominance of U.S. currency in world trade. The United Nations recently called for creating a new global monetary system, while Russia and China have both called for an end to dollar hegemony. Officials around the world have also expressed deep concern about the Federal Reserve’s inflationary policies and artificially low interest rates.

The Independent article also highlighted an alleged potential for military and economic confrontations between the United States and China, citing statements made by government officials. "Bilateral quarrels and clashes are unavoidable," China’s former special envoy to the Middle East told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

Diversifying away from the dollar will be a tricky undertaking for countries like China, Japan, and the Gulf Arab states. They hold trillions of dollars in reserves, and if they started selling rapidly, the price would tank, eroding a significant part of the value of their reserves. But it is not impossible, or even unthinkable.

If and when the world does ultimately abandon the dollar, it will be bad news for the American economy. Faced with the prospect of rising prices for imports and a manufacturing base that has been shipped abroad, consumers will find themselves increasingly strapped for purchasing power. But with the Federal Reserve printing debt-money like it’s going out of style, can anyone really blame other countries for wanting to get out?


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