Why is this important?
Because so much of the world's trade is in oil.
What dollar hegemony does is to transform the dollar-denominated payments imbalance of the United States into a dollar-denominated debt bubble in the US economy. Holders of US debt and assets are rewarded with high nominal returns provided by a high growth rate reflecting rising asset prices denominated in money that constantly loses purchasing power.World trade is now a game in which the US produces dollars by fiat and the rest of the world produces things that fiat dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture dollars needed to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong US dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it even stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in US dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petrodollars is the price the United States has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
By demanding that oil sales are denominated in dollars, the dollar sees a huge artificially-created boost in demand. This is a huge competitive disadvantage for the rest of the world
All central banks have since been forced to hold more dollar reserves than they otherwise need to ward off sudden speculative attacks on their currencies in financial markets. And dollar reserves by definition can only be invested in US assets. Thus dollar hegemony prevents the exporting nations from spending domestically the dollars they earn from the US trade deficit and forces them to finance the US capital account surplus, thus shipping real wealth to the United States in exchange for the privilege of financing US debt to further develop the US economy.
The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency, the US in essence owns the world's oil for free. And the Quantity Theory of Money dictates that the more the US prints greenbacks, the higher the price of US assets will rise. And by neo-classical definition, a rise in asset value is not inflation as long as wages lag behind. Thus a strong-dollar policy gives the United States a double win while workers everywhere, including those in the US itself, are handed a double loss.
This is very important to our economic standing in the world. Normally we could threaten invasion, as we did when Iraq dropped the dollar. However, the U.S. currently has its hands full with two very expensive wars, and Iraq isn't producing much of that dollar-demanding oil. Invading the entire Gulf would halt oil production, which would drop demand for the dollar. African oil producers, along with Venezuela, would either drop the dollar immediately or cut off exports, forcing us to buy through third countries at a markup. We simply cannot invade the entire oil-producing world at once while maintaining oil production. Certainly China would see this an existential crisis. Anything Bush could do would have to quick and decisive, and would have to be more than air strikes.
Iran drops dollar from oil deals: report
TEHRAN (AFP) — Major crude producer Iran has completely stopped carrying out its oil transactions in dollars, Oil Minister Gholam Hossein Nozari said on Saturday, labelling the greenback an "unreliable" currency.
"At the moment, selling oil in dollars has been completely halted, in line with the policy of selling crude in non-dollar currencies," Nozari was quoted as saying by the ISNA news agency.
"The dollar is an unreliable currency, considering its devaluation and the oil exporters' losses," he added.
The world's fourth largest oil exporter, Iran has massively reduced its dependence on the dollar over the past year in the face of US pressures on its financial system and the fall in the dollar.
Nozari did not specify in which currencies Iran was now being paid. In the past, officials have said most oil income was in euros, with a significant percentage in yen.
Japan, which purchases 20 percent of Iran's crude oil, has recently agreed to pay for the crude oil in yen, officials have said. The UAE dirham has also been mooted as a possible payment currency.
Iran has in the past months been whittling down the proportion of dollars in its oil revenue income. Officials in October said that dollars accounted for only 15 percent of payments and predicted the amount would fall to zero.
However, the oil income is still being booked in dollars.
The United States has in recent months successfully encouraged major European and Asian banks to cut their dealings with Iran in a bid to make the Islamic republic give way on its controversial nuclear programme.
Washington has also blacklisted major Iranian banks for alleged support of terrorism and seeking nuclear weapons, charges denied by Tehran.
Iran has also reduced its dollar assets held in foreign banks and urged OPEC to take collective action to price oil in other currencies such as the euro, instead of the US currency which is used across the world at present.
The fall of the dollar, which has weakened considerably against the euro and other currencies in the past 12 months, has affected the revenues of OPEC members because most of them price and sell their oil exports in the US currency.
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Iran completes move away from dollar reserves
By Babu Das Augustine, Banking Editor
Published: October 22, 2007, 22:50
Washington: Iran's central bank governor has said that the country has completed the process of diversifying its external reserves away from the dollar.
Tahmasb Maaheri, who took over as the central bank governor of the country, told Washington-based Emerging Market magazine the process of diversification is almost 100 per cent.
"We have done our best to implement this diversification in both our resources, instruments and forex reserves in order to get maximum out of our assets," he said.
Currently, most of Iran's trading partners are making payments for oil in currencies other than the dollar.
Iran's move to diversify away from the dollar has been partly motivated by political tensions with the US and partly due to the weakness of the dollar in the past two years.
In recent years, Iran has been calling for reserve diversification and pricing of oil against a basket of currencies.
Although many countries in the Middle East are not as vocal as Iran, recent statistics from US Treasury Department indicate that many of them are diversifying their reserves away from dollar denominated assets.
Data
The latest data from the US Treasury showed outflows of $163 billion from all forms of US investments in August. While Japan and China led the withdrawals, the new revelation has increased fears of further withdrawals, significantly by Gulf central banks and government-owned funds.
Asian investors sold $52 billion worth of US Treasury bonds in August. While Japan sold US Treasuries worth $23 billion, China and Taiwan sold $14.2 billion and $5 billion, respectively. It is the first time since 1998 that foreigners have sold Treasuries so heavily.
Gulf central banks, which hold only a fraction of their total foreign exchange reserves, continue to maintain more than 70 per cent of their reserves in dollar denominated assets.
However, the government-owned investment funds who control the bulk of oil export earnings, are understood to be diversifying away from dollar-denominated assets.
While Qatar recently admitted that it has diversified more than 50 per cent of its assets, investment banking sources have confirmed that most Gulf-based sovereign wealth funds have active currency strategies and many of them are diversifying their holdings.
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