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$ Collapse in Iran

Hon. Ron Paul of Texas before the U.S. House of Representatives:

How can the dollar collapse in Iran?
An explanation by Rudo de Ruijter, independent researcher, Netherlands

The End of Dollar Hegemony C urrency War By Gordon Prather Chris Cook: The Nucleus of the Issue

The facts below explain why and how the new eurodenominated oil bourse (opening on March 20, 2006 in Tehran) w ill cause the collapse of the US dollar. This is a far more important issue, than the US allegations about an Iranian nuclear threat. These allegations may w ell appear to be a smoke-screen. Take 60 seconds to understand the key of the real issue. 1. How , since decades, does the US succeed to import more than it exports? 2. How did Saddam spoil the game? 3. How w ould the dollar collapse in Tehran?

Reversing the Polarity Ramifications of a Bourse by Krassimir Petrov

1. How, since decades, does the US succeed to import more than it exports? US debt is about 8,000,000,000,000 dollars. 45 percent is due to foreigners. How can the US incur such high debts? Thanks to OPEC's agreement (1971 and 1973) oil is exclusively sold in US dollars. This creates a permanent demand for dollars on the exchange market. Roughly 85 percent of the oil trade takes place completely outside the US. The related dollar cycle goes from exchange market, via oil purchasing countries, to oil producing countries, w hich spend them in different countries, w hich in turn bring them back to the exchange market. Back on the exchange market there are, generally and since decades, alw ays dollars missing (more demand than supply.) Reasons: a. The volume and price of the traded oil generally increases. More dollars are needed over time. b. Thanks to free trade, many dollars stay in use in international trade outside the US. c. Many foreign central banks keep dollars as strategic reserves. d. The US Treasury issues bonds, w hich w hen sold to foreigners, reduces the amount of dollars available abroad. So for decades, foreigners alw ays needed more dollars. The US treasury issued extra dollars. And here it becomes very

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interesting. There is only one w ay to make these dollars available abroad. Spend them around the w orld! The US w ould purchase goods, services, shares, investments etc. But the US never had to deliver anything in return. Foreigners needed these dollars to buy oil. The purchases w ere just inscribed on the trade balances and the amounts added to the US foreign debt. For the US, the oil trade w orks like a fairy credit card. Each time more dollars are needed abroad, this means "free" shopping. Nothing can be done about it.

2. How Saddam spoiled the game Saddam sw itched to the euro on November 6th, 2000. The exchange of the Iraqi dollar reserves soon followed. It created an overflow on the exchange market and the dollar started its descent. (See graphic.) Considerable numbers of international traders and investors reacted by sw itching aw ay from the dollar. Central banks would sooner or later have to exchange a part of their dollar reserves, too. By the end of 2002 the dollar had lost 18 percent. On March 20, 2003 the US invaded Iraq. On June 6th, 2003 the oil trade w as sw itched back to dollars. How ever, the descent of the dollar merely halted. In the meantime Iran had sw itched to the euro, too.

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3. How can the dollar collapse in Tehran? Iran has switched to the euro as of spring 2003. Versus the euro, and since the start of its descent, the dollar is 30 percent dow n now. The next Iranian step aw ay from the dollar is the euro-based oil bourse (foreseen starting March 20, 2006). The sole fact that there w ill be another w orld oil price quote, independent from IPE and NYMEX, w ill leave the US dollar w ithout defence, as soon as one single oil producing country sw itches aw ay from the dollar. If an oil producing country sw itches away from the dollar, the dollars related to its oil trade become superfluous and overflow the exchange market. Basically the US has three w ays to get rid of the overflow : 1. withdraw the dollars from the exchange market by issuing bonds; 2. get the dollars back into the oil trade by letting the oil prices rise on IPE and NYMEX; 3. export more than import. Method 1 still w orked partially betw een 2000 and 2003. Method 2 has been used in 2004 and 2005. The oil price doubled. (This w as probably more than the Treasury had counted on. A few hurricanes helped to push the oil prices sky high.) If, after March 20th 2006, Teheran keeps its oil price stable, just one sw itch-to-the-euro of an oil producing country w ill make the dollar collapse. The US w on't be able to deal with the superfluous dollars that w ill overflow the exchange market then. Method 1 w on't w ork: There is insuffiscient demand for bonds. (Short term rates are already inverted.) Method 2 w on't w ork: Rises in oil prices on IPE and NYMEX are more or less blocked, if Tehran's oil price remains stable. Method 3 w on't w ork: Increasing tremendously the US exports, is not a feasable short term solution.

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The Oil Bourse in Tehran will not only reduce the pow er of IPE and NYMEX. It will also have its influence on the exchange rate betw een dollars and euros. If oil gets cheaper in euros, there w ill be a rush on euros. And vice versa. Many countries each have their particular reasons to fear the upcoming bourse. Just an extra ride in the merry-go-round of Debts. The strategy of a w ar or embargo against Iran is shortsighted. The US may stop Iranian oil sale in euros and force the w orld to buy oil in dollars again. But w ith a US debt rocketing at higher and higher speed, very soon another non-dollar oil bourse (or even several) can be established elsew here in the world. A war or embargo w ould only mean a small extra time for the dollar miracle. It w ould be at a very high price.

A DETAILED OVERVIEW, with references to sources and proofs In 2002, most journalists did not see w hat w as behind the accusations that Iraq had W MDs. Today, most people do not know w hat is behind the accusations that Iran has plans for nuclear weapons. Iran's threat is not nuclear, but far more dangerous to the US. If Iran can open its upcoming euro-based Oil Bourse in Tehran on March 20th 2006, Iran w ill threaten the US dollar. Up to 1971, each US dollar represented a fixed amount of gold. During the Vietnam War, the US had printed and spent more money than their gold reserves allow ed. President Nixon had to abandon the gold guarantee. Since then the dollar value is determined by the law of offer and demand on the exchange market. Normally, the exchange rates betw een currencies reflect the health of their countries' trade balances. Countries that export more than they import w ill see their currency rise in value, and countries that buy more than they sell w ill see the value of their currency decrease. This is the case for all other currencies, but not for the US dollar. For 30 years the US has imported much more than it exported, and the trend is w orsening. [1] Normally, this should make the currency fall in value, but the dollar has not fallen. How is that possible? The same year Nixon abandoned the gold standard, the Oil Producing and Exporting Countries (OPEC) agreed they w ould only accept US dollars in payment for their oil. This has a major advantage for the US: all other countries w ould have to buy dollars first before they can obtain oil. This creates a permanent demand for dollars. Those foreign countries account for roughly 85 percent of the international oil trade. [2] This is the part of the oil trade that takes place outside the US, betw een oil producing countries and foreign countries. Call it the foreign oil trade dollar cycle: dollars are bought on the exchange market and spent in oil producing countries, w hich spend them in countries around the w orld. Those countries offer their dollar surplus on the exchange market and the cycle restarts. Oil commerce alw ays consumes more dollars. Global consumption increases, w hich raises demand for the dollar and allows the US to increase its production of dollars.[3] Since they are needed outside the US, they have to be made available abroad. This is w here it becomes very interesting. There is only one w ay to get the new notes outside the US: spend them and do free shopping around the w orld. (These notes have only cost the paper and the ink.) [4]

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Of course, this creates a debt, for the foreigners could use these notes some day to buy goods, services, shares, buildings or land from the US. But since they are now needed in the alw ays grow ing money cycle for the oil trade, there is no need to w orry about that. This system works like a fairy credit card. Although the US has already much too much debt, suppliers cannot refuse to deliver goods, because they need the dollars for their oil purchases. There are more sources of demand for dollars. Dollars disappear from the oil trade cycle for use in international trade betw een countries abroad. They form a huge amount of dollars that stays outside the US, only because of the preference of traders to use this currency. Nearly the w hole w orld needs dollars, so they are accepted nearly everywhere. Central banks, w hen they can, keep reserves in foreign money to protect their ow n currency. To explain it simply: if ever the money market w ould be glutted by their ow n currency, they could buy it back and offer the foreign currency in exchange. These foreign banks traditionaly choose to build up their stategic reserves in the best accepted currency on the market: the US dollar. For decades, the amount of dollars outside the US was generally grow ing. Each additional dollar abroad has meant it had to leave the US, the US has spent it abroad, and it has increased the US debt. Oceans of dollars are outside the US today. However, w hen traders lose their preference for the dollar, huge w aves might overflow the exchange market and make the dollar drop. The US Treasury, the Federal Reserve, has an efficient w ay to pull dollar surpluses aw ay from the exchange market: it offers bonds with interest. It is a good way to control the rate of the dollar. Pull more dollars from the market to see the rate go up, and pull few er dollars from the market to see the rate go dow n. These loans cost interest. To pay for the interest the Fed issues new loans, w hich adds to the interest to be paid. As a spiral the annual amounts have gone up and continue to increase. The national debt is increasing explosively now , at over eight trillion dollars ($8,000,000,000,000). [5] 45 percent is ow ed to foreign creditors. You have to be very optimistic to believe that this debt w ill ever be paid back. The only difficulty for the Fed is to find enough foreigners to buy their bonds. Traditional buyers are grow ing more reluctant. Often these are foreign banks and companies, w hich already have invested a lot in dollars. They fear that if the dollar collapses, their investments w ill be w orthless too. To keep the dollar miracle going, the buyers still continue to buy bonds. If they are shortsighted, they w ill think they get interest. If they observe better, they will notice they have to buy additional bonds first and that the interest is paid w ith their ow n money. Each year the US buys more goods than it sells. For the year 2004, the shortage on US commercial balance w as six hundred and fifty billion dollars ($650,000,000,000), meaning that in average each US citizen enjoyed $3,000 more imported products than he or she earned. You can express it as "the average productivity is too low " or "the government spends too much money". For instance, on the high military cost to fulfil the neoconservative dream to rule the w orld. [6] It w ill be an empire on credit, based on a strategy to keep the demand for dollars going, the dollar rate high enough, and Treasury Bonds attractive. Iraq

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Of course, Iraq's destiny had already been sealed in the neoconservatives' plans even before Bush Jr. entered the W hite House. In their eyes it is natural that the US should dominate the Middle East. The US is w orld's biggest oil consumer (25 percent of global oil consumption) and most of w orld's oil reserves are in the Middle East: Saudi Arabia (26 percent), Iraq (11.5 percent), Kuw ait (10 percent) and Iran (13 percent).[7] Iraq seemed already under control, as it had been paralysed since 1991 by the embargo. The UN and US had inspected the country during many years without finding anything suspicious. Sadam seemed already beaten. How ever, he still had a trick. Since 1997, Iraq had been allow ed to export oil in the Oil For Food program. In 2000 Sadam asked the UN to convert the account of the Oil For Food program from dollars into euros. The UN had no legal base to refuse it [8] and from November 2000 Iraq sold its oil in euros. As a result, the oil trade dollars became superfluous and overflowed the money exchange market, soon follow ed 10 billion from Iraqis dollar reserves. The dollar rate went dow n.[9] Seeing the dollar rate low ering, many operators in the rest of the w orld trade sw itched to the euro too, w hich lead to new waves of dollar offers on the exchange market and low ered the dollar rate further. For the US it normally does not seem a big deal to absorb surpluses of dollars by issuing Treasury Bonds, as long as there are enough foreigners to buy them. Once the dollars are absorbed, offer and demand w ould be stabilized again. Nevertheless, Iraq's sw itch to the euro reduced the market share for the permanent demand for dollars, and thus this reduced the upw ard force on the dollar rate. When the w orld oil price w ould rise again, there w ould not be any extra dollar needed in the Iraqi oil trade. It w ould permanently limit America's free shopping. Most painful, the US had no unlimited access to Iraqi oil anymore. It had to buy euros to dispose of it. In 2002 the fall of the dollar became more dramatic. The W hite House spread lies about WMDs and prepared to invade Iraq. Unfortunately the international community appeared to be reluctant. Meanw hile the dollar continued falling. In March 2003, the US overruled the Security Council and attacked Iraq. On June 6, 2003 the Iraqi oil trade w as sw itched back from euros to dollars. [10] Iran In spite of Iraq's sw itch back to dollars, the fall of the dollar merely halted. [9] In the spring of 2003 Iran had started to sell their oil in euros too. (Iran had announced its intention already in 1999, but Sadam actually sw itched to the euro in November 2000). Iran's move to the euro is logical if you realize that Iran sells 30 percent of its oil production to Europe and the rest mainly to India and China. The Iranian oil price w as still labeled in US dollars, but customers did not have to exchange their money into dollars anymore. From August 2003, the euro continued its march upw ards and the dollar continued to go dow n. Again huge amounts of superfluous dollars from the oil trade overflow ed the exchange market and had to be mopped up by issuing Treasury Bonds. How ever, this w ould not repair the needed permanent demand level. It w as not feasible to Invade Iran and turn the oil trade back into dollars, so a less popular method had to be used. The oil price

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should rise. This pumps the dollars into the oil trade again. For each extra dollar needed by the US, seven times more dollars are needed abroad (as 85 percent of the international oil trade takes place outside the US). To make up for the loss of the Iranian trade the price increase had to be substantial. US' military spending needed extra credit, and thus extra oil price increases. The prayers of the treasury have been heard. Betw een July 2004 and September 2005, spot prices doubled. [11] A few hurricanes helped US citizens, and the rest of the w orld's oil consumers, accept the new policy. To see Iran in the euro-camp is not pleasant for the US. It creates a grow ing demand for euros. On the contrary, the market share for the permanent dollar demand becomes narrow er and so does the acceptance of the dollar in international commerce. Betw een July 2004 and July 2005 the part of the dollar in w orld trade w ent dow n from 70 percent to 64 percenet. A little bit less than half of those 64 percent represents America's part in w orld trade.[12] Oil bourse in euros How ever, the biggest change has to come next month. On March 20, 2006, the Iranians want to start an oil bourse in Teheran, w ith prices in euros.[13] This can have big effects on the exchange rate between dollars and euros. If the oil price in euros gets low er than the oil price in dollars, there w ill be a rush on euros. And if it the oil price in euros gets higher than its price in dollars, there will be a rush on dollars. So, basically Teheran gets an influence in the exchange rate of the currencies, w hich means risks for both the US and Europe. Today Teheran is pressured and threatened by both. Fluctuations in exchange rates might also bother China's exports to the US. The New York based NYMEX and London based IPE would lose a lot of their power to set the world's oil prices. Normally, since Tehran's bourse has to be attractive for oil producers and oil consumers, it w ould not be logical to expect important differences in price w ith the dollar-based markets. Maybe just a bit low er, to build up a market share. Each loss of market share of NYMEX and IPE is a big problem for the US, since it determines w orld's permanent demand for dollars. But the problem can also become much bigger. At the moment that other oil producing countries sw itch to the euro, there w ill be new waves of superfluous dollars on the exchange market, w hich take the dollar rate dow n. For the US, mopping them up by issuing bonds will then hardly be possible, since traditional buyers and central banks w ill prefer to convert, as least partly, to the euro too. Pumping the dollars back into the oil trade w ith rises in oil prices w orked fine in 2004. But from March 2006 this w ay out can easily be blocked by stabel prices in Teheran. If prices in euros ramain stable, prices in dollars can hardly rise. Prayers on the NYMEX and IPE market w ill be rather useless then. If the US loses its means to get superfluous dollars from the exchange market, the fall of the dollar w ould be a fact. As by coincidence the Federal Reserve has decided that from March 23, 2006 they w ill not publish the M3 money aggregate anymore. To put it simply, they w ill keep secret how many dollars are held in non-American banks.[14] When the dollar falls There are a lot of speculations about w hat w ould happen w hen the dollar falls. In my opinion it all depends on what w ill be left of the permanent demand for dollars. As long as the dollar rate is

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not based purely on US imports and exports, any scenario of changings w ill turn out to be temporary. I do not say these changings w ould not hurt, but in the end the US w ould still have its credit card and can continue to buy on tick. Normally, w hen dollars become cheaper, American products and services become cheaper for foreigners. Instead of buying bonds, foreigners w ould increase their imports from the US. Simultaneously, foreign goods w ill become more expensive for the US. But once again, the US w ill profit from the oil trade. Oil producers w ill not accept a low er value for their barrels. If the dollar goes dow n 10 percent, their prices will "logically" rise 10 percent. (In this case the price converted to euros w ould remain the same.) So this w ould mean that the permanent demand for dollars in the oil trade rises w ith 10 percent again. At some point of the fall , the upw ard force on the dollar rate w ill be back, the US treasury will mop up the dollar overflow and the US can continue to buy on tick again. Outside the US many central banks detain enormous reserves of dollars and treasury bonds. These paper mountains would shrink in value. Many industries detain dollar denominated capital. In most cases their value w ill drop. Many banks in the w orld hold dollar denominated assets. They w ill have troubles in meeting the obligations to their clients. These difficulties may lead to a cascade of bankrupts. The essence of the problem The essence of the problem is the fact you need a special currency to buy oil. As long as the w orld needs dollars to buy oil, the US makes abuse of the situation and buys on tick from the rest of the w orld. The euro contains the same risks. As long as there w ould be a motor for a permanent demand for euros like, for instance, an euro denominated oil bourse in Tehran, the eurozone could make debts and let it increase indefinitely. To avoid such debts, the eurozone w ould have to export the equivalent of all euros needed outside its borders and keep the same amount in foreign currencies in their central bank. W hy w ould they? The credit trick w orked fine for the US during more than 30 years! When oil producing countries w ould sell oil in tw o or three different currencies, this simply means that the three involved countries can do the same trick as the US does now . In the long run it w ould multiply the problem by three. The only solution for this problem would be that oil selling countries accept all currencies on the market. Tehran has already taken into consideration to accept more than one currency and not just the euro. Step by step. For the outside w orld the diplomatic joust is about nukes, which seems more exciting. How ever, since 9/11 the w hole w orld know s that rather inexpensive terrorist solutions are much more effective to do harm and that even a big arsenal of nukes does not offer any protection. We are asked to believe Iran did not notice that and still w ants such old fashioned nukes. [15]

[1] http://w w w.census.gov/foreigntrade/statistics/historical/gands.txt [2] http://w w w.eia.doe.gov [3] printed is a w ay of speaking, since today many created dollars are just numbers on bank accounts.

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[4] If you prefer, you could convert the dollars into another currency first. That makes no difference. [5] http://w w w.babylontoday.com/national_debt_clock.htm (The show ed amount can vary from one internet provider to another. Probably due to internet-proxyservers that do not update often enough.) [6] http://new americancentury.org/ RebuildingAmericasDefenses.pdf [7] http://w w w.eia.doe.gov/emeu/ international/reserves.html [8] http://w w w.un.org/New s/briefings/docs/ 2000/20001031.db103100.doc.html [9] http://fx.sauder.ubc.ca/data.html [10] Financial Times, le 5 juin 2003 [11] http://tonto.eia.doe.gov/dnav/pet/hist/ w totworldw.htm [12] BIS (Bank for International Settlements) [13] http://ww w .iranmania.com/ New s/ArticleView /?New sCode=28176& New sKind=Business+%26+Economy [14] http://ww w .federalreserve.gov/ releases/h6/discm3.htm [15] Already during the Cold War the use of nukes was limited to frighten each other. Threats and reactions on threats w ere matters betw een presidents w ith red buttons. Today the reactions on threats or use of nukes do not simply depend on presidents and governments. They are much more difficult to control.

NOTE ABOUT GRAPHICS: Trade Balances 1960 - 2004 are made w ith data from http://w w w .census.gov/foreign-trade/ statistics/historical/gands.txt Dollar rate versus euro from 1998 to 2006 are made w ith data from http://fx.sauder.ubc.ca/data.html Oil prices fron 1998 to 2006 are made w ith data from http://tonto.eia.doe.gov/dnav/pet/hist/ w totworldw.htm LIST OF ARTICLES:

Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse by W illiam R. Clark (Friday August 05 2005) http://usa.mediamonitors.net/content/view /full/17450 Killing the dollar in Iran, By Toni Straka, "W ith the w orld facing a

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levels,"

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daily bill of roughly $5.5 billion for crude oil at current price http://w w w .atimes.com/atimes/ Global_Economy/GH26Dj01.html America's Foreign Ow ners, Thursday, September 22, 2005 http://w w w .thetrumpet.com/ index.php?page=article&id=1712 The Proposed Iranian Oil Bourse, Krassimir Petrov, Ph. D., January 17, 2006 http://w w w .321gold.com/editorials/ petrov/petrov011706.html Walker's W orld: Iran's really big w eapon, By Martin Walker, UPI Editor 1/19/2006 http://w w w .upi.com/InternationalIntelligence/ view .php?StoryID=20060118-052333-1392r Behind the mad rush to bomb Iran, W ebster Tarpley, Jan 25 2006 http://w w w .pressbox.co.uk/detailed/International/ BEHIND_THE_MAD_RUSH_TO_BOMB_IRAN -_Teheran_s_Euro-Based_Oil_Exchange_Spells _Doom_for_Dollar -_Interv_50885.html Short articles, February 06, 2006 http://w w w .whatreallyhappened.com/ archives/cat_iran.html Petroeuro, From Wikipedia, the free encyclopedia http://en.w ikipedia.org/w iki/Petroeuro Trading oil in euros - does it matter?, by Cóilín Nunan, Published on 30 Jan 2006 by Energy Bulletin. Archived on 30 Jan 2006. http://w w w .energybulletin.net/12463.html
Druckversion Leserbrief

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