How close are we to ‘Sudden Disorderly Adjustment’?


Richard Moore

Original source URL:

Vol.6 No.18, 24 May 2006

How close are we to 'Sudden Disorderly Adjustment'?
Margaret Legum

This article was published in the Business Report on Tuesday, 23 May.

What are we to make of the growing chorus of fears about the possible collapse 
of the dollar? Is it a case of crying wolf again?

Those fears link four elements: Iran¹s stated intention soon to open its own 
electronic International Oil Bourse; its resolve to sell oil there in euros, not
dollars; the expectation that the price of oil will rise to over $100 a barrel, 
triggering world recession; and the demand for gold, rather than dollars, as a 
store of value.

Since the US is deep in debt, nationally and internationally, the dollar¹s value
depends entirely on the fact that it is a reserve currency for other nations. We
all have to keep reserves in dollars for two reasons. First, by an agreement 
made in the 1940¹s, the oil producing countries of OPEC agreed to sell oil only 
in dollars. That meant everyone had to hold dollars if they wanted to buy oil, 
resulting in two-thirds of all central bank reserves being in dollars.

That in turn means that the Americans have the privilege of producing the 
international currency. Creating money is nice work if you can get it. It is the
equivalent of having a mint in your backyard. You can buy what you want with the
new money, without having to supply the equivalent value of goods. America has 
been financing its annual deficit with the rest of the world ­ it borrows over 
$2 trillion a day - by simply making new money and spending it into circulation.

They will not be able to do that if we no longer have to buy our oil in dollars.
Its value would fall as nations switch to other currencies to buy oil or to gold
as a reliable store of value. The creation of dollars would not be available as 
a mechanism to cover the huge international debt. If that process began, there 
could be the kind of flight from the currency that has wrecked the economy of 
many nations within the past decade.

Even more alarming are suggestions that to avoid this possibility the American 
government is planning to invade Iran. The fact that the invasion of Iraq was 
preceded by unwarranted accusations of weapons of mass destruction, and that 
Hussein had threatened to switch sales of oil from dollars to euros, gives 
credence to such fears. The fact that Iraq¹s current chaos makes it a net 
importer of oil seems not to deflect American resolve.

What is the evidence for the possible imminence of this scenario? Associated 
Press on May 5 quoted top Wall Street analyst Bill O¹Grady of A.G. Commodities: 
ŒIf one day the world¹s largest oil producers allowed, or worse demanded, euros 
for their barrels, it would be the financial equivalent of a nuclear strike.²

On May 8, an editorial in right-wing Forbes Magazine, written by Bush supporter 
Jerome Corsi, predicts: ³If Iran wants also to seriously threaten the dollar¹s 
position as a dominant foreign reserve currency, a war becomes almost certain. 
The Iranian oil bourse may never be mentioned by US policy-makers as an official
reason the US decides to go to war with Iran, but it may end up being the straw 
that broke the camel¹s back.¹

A UK network on sustainable development has collected the evidence that this 
scenario may be round the corner. It claims the Western media has up to now 
self-censored on the issue ­ sounding alarm bells as the gold price soared to 
nearly $700. It records Al-Jazeerah, on April 30, reporting that ŒOil producing 
countries such as VenezuelaŠand a few of the larger oil consuming countries, 
notably China and India, have already announced their support for the Iranian 
bourse¹ An article : Petro-Euro: a reality or distant nightmare for US¹ quotes 
US security expert William Clark saying ŒIf Iran threatens the US dollar in the 
international oil market, the White House would immediately order an attack 
against it¹.

Gold is now at a 20-year high against the dollar, and the dollar at a one-year 
low against the euro. The Financial Times of May 16th, under the headline: 
³Fears for Dollar as Central Banks Sell US assets² reported that Œcentral banks 
sold a net $14.4 billion during the month, the largest sale since August 1998.¹

At the opening of the IMF meeting on April 21, Russia¹s Finance Minister said 
his country Œcould not consider the dollar a reliable reserve currency because 
of its instability¹. The same day the Swedish Riksbank halved its dollar 
holdings to buy euros.

At that IMF meeting the 2006 World Economic Outlook was launched, warning of a 
dollar collapse ­ due to global trade imbalances, spiraling US debt and the 
demise of the petro-dollar reserve standard. In the language beloved of 
obfuscating economists who hope thereby to soften the truth, it stated: ŒGlobal 
current account imbalances are likely to remain at elevated levels for longer 
than would otherwise have been the case, heightening the risk of sudden 
disorderly adjustment.¹

ŒSudden disorderly adjustment¹ is the current bankers¹ euphemism for the 
consequences of a dollar collapse. Others, including Morgan Stanley economist 
Stephen Roach, as well as financiers Soros and Warren Buffet, refer to it as 
Œeconomic Armageddon¹. How close are we to that?

© South African New Economics Network 2006. Page generated at 12:49; 31 May 2006

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