I was wondering when this story would hit. I think this is the "real" reason for the war. I've tried to make this argument in private and it's been, ummm, not well received. And while this article certain doesn't settle any questions, I'm glad to see it getting some air.
Effectively, the normal standards of economics have not applied to the US, because of the international role of the dollar. Some $3 trillion (£1,880 billion) are in circulation around the world helping the US to run virtually permanent trade deficits. Two-thirds of world trade is dollar-denominated. Two-thirds of central banks' official foreign exchange reserves are also dollar-denominated.

Dollarisation of the oil markets is one of the key drivers for this, alongside, in recent years, the performance of the US economy. The majority of countries that require oil imports require dollars to pay for their fuel. Oil exporters similarly hold, as their currency reserve, billions in the currency in which they are paid. Investing these petrodollars straight back into the US economy is possible at zero currency risk.

So the US can carry on printing money - effectively IOUs - to fund tax cuts, increased military spending, and consumer spending on imports without fear of inflation or that these loans will be called in. As keeper of the global currency there is always the last-ditch resort to devaluation, which forces other countries' exporters to pay for US economic distress. It's probably the nearest thing to a 'free lunch' in global economics.
Iraq is the only major oil exporter to clear their sales in Euros. Iran is reportedly "contemplating" a switch. There is a much longer paper about this subject. I'll dig up the link.
- jim 3-28-2003 10:42 pm

Petroeuros could be interesting if the US continues to run vast trade deficits. Long term, if you keep "printing money", you effectively devalue the dollar and make it less valuable to overseas creditors. James Grant made a similar point on trade deficits a few days ago.
- bruno 3-28-2003 11:33 pm





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