Currency Warfare

As I watch us slowly go into war with Iran, I think about the dollar and its significance in our foreign policy.  I always tell people that the war in Iraq was not about oil it was about the currency that oil is denominated in. 

Today we are talking about bombing Iranian bomb factories (the irony is hilarious) over our currency - the dollar.  Now I don't want to get into what is right and wrong, because honestly I am not sure.  I know killing in the name of money is morally reprehensible, but at some point the dollar does become a matter of national security - because we have let it get to that point. 

This point of this blog is to provide a viewpoint and news that is uncorrelated with the general public.  That being said, I do NOT believe in invading Iran because of nuclear ambitions - quite frankly because I don't think they have them or are as capable as they are made out by our leaders.  I do NOT believe in invading Iran because of IED's, for the pure fact that we shouldn't have our troops in Iraq to begin with.  But I do believe that the debate should be based on reality.  Our tax dollars go towards such a military pursuit and it is no coincidence that the Iran acceleration happened in line with news such as this.  Please note that the events in Iraq came after news such as this.  We won't attack those who are doing business with us like Kuwait or Saudi Arabia, but those who we benefit from just simply doing business - countries who have to deal in dollars and therefore pump them through our banks and into our financial system - Iraq, Iran, Kuwait, and Venezuela. 

These are scary times where we are putting economic prosperity over national security and global geopolitical stability and unless we confront the truth we will forever be enslaved to our own rosy world view. 

Comments

[Bond investor]

ZB, we won't go to war with Iran. All we need to grind their sick economy (sick because of Ahmedinejad's subsidies, repression and politically-induced lack of foreign investment) to a halt is a gasoline embargo. The irony of sitting on top of all that oil, but not having the refining capacity to power the autos in Tehran due to government mismanagement. Now if we can just get the weenies on the Security Council to ever agree on an embargo...

Also, Iranian claims of non-dollar oil income may well be true, but it doesn't mean it's any great accomplishment. Iran could accomplish the same thing by accepting dollars and then exchanging them for euros or yen via a commercial bank. It's still a global market for oil. If oil was cheaper in yen or euros than in dollars, arbitrageurs would eliminate that anomaly quickly. So a decline in oil prices, whether in USD or EUR, would lower Iranian national income. Oil futures have returned to "normal" backwardation -- futures prices lower than the spot price.

[Zero Beta]

I agree with a lot of what you say. I don't think at this present time we will go to war there. I think economic measures are good, however I also think our economic policy in that region has led to a more scary religious crusade against our country - separate from the actual countries themselves.

You mention that oil priced in Euros and dollars would get arbitraged away. I agree with you and I think thats the fear. If oil is cheaper in Euros than it is in dollars, an arbitrageur would simultaneously buy the oil and euros and sell it in dollars which is buying euros and selling dollars - weakening our currency against the euro. However, what I am talking about is just the effect of Petrodollars and the dollar reserves that they create. The fact that Arab central banks are shifting away from investing their reserves in dollars is something that scares us. They either use them to finance our deficit through Treasury Bonds, which in recent time has been used to support a war that is killing people in their region, or buy stakes in our companies which may or may not be such a great investment. Either way this helps our economy and pumps money through our banks brokereages which basically take a cut on the dollars that flow through them.

The move towards a Euro reserve I think is somewhat economic but also political. Europe is not in the Middle East bombing Arabs, so the Arabs are much more inclined to buy european bonds and euros. Obviously this a relationship that works both ways. European nations, aware of the situation, direct their political and foreign policy to benefit their economy and enable them to socialize healthcare and spend tons of money. IMHO,our problem is that we are not honest with ourselves in every aspect of these wars and don't realize the currency motivation behind confrontation.