The US Dollar Has Failed. We Need To Delink.

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Ready's picture
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The US Dollar Has Failed. We Need To Delink.

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Marla Singer at ZeroHedge wrote:

Remember all that pooh-poohing when the gulf states were talking about their own currency?  About how silly that would be?  That it would never happen?  Yeah well, sort of looks like it might.  True, there is a deep and very comfortable denial in the United States such that the country can spend anything it wants, pump debt to any level it likes, play whatever games it wishes with the way it counts spending, and still enjoy the benefits of a reserve currency indefinitely.  That denial may be just about ready to hit reality:

“The Gulf monetary union pact has come into effect,” said Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

 

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil reserves, and financial clout equal to that of China. Saudi Arabia, Kuwait, Bahrain, and Qatar are to launch the first phase next year, creating a Gulf Monetary Council that will evolve quickly into a full-fledged central bank.

 

The Emirates are staying out for now – irked that the bank will be located in Riyadh at the insistence of Saudi King Abdullah rather than in Abu Dhabi. They are expected join later, along with Oman.

 

The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency – dubbed “Gulfo” – is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. “The US dollar has failed. We need to delink,” said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank.

Well, Ben is certainly Man of the Year for proponents of a Gulf currency.

The "Gulfo", should it come to pass and the oil trade become denominated in them, has a significant impact on the US and moves us one more step closer to the 5th Horseman.

Anyone care to take a guess if all of the USDs employed in the Petro market come home would do to the value of the USD?

 

V's picture
V
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Re: The US Dollar Has Failed. We Need To Delink.

Just how many btu's can be liberated from one USD bill?

I think I will get a book on what useful things you can do with paper.

 

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Re: The US Dollar Has Failed. We Need To Delink.

As poor as the prospects are for the Dollar, there is no way I would put my wealth in anything that any of the middle eastern countries control.  The stability is a total joke.  I would rather take a shot holding dollars than fiat from Kuwait.  Remember, it was not long ago that Kuwait was taken over in a matter of hours - from a country that the US then took over in a matter of a couple of days.

There absolutely needs to be military backing to any fiat currency to have stability.  No one has that in the middle east now, and until that happens, any fiat currency they produce will be more risky than the US paper.

Also, take a look at what just happened with Dubai.  Holding back debt payments - without looking for bailout before it happened - and releasing that news on the Friday after a US holiday - - -well, thats high school politics and not the people I want backing any wealth I have.

Ready's picture
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Re: The US Dollar Has Failed. We Need To Delink.

Rickets,

Excellent points. I would respond that you don't have to put your wealth in the Gulfo rather than the dollar to be effected by this, unless you don't need petroleum that is.

This may be an oversimplifiction (I am of feeble mind) but if I want to buy an apple, and the only guy that has an orchard doesn't accept USD, I get what he wants or go without. This would mean that the trillions used in the petro market would become useless for this purpose, which in turn should find thier way home as people trade out of USD to aquire Gulfos. Double hit for the US.

To me, this can be viewed as nothing less than a challenge of the USD as reserve currency status.

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Re: Euro Issues may spike dollar/hurt gold?

Another note - with the European Union issues accelerating, its not unlikely insitutions get less comfortable holding Euros and euro denominated assets.  If/as they transfer portions of their wealth to other assets - that could mean a bid to the dollar....and perhaps US equities.

This would not be a move of money that would be based on valuation of US dollars or equities - rather than a flight to anything outside the Euro.  This could also cause strange behavior in gold - - as it might spike way up in euro terms, but actually could go down in dollar terms.

My point isnt to offer advice or a prediction here - -only to make people aware that if the Euros future continues to deteriorate or become even more uncertain, that money will flow elsewhere in seemingly irrational ways - and might influence prices in ways very opposite to the forecasts the majority of this community have.  As always, in times like these, its important to not get married to an opinion as unpredictable market forces may change and cause several years of deviation from what at one point seemed inevitable.

In dollar terms, this might mean a huge rally, and in gold priced in US dollar terms that could lead to a serious decline.  It may also put a bid in US equities.  Again - not making a call on what will happen - - its just a good time to consider new and market moving developments with extreme implications.  Very interesting developments for sure.

 

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Subprime JD
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Re: The US Dollar Has Failed. We Need To Delink.

As always, in times like these, its important to not get married to an opinion as unpredictable market forces may change and cause several years of deviation from what at one point seemed inevitable.

That is a very very good point. Alongside with all the other things you mentioned, instability in fiat will take place all over the world. The EUR is becoming more unstable as is the USD. China refuses to allow YUAN to float. The Japs continue to debase alongside the swiss FR. Where does one put their money??

Trading this market is a gamblers move and the gamblers with access to the best and fastest information win. Hence, GS and JPM have a huge advantage over us at the table.

Long term, i see volatility in the currency markets. The biggest factor here is that the USD is the world reserve currency and that millions of wealthy people have USD as a store of wealth.  For example, i know a doctor in Greece that owns $1 million in USD. The EUR does not hold this status thus a decline in the EUR would not be as precipitous. The US continues to print at a rate greater than the EU. The EU, has a higher risk of nations leaving the group. Time will tell.

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Re: The US Dollar Has Failed. We Need To Delink.
Karl Denninger wrote:

Today's lesson in falsity is the announcement, long rumored, by the Gulf States that they will be forming a common currency, breaking the formal and informal dollar pegs that have controlled the price of oil and kept the petro-dollar recycling mill operating, allowing The United States to force our inflationary policies down the Arabs' throats.

“The Gulf monetary union pact has come into effect,” said Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil reserves, and financial clout equal to that of China.

Potentially displacing my tailfeathers.  That displacement is now assured.

Oh, and it doesn't stop with just money either:

The GCC also agreed to create a joint military strike force – akin to the EU’s rapid reaction force – to tackle threats such as the incursion of Yemeni Shiite rebels into Saudi territory earlier this year.

They nevertheless repeated on Tuesday that “any military action against Iran” by Western powers would be unacceptable.

Well there you have it.

China will be next with a Pan-Asian common currency and exchange system.  The rumblings have been coming from there too, and they'll be followed by action - if for no other reason than that with the unpegging of oil from the dollar there is no longer any reason for China to continue to maintain a dollar hegemony of its own, and in fact doing so could be extremely damaging to China's economy.

link

So, it would seem there is a Military compliment for this news, and at least Denninger thinks China is next.

Maybe we will buy oil with arms...

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SagerXX
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Re: The US Dollar Has Failed. We Need To Delink.

Whether or not this is a death blow to the US$, it's hard to think of it as good news.  At least, it's a step away from the US$ being the unquestioned reserve currency, and I'd think at least some of those $s held outside our economy would come home to roost...

Viva -- Sager

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