Iran's Oil Bourse: A Threat to America?

In addition to nuclear weapons threats, Iran apparently has begun an economic offensive against America. According to Israel Insider (and several other publications), the Mullahs plan to open an international oil bourse (a European term for trading exchange) on March 20 that would trade petroleum using euros as currency. Currently the entire world uses American dollars for such trading, and Iran believes a euro-based exchange will encourage other nations to withdraw their ample dollar reserves involved. This, the Mullahs hope, would trigger massive dollar inflation and greatly increase the cost of and risk of default on foreign debt, sending the U.S. economy into a tailspin.

The article's author believes America is vulnerable both because foreign nations have accumulated large dollar reserves to help finance petroleum purchases and because America borrows large sums from these same nations to support its own budgetary overspending. With the euro available as an alternate currency, the foreigners will want to diversify so to hedge against any dollar depreciation, and the necessary dollar dumping will flood the U.S. market causing hyperinflation. Furthermore, without such high reserves, the foreigners will become less inclined to lend to America, and the cost of said borrowing (and hence the default risk) will rise. Collectively, the author predicts, this will lead to long term stagflation and the end of American economic dominance.

So now we must ask - is this threat legit? Does Iran really have such power over us? The possibility certainly seems alarming, but I wouldn't be so sure. Surely Iran aims to harm us, but whether their plan will succeed is another matter entirely. I believe Iran's strategy will fail due to several key factors the article's author overlooks.

First, oil trading is not a large part of our economy. Even if foreigners decide to trade oil entirely in euros, they are still likely to maintain their dollar reserves as backup for their enormous investments in U.S. stocks, funds, real estate, and other equities.

Secondly, even if they do begin to dump dollars, long-term inflation is no sure bet. America can always counter by lowering the cost of using dollars on its own NYMEX exchange, and naturally the foreigners will return to greenbacks to get a better deal. (See the first comment at the end of this article.)

In addition, a rise in the cost of foreign debt (unlikely anyway due to the two above principles) would have far less impact on the economy than the author conveys, because compared to GDP the debt itself is actually minimal. As long as GDP growth keeps up with debt percentage-wise (and we have little reason to believe it won't), we should run no greater risk of default than ever before.

Iran may intend to undercut the U.S. economy, but I don't believe their strategy will work. That's not to say they won't hurt us at all, but it shouldn't be nearly as catastrophic as they hope. The Mullahs may be overconfident as always, but then again, they haven't exactly been known for levelheaded political thinking. America must monitor this situation intently and respond as necessary, but market principles and our internal productivity should allow us to strongly pull through.

If we attack Iran, it will be motivated not by oil or economics, but to stop a fanatic regime from threatening the world with WMDs. As opposed to the oil bourse situation, on this issue we must hurry and act accordingly.

Comments

[Dodger K.]

Surfer,
Nice to see you entering into economics discussion. One reason why the Dollar has appreciated against the Euro is because U.S. risk free bonds offer a higher interest rate than that of European bonds. As long as Europe continues its high regulation, high tax, heavy spending policies, it will continue to grow at a slow rate, thus keeping borrowing rates low. In fact, despite what most economists say, look for the Euro to decrease in value. Here is why:

1) As mentioned-- European fiscal policies = stagnant growth = low interest rates = less investors will need to buy Euros because less people will want to invest in the low interest rates that Europe offers

2)Most economic commentators completely ignore the coming Jihad in Europe. As more people see Islamic violence erupt in Europe, investors will be less likely, not more likely to invest in Europe.

3)For at least the first 6 months of the year, I expect the spread between U.S. interest rates and European interest rates to rise. As I mentioned above, this will lead more investors to invest in the higher Dollar rate versus the lower Euro rate

4) Regulations. Regulations. Regulations. Even England (watch out Pound) is heading in this direction. As Europe becomes an even more hostile business environment relative to the rest of the world, European markets become less attractive. This is a continuing pattern.

5) Long term-- In 20 years, the average American will be twice as rich as the average Frenchman or German. Don't forget that when the Euro begins to tank in the next few years.

[Mini Me]

Dodger K, #5 sounds great to me, being an American myself! In regard to Iran, no matter whether or not this plan affects the American economy greatly, I think Iran's intent to intentionally attack and undercut the American economy serves as a legitimate secondary reason as to why America needs to respond to Iran in some form, with a military response being an option.

Meanwhile, in other news, Alec Baldwin has come out and called Vice President DC a terrorist. (http://www.huffingtonpost.com/alec-baldwin/will-they-go-to-court_b_15875.html)
This is just one more example that proves how liberal Hollywood has become. However, it isn't only Hollywood, but the U.S. Media as well… Why is it that not one news channel or newspaper in the United States will print or show the caricature of Mohammed, yet they are all willingly printing and showing the pictures from Abu Ghraib? Yes, prisoners were mistreated in Abu Ghraib, however it happened three years ago! And since then, several soldiers have been reprimanded, with jail time being involved. Everyone is aware that these mistreatments occurred, this isn't new news. Still, every U.S. media outlet shows the pictures, and these new pictures seem not to serve any purpose except making the U.S. look bad. By releasing these pictures the media isn't reporting anything. We are all aware of what happened, and the release of more pictures is simply an attack on America. Meanwhile, the caricature of Mohammed was actually breaking news and the most talked about news story for days. However, not one newspaper was willing to print the ads, and not one news channel was willing to show the caricature on tv? Why? Because they claimed they didn't want to offend the Muslim community, however when you release photos in regard to an embarrassing event that is three years old and no longer news anymore, you simply have one purpose, with that purpose being to embarrass America and make it look bad. How is the media not fully covering the news with the fear of embarrassing one interest group while they are willing to embarrass America by releasing photos in regard to an event that is a three year old story and no longer news? Not only is the media hypocritical, but this proves just how liberal the American media has become.

[verdant]

Hi Mini Me,

Yes, our mainstream media is clearly biased, but why? Answer - because it is primarily based on the coasts, where the blue state populations are located. Blogs are more representitive of the population in general. This is why major blue state newspapers are losing readers, and why liberal news broadcasts are losing viewers, while Fox News and the Washington Time are growing.

Eventually there must be sufficient consumers for products to succeed. The mainstream news outlets' drivel that dissimulates a news has never been more apparent than the contract between the newsworthy caricatures that the mainstream U.S. news outlets refuse to publish and the old non-newsworthy Abu Ghraib photos that are published with impunity, as you noted.

Similarly, one can sense the glee mainstream reporters have in promoting other non-newsworthy events, like the vice president's delay in informing the mainstream media of his recent hunting accident, and their offence at not being timely informed of such a non-event. One must learn to laugh at their obvious tendentiousness and hypocrisy, as they strive to push public opinion to the left. Fortunately, they are pushing with a string...

[Solid Surfer]

Dodger, thanks for the analysis. I agree - Europe's mainstream policies (in the fiscal, economic, and social arenas) greatly inhibit growth, and unless they change, the U.S. will pull further and further away from them.

Europe could easily change this by adopting American-style capitalism, but considering how they want to be the "anti-U.S.", I doubt they'll do anything about it until China and India start to surpass them, at which point they'll probably freak out enough to undertake some real reforms.

[Solid Surfer]

Most Americans don't buy the liberalism put out by the mainstream media, but I'm not surprised that the media doesn't get it.

It's very similar, I think, to the mainstream record companies who in recent years have been faced with a digital music explosion. CDs had been overpriced for a long time, and once consumers showed their preference for digital music through illegal dowloading, you would think the record companies would have taken advantage by offering a legal download service. But instead, they couldn't see the forest for the trees and tried to place all sorts of restrictions on digital music. Of course, consumers hated it, and then Apple swooped in with iTunes and took a vast majority share of the market.

Similarly, the mainstream media doesn't get the fact that their news reporting is out of touch with the views of the nation. But instead of shedding their liberal bias, they have remained entrenched in it, which has allowed alternative media (blogs, satellite radio, etc.) to come in and grab a large share of the market. Just like the record companies (who, not coincidentally, have been run by mainsteam media-types), the mainsteam media's information monopoly has been broken, and I certainly don't see it coming back.

[Rich]

Dodger K,

I do believe you are right on track. While the Euro may be strong at the moment, it cannot continue to hold its value. The current strength of the Euro against the dollar is basically hot air. It is difficult to determine exactly when, but the Euro will eventually crash. While the British Pound will probably face the same future, the Brits were intelligent enough to realize that the glamour of the Euro would be short lived. That is precisely why they stayed with the Pound.

[Imtiyaz Badeghar]

Hi all,

I really dont know why you all want america to be the superpower. Its very strange. Muslim countries should now try to be the superpower. It is now necessary. Iran is best available option now.