What if oil was traded in euros?
April 23, 2003 2:14 PM   Subscribe

What if oil was traded in euros? "Even more alarming, and completely unreported in the U.S. media, are significant monetary shifts in the reserve funds of foreign governments away from the dollar with movements towards the euro. It appears that the world community ... seems poised to respond with economic retribution if the U.S. government is regarded as an uncontrollable and dangerous superpower." An analysis of the previous link. Apologies to those I
posted by Birichini (25 comments total)

 
've offended with another post relating to Iraq...

Damn I hate it when hit return too quickly!
posted by Birichini at 2:16 PM on April 23, 2003


In Euros? You're assuming some long-term divergence in the two currencies which would make us pay more? Bring it on. I doubt the Euro will be more than the "runner-up" currency any time soon. And probably by that time, we won't need OPEC anymore anyway.
posted by ParisParamus at 2:35 PM on April 23, 2003


hasn't this been posted 2 other times this year?
posted by reverendX at 2:47 PM on April 23, 2003


A few comments:

1. It really doesn't matter that much who's currency we're using if the transactions still end up being largely with America. The US is simply too important economically to by-pass.

2. There's a limit to how much foreign governments are going to want to sacrifice in order to annoy the United States. They voted against the war, but that didn't really have any immediate effect on their economies. Something as major as switching trading currency would. This is especially the case considering that the Euro is pretty much tied to the EU, which has an uncertain economic future.

3. A lot of foreign governments are not anxious to offend the US too much right now. Many nations depend on the US as a trading partner, or as a source of aid. Many of the nations that were against the war now would prefer to cater to the US to repair their relationship.
posted by unreason at 2:48 PM on April 23, 2003


Paris:
the effects of this shift would be more complicated. when your currency is the standard, it is stockpiled by other countries, which increases demand, and drives up the value. the relationship between the dollar and the euro is not the whole of the issue.
posted by Ignatius J. Reilly at 2:51 PM on April 23, 2003


Java chart of currency rates. This has been a good year for switching to euro, at least in the short term. It hit a high of $1.10 a few weeks ago.
posted by rschram at 3:00 PM on April 23, 2003


stockpiled by other countries, which increases demand, and drives up the value.

Do other country's reserves of $ really make that big a difference once they're stockpiled? And aren't those stockpiles relatively small when compared to all the $s in circulation, multipled by the velocity of those dollars?
posted by ParisParamus at 3:19 PM on April 23, 2003


rschram: I agree that the Euro has been doing well against the dollar as of late; however, people seem to forget that the Euro originally debuted at $1.17 back in 1999.
posted by reverendX at 3:22 PM on April 23, 2003


This really doesn't make any meaningful difference. But don't take my word for it. Paul Krugman, who's no fan of Bush Junior, pretty much blew this little "conspiracy theory" (his words, not mine) out of the water a month ago in this short essay on .
posted by Zonker at 3:28 PM on April 23, 2003


his website. (Aw, nuts--it looked just fine when I previewed it.)
posted by Zonker at 3:29 PM on April 23, 2003


From the guardian piece:
The US does very well from this arrangement. In order to earn dollars, other nations must provide goods and services to the US. When commodities are valued in dollars, the US needs do no more than print pieces of green paper to obtain them: it acquires them, in effect, for free. Once earned, other nations' dollar reserves must be invested back into the American economy. This inflow of money helps the US to finance its massive deficit.

Somebody needs to go back to macroeconomics class.
1. The US doesn't just print money when it needs to buy things. Last I checked, the inflation rate was very low.
2. Since dollars are traded everywhere, there's no special reason why dollars, once they leave, have to return to the US.
3. The US has a trade deficit, which means more dollars leave the US than come back into it -- it is 'losing' money on international trade, not 'making' money.
4. Even if the US had a net inflow of dollars, this wouldn't go directly to the federal budget to "help finance the [budget] deficit".

If this [oil being denominated in euros] happens, oil importing nations will no longer need dollar reserves to buy oil. The demand for the dollar will fall, and its value is likely to decline. As the dollar slips, central banks will start to move their reserves into safer currencies such as the euro and possibly the yen and the yuan, precipitating further slippage. The US economy, followed rapidly by US power, could then be expected to falter or collapse.

This reasoning is so far out in left field as to be laughable. The dollar doesn't derive it's value from OPEC using dollars for pricing. The fundamental value of the dollar comes from the fact that you can buy things in the US with them; ergo, anybody that trades with the US will still want dollars. Also, the author has confused cause and effect: the dollar would weaken if the US economy did, not vice versa.
posted by Mark Doner at 3:31 PM on April 23, 2003


And aren't those stockpiles relatively small when compared to all the $s in circulation, multipled by the velocity of those dollars?

yes. but "small" economic disasters ruin people's lives.
posted by Ignatius J. Reilly at 3:44 PM on April 23, 2003


Mark Doner -

1. The US doesn't just print money when it needs to buy things. Last I checked, the inflation rate was very low.
3. The US has a trade deficit, which means more dollars leave the US than come back into it -- it is 'losing' money on international trade, not 'making' money.


The idea is that these two combine to benefit the US; dollars are printed to buy things overseas, and inflation is low because these dollars stay there preventing a domestic surplus.
posted by copmuter at 3:58 PM on April 23, 2003


Apologies to those I've offended with another post relating to Iraq...

You're welcome to post on WarFilter if you're concerned about it.
posted by homunculus at 4:22 PM on April 23, 2003


copmuter:

That's the thing though, dollars just aren't printed to buy things overseas. They're printed to meet demand, as determined by the Fed. Also, most money is electronically 'created' by inter-bank loans, which has even less to do with the government's spending. Go look up the process by which money enters the economy sometime.
posted by Mark Doner at 4:26 PM on April 23, 2003


I'm hoping the dollar crashes. It's just disgusting that what I pay for a burrito is someone's monthly salary in Thirdworldia.

And also, I'd like to be able to pay off my student loans with a couple heads of cabbage... {dodges plummeting chunk of sky}
posted by zekinskia at 4:54 PM on April 23, 2003


The US is simply too important economically to by-pass.

With the countries who have just been accepted into membership (pending a few referenda, most of which are rubber-stamping the obvious), the GDP of the European Community will be as large as that of the US... and that's including the 'dollar hegemony', the influence on the USD's international value of it being the de facto world currency. If the coin was flipped, the euro would dwarf the dollar.

OPEC, of course, is well aware of this. OPEC's purpose is to stabilise the price of oil in world markets, and to do that it needs to anchor the price to a stable currency -- in other words, the largest one.

France and Germany, the dominant economies within the euro-zone, are well aware that OPEC is well aware of this. And suddenly the anti-war ducks start falling into a line...
posted by Hogshead at 5:10 PM on April 23, 2003


Anyone see 24 last nite? Kate is trying to buy off the criminals and hands them a stack of cash. "What the hell is this?" "That's 20,000 Euros, you can spend it anywhere in the world". "I want real money you bitch...kill her"!
posted by Mack Twain at 5:14 PM on April 23, 2003


it needs to anchor the price to a stable currency -- in other words, the largest one.

This is not always true. There was a time, back in the mid to late '70s, when the world markets considered the US dollar not to be worth the paper it was printed on, instead seeking things like Swiss and German francs and yen. That was not because our economy was not the biggest in the world, it was because our economy was in the crapper, we had out of control inflation and the implied promise represented by a dollar bill didn't have much credibility at the time.

In the intervening years that has changed, and the dollar is probably the world's most stable major currency, hence its desirability in the rest of the world. The EU economy could very possibly become bigger than that of the US, but unless its currency proves itself as stable as the dollar, it won't matter.
posted by deadcowdan at 6:29 PM on April 23, 2003


And also, I'd like to be able to pay off my student loans with a couple heads of cabbage...

Unfortunately that's not even funny. When the debt becomes unserviceable, that's exactly how the government will be forced to respond, with inflation.
posted by George_Spiggott at 7:26 PM on April 23, 2003


Oh, and I might add that the rich will not object to inflation if the only alternative is a tax increase: paying off debt with inflation is the ultimate in regressive taxation schemes.
posted by George_Spiggott at 7:27 PM on April 23, 2003


Dollars are transferred overseas (physically or otherwise) to procure goods and services, supply drops at home. The money stays abroad where it is amassed or circulated. In response to increased domestic demand, the central bank (I admit you've got me there) increases lending, based on national collateral, to major banks which then circulate the money (physically or otherwise) into the economy. Bottom line is an unchanged domestic money resevoir and a net increase in capital.

I'm no macroeconomist; yet I struggle to find the gap in this logic.
posted by copmuter at 7:35 PM on April 23, 2003


Well, copmuter, you have a point, but see the nice Krugman essay Zonker linked to. It seems that the amount involved is relatively trivial:
So the main thing is cash overseas - $300-350 billion of bills, mostly in large denominations, hidden under beds, being transferred among criminals, etc.. At an interest rate of 4 percent - say that's a normal rate - this is a subsidy to the US of $12-14 billion per year. Small change, for a $10 trillion economy. It's not even a significant part of our current account deficit.
posted by Mark Doner at 8:17 PM on April 23, 2003


Euros for oil? I was just wondering when drug dealers are going to start demanding euros for their wares too? Imagine getting rejected trying to buy an ounce of green bud with dollars!
posted by KidnapCounty at 12:52 AM on April 24, 2003


To defend our sovereignty - and that of the rest of the world - from the US

The most rediculous article ever. Typical of the anti-USA crap coming out of Europe to suggest the sovereignty of Britain is threatened by the US. Unbelievable. What it comes down too is with the USSR gone Europe needs a new enemy to project it's problems at home on and the USA is it.
posted by stbalbach at 7:07 AM on April 24, 2003


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