The Society for Worldwide Interbank Financial Telecommunication (SWIFT) describes itself as, “a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. More than 9,000 banking organisations, securities institutions and corporate customers in 209 countries trust us every day to exchange millions of standardised financial messages.”
SWIFT is the backbone of global free trade. By means of SWIFT, businessmen in virtually any country can digitally buy or sell products to other businesses anywhere else on the globe. Without access to SWIFT, global trade would be slow, uncertain and difficult.
The US gov-co has recently ordered Iranian banks be denied access to SWIFT until the Iranian government agrees to meet US demands concerning Iranian nuclear weapons. Nations such as India (which are buying crude oil from Iran) are also threatened with restricted access to SWIFT unless they stop purchasing Iranian crude.
According to Bloomberg (“U.S. Wants Iran Oil Buyers to Pledge Cuts or Risk Sanctions”),
“If a country doesn’t prove it’s making the necessary reductions [in the purchase of Iranian crude oil] by the end of June, any institution in that nation that settles petroleum trades through Iran’s central bank will be cut off from the U.S. banking system.”
And conversely, the US banking system (and US dollar) will be “cut off” from any nation that continues to trade with Iran.
The question is: Who needs who?
The US prints 100% of the “world reserve currency”. But Iran pumps 5% of the world’s oil. So, how many foreign nations need the US banking system more than they need Iran’s oil? How many foreign nations need Iran’s oil more than they need US banking and fiat dollars?
If a significant number of nations stick with Iran and are therefore denied access to SWIFT and/or the US banking system, those nations will undoubtedly agree to execute their transactions by means of a currency other than fiat dollars and by means of a new international settlement system other than SWIFT.
If the Iranian conflict persists, a new international settlement currency may emerge. It might be the yuan, euro or even gold. A new “international settlement currency” will not necessarily replace the dollar as world reserve currency. But insofar as an alternative to dollars emerges, the fiat dollar’s purchasing power will fall.
• How did the fiat dollar come to be? How did the intrinsically-worthless fiat dollar come to have value?
Back in A.D. 1933, the US gov-co stopped backing our domestic dollar with gold. By A.D. 1968, the domestic dollar was no longer backed by silver. In A.D. 1971, the Nixon administration stopped backing international dollars with gold and the dollar became a pure fiat currency without any intrinsic value. The dollar should’ve collapsed shortly thereafter.
However, in 1971, the Nixon administration negotiated an agreement with Saudi Arabia whereby the US would guarantee the Saudi’s security so long as the Saudi’s guaranteed to sell their crude oil only for dollars. Soon after, the OPEC nations also agreed to sell their crude only for fiat dollars.
As a result of these agreements, any nation that wanted to purchase crude oil on the international markets needed to first have fiat dollars in order to make the purchase. This created an international demand for fiat dollars. This international demand created a perceived value for the intrinsically-worthless dollar. The dollar was implicitly backed by crude oil (rather than gold or silver) and became the “petro-dollar”. So long as the world needed fiat dollars to purchase crude oil, the fiat dollar remained the world reserve currency.
So long as the world needs and demands fiat dollars to purchase its oil, the dollar will remain valuable. But, insofar as the world begins to transact international trade in currencies other than dollars, the foreign demand for dollars will fall and the dollar’s perceived value must decline.
• The dollar’s decline began in A.D. 2000 when Saddam Hussein started selling Iraqi crude for euros rather than dollars. Saddam thereby threatened the “petro-dollar’s” monopoly on purchasing crude oil and thereby threatened to devalue the dollar. Under the pretext of destroying “weapons of mass destruction,” the US invaded Iraq in A.D. 2003 and hanged Hussein.
Last year, Libya’s Colonel Gaddafi tried to create a pan-African currency that would be backed 100% by gold—rather than dollars. Under the pretext of protecting Libyan people from Gaddifi, the West attacked Libya, wrecked that nation and killed Gaddifi.
The recent wars in Iraq and Libya were currency wars. Despite pretexts to the contrary, hundreds of thousands have died in the name of preserving the apparent value of the fiat dollar.
For the past seven years, Iran has repeatedly threatened to open a “bourse” (market) to sell crude oil for currencies other than dollars. Each time the bourse neared opening, the US threatened Iran with military force, and Iran postponed the bourse. However, the Tehran Times recently reported that the Iranian oil bourse would start trading oil in currencies other than the dollar on March 20. Given that the US is closing Iranian access to SWIFT in order to restrict Iran’s ability to sell its crude oil on the international market, Iran has little choice but to sell its crude for currencies other than dollars on a bourse that doesn’t depend on SWIFT.
Therefore, to protect the fiat dollar, the US is again threatening to bomb Iran. But are these threats rational? Have the forces opposing the fiat dollar’s status a “petro-dollar” and world reserve currency become too large and diffuse for the US to resist?
• The Bloomberg article reports,
“The Obama administration wants China, India and 10 other nations to present plans detailing how they will curtail Iranian oil imports, saying past cuts aren’t enough to win them an exclusion from new U.S. sanctions.”
Dahyam! The US is attempting to control the purchase of crude oil by twelve nations—including China (#2 world economy), Japan (#3), India (#9) and some nations of the EU.
If there were only one or two nations continuing to do business with Iran, the US might be able to pressure or even invade them. But even the almighty US can’t simultaneously invade or intimidate a dozen nations. I think by threatening Iran and its twelve customers, the US has bitten off more than it can chew.
“Secretary of State Hillary Clinton this week granted Japan and European Union countries six-month, renewable exemptions from the measures that take effect June 28, crediting them with ‘significantly reducing’ imports from Iran.”
Oooh, how grand! Queen Hillary has “granted” some “exemptions” to some of her vassal states. I’ll bet the peons just love it when the almighty US grants them the occasional “royal” crumb.
Carlos Pascual, the State Department’s special envoy and coordinator for international energy affairs declared,
“What we are looking for is for countries to come to us and tell us if they believe that they should be in that category that deserves an exemption, what are the kinds of significant reductions that they are willing to pursue.”
“Come to us and tell us”?!
Maybe these Bloomberg quotes are taken out of context. Perhaps, originally, these quotes weren’t as idiotic and insensitive as they now seem. But for me, the gov-co’s expectation that the nations of the world will “come to us and tell us” reflects an imperial attitude that presumes those nations to be mere supplicants. I hear an arrogance in that expectation that seems astonishingly un-diplomatic. Is our gov-co that stupid, or are they trying to make these people mad?
• Out of 13 nations involved in buying and selling Iranian crude for currencies other than dollars, twelve are buyers and only one (Iran) is the seller. Iran is the central player in this current threat to the fiat dollar. Therefore, there’s no need to bomb the other twelve buyers. Just bomb the one seller (Iran) and the threat disappears.
If Iran were bombed to destroy its oil wells, pipelines or port facilities for pumping crude oil onto ships, Iran could no longer sell its crude for any currency—not dollars, rupees, yen, yuan or gold. Thus, the dollar’s hegemony might be preserved by simply bombing Iran and killing several tens of thousands of Iranians who had the audacity to think they could sell their own crude oil for any currency they pleased.
The problem with bombing Iran is that Iran supplies 5% of the world’s crude oil. It’s virtually impossible to reduce the world’s supply of crude oil by 5% without pushing the global and US economies deeper into recession and perhaps into a depression.
It’s estimated that global crude oil production is about 90 million barrels per day, and there’s only about 2 million barrels a day of unused production capacity (down from 6 million in A.D. 2009).
Thus, 1) the globe’s oil-producing capacity can’t be cut at all without raising the price of oil (which is bad for the US and global economies); and 2) global production can’t be cut by more than 2 million barrels per day without adding further recessionary pressures (also bad for the economies).
Iran produces about 4.5 million barrels of crude per day. If the maximum sustainable reduction in oil production is about 2 million barrels per day (the current excess oil production), then it follows that if US bombs Iran to destroy their ability to pump and sell crude oil, global oil sales could decline enough to precipitate global economic recession/depression and thereby antagonize most of the rest of the world.
It’s possible that the US could bomb only enough of Iranian oil production capacity to cause Iran great hardship, but not reduce the total global oil supply by enough to increase the forces of recession/depression. For example, if Iran produces 5% of global oil and the U.S. destroyed 25% of Iranian oil production, the world would only suffer a supply loss of about 1%. That would be a huge blow to Iran, but a seemingly tolerable blow to global economies.
But—in the “fog of war,” mistakes happen. What if the US tries to only reduce Iranian oil production by 25%, but “accidentally” causes Iranian oil production to be reduced by 50%? That could wipe out the world’s 2% excess production, raise prices dramatically, and push the world into recession/depression.
The world’s economies are all precarious. Any reduction in the global supply of crude oil, should cause the price of remaining crude oil to increase. Global agriculture is so dependent on crude oil that every increase in crude oil prices results in an increase in food prices.
While food price increases may be merely annoying to the wealthy Western nations, they can be devastating to the poorer nations of North Africa and the Middle East. Rising prices for crude oil and food in A.D. 2010 inspired the “Arab Spring” of A.D. 2011. In consequence, a number of governments were overthrown, and all nations of North Africa and the Middle East were destabilized and exposed to further political turmoil or revolutions.
In the event of further Middle East turmoil, the current supplies of crude oil may be diminished, contributing to higher prices, even more political turmoil—all of which can precipitate even more recession/depression for the US and global economies.
Point: Because crude oil supplies are already strained and because the nations of North Africa and the Middle East are already destabilized by last year’s “Arab Spring,” any attempt to adversely affect the world’s supply of crude oil is a game every bit as dangerous as Russian Roulette. Yes, the US may be able to attack Iran “just enough” to cause Iran great harm, but not hurt global economies. But if there’s any miscalculation or any unforeseen consequences, an attack on Iran could cause a global depression. The US gov-co would be blamed.
Is the gov-co willing to take that risk?
If not, how significant is the US threat to cut Iranian oil sales by denying access to SWIFT and/or the US banking system?
• To the extent that the gov-co restricts Iran’s ability to sell its crude oil, the US could become the world’s foremost villain.
On the other hand, if the gov-co does not destroy or significantly restrict Iran’s ability to sell crude oil for currencies other than fiat dollars, the dollar could be significantly devalued—perhaps destroyed—and the US gov-co could assume the title of World’s Foremost Fool.
The gov-co is caught between the rock and the hard place. The Iranian confrontation is very nearly a must-lose situation for gov-co. No matter what the gov-co decides to do, it run the risk of either starting a global depression, or allowing significant devaluation of the fiat dollar.
• The fundamental point is that the world’s economies need crude oil like you and I need oxygen. The global economy can’t survive without a constant supply of crude oil. Iran is a significant supplier of crude oil. The world economy can’t easily survive without Iran’s oil production.
But does the world also need fiat dollars? And, if so, what does the world need more—Iranian crude or fiat dollars?
For the answer to that question, go back to A.D. 1971 when the Nixon administration negotiated its agreements with the Saudis and OPEC to turn the worthless fiat dollar into the “petro-dollar”. Did crude oil derive its value from the fiat dollar? Or did the fiat dollar derive its perceived value from crude oil?
The answer’s obvious. Since A.D. 1971, the fiat dollar’s perceived value was derived from petroleum. That tells us something that even our gov-co has known for 41 years: crude oil has intrinsic value; fiat dollars do not.
The Nixon administration recognized the world’s dependence on crude oil and finagled an artificial monopoly whereby the world couldn’t purchase crude oil without first having dollars. By making the fiat dollar indispensable to the purchase of crude oil, the Nixon administration gave the fiat dollar value derived from crude oil. Crude has real value; fiat dollars are intrinsically worthless.
For the past 41 years, crude oil has been an absolute necessity while the fiat dollar has been, at best, a convenience. People have persistently demanded petroleum, but only tolerated the fiat dollar.
Some people—perhaps including our own government—have been so confused by the world’s habitual reliance on the fiat dollar that they’ve come to believe that the fiat dollar (which is intrinsically worthless) is more valuable than crude oil. That belief is absurd.
Oil has real value. Fiat dollars do not.
That’s the primary info needed to predict how the conflict with Iran will probably be resolved. The world needs Iranian oil. The world may want—but does not need—fiat dollars.
If the world is forced to choose between fiat dollars and Iranian oil, the world will choose Iranian oil and reject fiat dollars.
And, yet, that’s exactly what the US gov-co doing by engaging in confrontation with Iran: forcing the world to choose between fiat dollars and Iranian oil. By denying nations which purchase Iranian oil access to SWIFT and/or the US banking system, the US is forcing nations to choose between acquiring the Iranian crude they need and the convenience of the fiat dollars that they want or perhaps merely tolerate.
In the end, needs trump wants. If the world is forced to choose, it will choose Iranian oil over US dollars.
More, by forcing the world to choose between fiat dollars and Iranian crude, the US gov-co is helping to break the link between crude oil and fiat dollars and thereby devalue the dollar.
Whether the gov-co is risking this devaluation intentionally or stupidly is debatable, but the conflict with Iran can have only one monetary outcome: the fiat dollar will be devalued.
In consequence of dollar devaluation, the prices of crude oil, food and gold will rise—perhaps dramatically.
The big questions are:
1) How badly can the fiat dollar be devalued before it dies; and,
2) What currency or precious metal will come to supplant or replace the fiat dollar as a reliable store of wealth?
Answer the first question, and you’ll have some idea of how long you have to prepare for a dollar collapse.
Answer the second question, and you’ll know what you should be buying now as a medium for preserving your wealth in the future.
And for extra credit, here’s a third question: How long can a nation survive that’s ruled by fools?
• In relation to Iran, our gov-co may be damned if it does, and damned if it don’t. The only question is When do we hit that moment of “damnation” (judgment)? That moment will be whenever the American people and the world recognize that the fiat dollar really is intrinsically worthless and dependent on crude oil for its support.
The current confrontation with Iran is not the final battle in the currency wars. But that final battle is getting close.