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Repatriation of the US Dollar

Repatriation of the US Dollar
Thursday, May 19, 2005 - 09:36 AM



BY ROD COFFMAN - There is only one country in the world that has to take the US Dollar and that is the country of its birth, the United States. For the time being, most industrialized countries are forced to accumulate dollars in order to purchase oil. In order to be an industrialized country you must have oil and from this simple equation the US has gone to great lengths to make sure this oil is sold in dollars. This has created dollar hegemony sometimes referred to as the Petrol Dollar and is at the root of all the world’s conflicts today. The Petrol Dollar creates the need for other valuable resources to sell in dollars as well in order for the country selling those resources to accumulate dollars for the purchase of oil. Numbers that I’ve seen estimate the total amount of dollars or their equivalents floating around in the world today to be about $55 trillion or over five times the total size of the US economy.

On a small scale over the last few years the repatriation of these dollars have started to flow home, but so far no more than a trickle of it’s potential. The Federal Reserve along with the media have been able to hide these returning dollars into the stock market and into real estate prices, but this has really only just started. The media has been also able to hide 10% inflation numbers from the public by misstating the Consumer Price Index numbers, but pretty soon they won’t be able to hide these. If the Federal Reserve can’t get the price of oil up to $100 per barrel like they are planning, these dollars returning home will be much harder to hide. $100 oil will double the need to hold on to dollars and from this will allow the game to continue for some time into the future.

The world is taking small steps at this time to rid itself of the dollar yoke that the Federal Reserve has strapped upon them. If you weren’t paying attention to the events of the world, you wouldn’t even notice. Fortunately for the Federal Reserve the US media plays a vital role in keeping up the illusion that all is going well for the US. Even those paying attention would have a hard time explaining to the layman what’s going on.

There’s only one country that has completely removed the dollar from its economy and due to its size this is really only a symbolic role. Thanks to a bartering arrangement with Venezuela for oil, Cuba fairly recently was able to do away with the dollar from the island completely. Cuba needed about $4 million dollars per day for the purchase of oil on the world market now they no longer need to accumulate this amount. This annual $1.5 billion needed for dollars should be almost microscopic by comparison to the $55 trillion floating around the world. Unfortunately for the US each dollar purchase of oil has an exponential effect on the other commodities that were needed to come up with the $1.5 billion. I don’t have a formula for this calculation, but I would have to imagine that this $1.5 billion reduced the demand for dollars by some $10 billion or more. Unless you’ve been paying attention, a $10 billion decrease in demand for dollars is nothing when compared to the current total market for dollars.

Other countries have taken various actions to reduce their dependence on the US dollar. Both Brazil and Argentina have settled with the IMF and are not taking out additional loans, which would create additional dollar demand from their countries. Russia as well has stopped taking out additional IMF loans and in fact has accelerated their prepayment schedule. I can’t think of any major loans made by the IMF in the last few years that would help create additional dollar demand. In fact the IMF has stated that they are thinking about selling off their gold holdings as a method of stimulating dollar demand. Without current loans being made this will really cut into dollar demand in the future. Currently there’s speculation that China, Russia or India could use some of their dollar holdings to help pay back some of the debts held by third world countries. This would further reduce dollar demand and would probably create an ally from the country this alliance helps out.

The creation of Free Trade Zones and in particular the Free Trade Area of the Americas that the Bush administration has been pushing for the last few years has been announced dead. South America has decided to form a trading block among themselves at the exclusion of the United States. The United States version of a Free Trade Agreement simply means that countries send the United States their resources and the United States ships back dollars. Without additional free trades zones being created there will be a loss of additional demand for US dollars.

There is also an experiment going on that allows Zimbabwe to use their own printed currency to purchase goods directly from China. It’s hard to gather much information regarding this, but judging from Zimbabwe’s recent election there has been some success. This does give China a much-needed presence in Africa and allows China to learn how to utilize this strategy for other countries as well. I would imagine we’d hear more about this type of relationship developing in other countries during the next year. Net effect is a lower demand for dollars from these countries.

Russia’s Central Bank has recently stated that they will no longer support the dollar and will allow the Ruble to float against the dollar. Once again, by not purchasing dollars or selling Rubles to support the dollar this will reduce the total demand for dollars in the system. This might not seem like a lot, but it puts pressure on Turkey to reduce their dollar holdings because of the devaluation of these holdings. This helps steer Turkey into the direction of joining the Euro Zone and further reduce the need for dollars.

The Eurozone itself in the last year or so has added ten countries to its membership. The Eurozone has now created an economic block that is larger then the economy of the US and also has a population larger then that of the US. This larger demand for Euros helps increase the Euros value and puts additional pressure on the dollars value. In the next few years Turkey may join this union and add an addition 70 million people and its $200 billion economy to the Eurozone. Turkey holds a lot of dollars and if they lose a great deal of the demand for these dollars, the dollars value will continue to decline.

The world is also doing a lot to reduce their dependency upon oil. The Kyoto Agreement calls for a reduction of greenhouse gases of 25% by 2012. The world has made great strides in working towards this goal. China has built the Seven Gorge Project, which will produce the equivalent of 17 nuclear power plants worth of clean energy. China has also stated that they will be completing 2 to 3 nuclear power plants each year for the next 10 years. Even here in the US we are seeing more hybrid cars and a lot more energy efficient lighting and insulations. Brazil announced the creation of the world’s first biomass electrical power plant. There are many alternative energy sources other than those using hydrocarbons, and as the world turns towards those alternatives, oil demand should drop. Any reduction in oil demand will have an adverse effect on dollar demand.

The world has certainly shied away from purchasing their military equipment from the US for the last couple of years. Most of the world’s military equipment is now being sold by Russia, China and Europe. Many countries that have been traditional buyers of US gear have lately been announcing purchases from other sources including the Saudis. The only recent US purchase that I can remember is Pakistan’s purchase of aged F-16 jets, which was really just allowing a previous purchase to go through that was put on hold after Pakistan became a nuclear power. Military sales have been a large source of dollar demand for the US and without this the world needs a lot less dollars.

There has been a great deal of work that seems to be going on in regards to oil being supplied in a currency other than dollars. China and India have announced planned investments totaling over $200 billion into Iran’s oil and gas industry. Major investments have been made into Venezuela’s oil and gas industry as well. Russia, China and Japan have announced major investments into Russia’s oil and gas industry. Russia has announced that their oil pipeline headed east is going to supply China in the not too distant future with 1.6 million barrels of oil per day. China itself has announced a major oil discovery off of its coast. Cuba has announced an oil discovery off of its coast. Vietnam has announced an additional oil discovery. We even hear that Norway is considering switching their oil from dollars to Euros. Even the Iraqi resistance seems to understand that the cheaper the price of oil is, the more harm that is actually being done to the US economy.

How these events unfold is certainly speculation on anyone’s part, but the following is how I currently see things shaking out in the next couple of years. Certainly Russia’s pipeline going to China will sell using the Yuan as the currency. Russia can then go ahead and purchase consumer products from China for the growing middleclass in Russia. Iran is certainly the wildcard but I would imagine that when the oil and gas pipelines going through Pakistan and reach India, that oil would be sold using the Rupee. This would be most beneficial to both countries. Iran may very well sell their hydrocarbons in other currencies as well, but one of those will be the Rupee. I believe between Venezuela and Ecuador they will both be the suppliers to the rest of South America. I can’t imagine there won’t be a reemergence of the Peso in South America and that will be the currency used. When this happens I would imagine that Norway would decide to sell their hydrocarbons using the Euro.

When major hydrocarbon suppliers start selling oil in other currencies then the repatriation of the dollar will kick into full gear. I would imagine that foreign holders of dollars would try to purchase real estate for these dollars. I would think the nature of the US stock market would lead foreigners to avoid putting their dollars at risk. With a level playing field regarding currencies I would think that foreigners would also try to purchase those manufactured products that they can use. The hyperinflation that will be created will be massive and I would advise holding gold, silver and real estate as investments that seem to stand-up under those kinds of conditions. In the meantime the trickle will continue, rates should continue to fall or at least stay in that trendline. I certainly believe right now that more then ever; doing the exact opposite of what the media would like you to believe is in your best interest. When the media says panic I recommend a celebration and when the media says celebrate it would be a good time to panic.

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Rod Coffman is a Contributing Writer to Newtopia


LINK: http://www.newtopiamagazine.net/articles/51?POSTNUKESID=d943c6598e2c7dddc03382d400eaa72f