| The
Story About Oil You Need to Hear December 30,
2005
Postata de soj Wow! I just
got a tip on this story from reader Romeo A., so my thanks go out
to him.
Some news stories
are screamed in 100 headlines in 100 different newspapers and media
outlets. This one however is so quiet it's almost a whisper, yet it
may be one of the biggest stories next year.
It all begins
here, with a blurb so tiny that I'll reprint the entire thing. From
the Federal Reserve's website, November 10, 2005:
On March 23, 2006, the Board of Governors of the Federal Reserve System
will cease publication of the M3 monetary aggregate. The Board will
also cease publishing the following components: large-denomination
time deposits, repurchase agreements (RPs), and Eurodollars. The Board
will continue to publish institutional money market mutual funds as
a memorandum item in this release.
To fully understand
how the "Federal Reserve" is neither federal nor a reserve of anything
of value, see my full-length story here.
But what is
the M3? And how is it relevant?
The Fed collects
data on how much money is in circulation, where it's being stored
(as cash, as stocks, etc) and prints these statistics on a quarterly
basis. These are the "M" series of reports.
M0 (M Zero)
is simply how much physical American money is in circulation, both
coins and bank notes. M1 is M0 plus all the money that's in a bank
that someone could withdraw immediately (usually known as "checking"
accounts). M2 is M1 plus other types of accounts, including money
markets and smaller CDs (under 0,000).
M3, the one
that will no longer be printed, is M2 plus Eurodollars. While Eurodollars
sounds like plastic money used at EuroDisney, it actually refers to
dollars being held in non-American banks (originally most dollars
held overseas were in European banks, but "eurodollars" could just
as easily be held in China).
I for instance
have some "eurodollars" since I live in Romania and have a few bucks
in the local bank. But 99% of American money being held outside its
borders are actually under the control of central banks and large
institutions.
Why does this
matter? Why would keeping track of how many dollars are being held
overseas matter to anyone except perhaps some bankers?
The answer has
to do with oil. Texas tea. Black gold. The stuff which wars are fought
over, and alliances made to crush human rights in order to obtain
a steady supply of it.
While oil can
be drilled and refined and transported anywhere, there's only two
places where it can be officially purchased. One is in New York City
on the NYMEX stock exchange and the other in London on the IPE exchange.
I should mention that London's IPE is actually now owned by an American
country named "ICE".
This doesn't
mean that oil actually has to be transferred from say, Saudi Arabia,
to New York where it sits in a real barrel until it's sold to a customer
in Japan. What it does mean however is that oil is traded like any
commodity, via these two (and ONLY these two) stock exchanges. There
are also "futures" or promises of future oil deliveries sold and traded
as well.
So the customer
in Japan, perhaps a large oil refinery company, buys the oil "shares"
via one of the two exchanges from one of the oil owners, a company
such as ExxonMobil or Saudi Arabia's ARAMCO. And while the oil itself
never actually gets to London or New York, all the money involved
flows through those two cities. And every single barrel of oil is
bought and sold in American dollars.
This means that
every single country which wishes to buy oil has to own dollars to
do it. Since these dollars are held overseas, they are referred to
as Eurodollars, although once again they don't have to be in Europe.
A dollar in China is a dollar in America too - they aren't valued
any differently.
The world sells
and buys billions of barrels of oil per day, and every single one
of those billions is in the form of an American dollar. The effect
of this is that every single country in the world which holds large
reserves of dollars (for the purpose of buying oil) is essentially
propping up the American economy on a huge scale.
If you read
my full-length article on the dollar, you will know it's not worth
anything of intrinsic value. It isn't backed by gold, or even by the
American government. It's simply a piece of paper (or blip on a screen)
that everyone "believes" has worth. So a country like Saudi Arabia
ends up selling their tangible resource (oil) in exchange for billions
of pieces of green paper (dollars).
Those little
pieces of green paper, in order to make them worth anything, must
then be traded for something of value. That could be anything from
food to cars to high-tech weaponry.
Think of it
this way. Imagine that the world was one very large casino. Players
could trade in oil or food or electronic equipment for chips that
are manufactured and designed by the casino itself. The chips aren't
worth anything by themselves, as they're just painted pieces of plastic.
But for any player to cash out, they need to redeem the chips for
tangible goods made by the casino, at the rate that the casino sets.
If you swap "casino chips" for "dollars", that's a pretty good way
to understand how the system works.
Another way
to think of it is that every drop of oil is worth a portion of a dollar,
meaning oil is dollars and vice versa. Which means that all the vast
wealth that is oil is in effect, also adding that wealth to the United
States.
So back to the
Fed and their decision to stop reporting the holdings of dollars overseas.
Why does that matter?
There is a lot
of speculation out there, but one good guess is that Spring 2006 is
when Iran's oil bourse will debut.
I wrote an entire
article about it which you can find here but here is an excerpt:
Iran is a member of OPEC, which currently restricts all foreign sales
to the American dollar. So is there any way for Iran to start selling
its oil without having to resort to the currency of its foe?
The answer is close to completion and yet I've seen almost no mention
of it in the American mainstream media. If it wasn't for the trade
journals, I'd never even have heard of what Iran has planned.
In June 2004, Iran announced it was creating an oil bourse. The word
"bourse" is a French word which means "exchange" and refers to an
international market exchange where oil can be traded. Currently the
only two oil bourses are in London and New York.
Should Iran's oil bourse be successful and sales be denominated in
Euros, this will induce hedging of the Euro versus the dollar and
fundamentally alter the prices of oil. Some reports show that both
China and Russia, large trading partners with Iran, have begun to
increasing their holdings of Euros.
Iran had originally
scheduled to open its bourse (or stock exchange where oil could be
sold and bought in Euros) in 2005. That obviously hasn't happened,
but now the date is set for Spring 2006. Exactly when the Fed says
it will stop printing statistics of how many dollars are in existence
overseas. In fact, just this week the Iranian government has issued
preliminary licenses to trade on that bourse.
What's not well
known is that Saddam Hussein decided to switch from selling Iraq's
oil in dollars to Euros in November 2000. This was not widely reported.
At the time, Iraq's oil sales were limited and were under UN supervision
(as part of the "Oil for Food" program) so the sale in Euros did not
have a major impact.
According to
the Ithaca News, one of the top 10 stories that the press should've
reported in 2005 but didn't was Iran's oil bourse:
The Bush administration has been paying a lot more attention to Iran
recently. Part of that interest is clearly Iran's nuclear program
- but there may be more to the story. One bit of news that hasn't
received the public vetting it merits is Iran's declared intent to
open an international oil exchange market, or "bourse."
Not only would the new entity compete against the New York Mercantile
Exchange and London's International Petroleum Exchange (both owned
by American corporations), but it would also ignite international
oil trading in euros.
"A shift away from U.S. dollars to euros in the oil market would cause
the demand for petrodollars to drop, perhaps causing the value of
the dollar to plummet," Brian Miller and Celeste Vogler of Project
Censored wrote in Censored 2006.
"Russia, Venezuela, and some members of OPEC have expressed interest
in moving towards a petroeuro system," he said. And it isn't entirely
implausible that China, which is "the world's second largest holder
of U.S. currency reserves," might eventually follow suit.
"Barring a U.S. attack, it appears imminent that Iran's euro-dominated
oil bourse will open in March, 2006," Miller and Vogler continued.
"Logically, the most appropriate US strategy is compromise with the
EU and OPEC towards a dual-currency system for international oil trades."
I'm not enough
of an economist to be able to predict the impact on the removal of
the dollar as the sole currency for the purchase of oil, but there
are plenty of experts who predict some pretty scary things, the least
of which is a massive destabilization of the American economy.
What's interesting
is that plenty of people will tell you that Iran's bourse is of no
threat, and not even financially viable. This however reminds me of
a Radio Free Europe story on Saddam Hussein's move back in 2000:
Iraq is going ahead with its plans to stop using the U.S. dollar in
its oil business in spite of warnings the move makes no financial
sense.
Baghdad this week insisted on and received UN approval to sell oil
through the oil-for-food program for euros only after 6 November.
Iraq had threatened to suspend all oil exports -- about 5 percent
of the world's total -- if the body turned down the request.
The move comes despite repeated cautions that Baghdad's departure
from the oil industry standard of the dollar will cost the country
millions in currency conversion fees. UN officials have said Iraq
will have to reduce the price of its crude oil by about 10 cents a
barrel in order to compensate buyers for the additional costs.
But Saddam Hussein
profited handsomely on the conversion, especially because the Euro
rose approximately 17% in value. The Euro, which at the time was 82
cents to the dollar, is now worth about .25 and could easily rise
if its value becomes connected to oil on a large scale.
As I've written
about extensively, there are plenty of reasons for the Iranian and
American government to be at loggerheads. They certainly represent
wildly different political ambitions and they will clash for a number
of different reasons, not solely due to the threat of selling oil
for euros.
That being said,
it does seem ominous that the Fed wants to stop printing the statistics
of how many dollars are being held overseas precisely when those amounts
may go down dramatically. So far this story has been restricted to
a few financial websites and "tinfoil hat" locations but definitely
needs to be brought into the mainstream so it can be analyzed and
debated.
For a more financially-based
interpretation of the Fed's ending of the M3, see here, including
this:
M3 is very important. Indeed of the Fed's monetary numbers only M3
was of major importance and in other G7 countries we also focus on
M3 including our own Bank of Canada. No word that they intend to follow.
So why are they dropping M3? Well we have seen nothing to tell us
why we only know they are doing it. Oh it's not that the numbers will
completely disappear. For those that wish to take the time they can
pore through the Flow of Funds accounts (released quarterly as Z.1
release and the H.8 bulletin released weekly for commercial banks)
and piece together the former M3. Painstaking, but that is not the
way it is supposed to be. European Central Bankers put great stead
in M3 so why has the Fed after all these years decided to cease publication?
Some of the reasons we have seen floated around are as follows:
* History has shown that only failing economies e.g. Soviet Union
keep data secret (Financial Sense - Toni Straka - Unpleasant M3 Trend,
November 12, 2005). An interesting premise and a theme we saw woven
amongst a number of writers is that they have something to hide. The
claim is that the Fed should be transparent and by not publishing
the number the Fed now lacks transparency.
* The end of publishing of M3 in March 2006 coincides with the start
of the Iranian Oil Bourse. The premise here is that the with the oil
bourse trading in Euros there will be a rush out of US$ into Euros
and that M3 could drop sharply. A sharp drop in M3 would of course
presage a recession as falling M3 is a characteristic of weak economic
periods.
* M3 is a measure of inflation in the economy. A somewhat unproven
rule of thumb is GDP + inflation = M3. Will be able to properly measure
inflation going forward if we don't know what M3 really is.
* We are about to enter a period of hyperinflation and by eliminating
M3 we will not know how much liquidity the Fed is pumping into the
system. Remember the Fed doesn't really print money it is the banking
system that expands money supply. But the Fed influences it through
open market operations. We will have to watch daily Fed repo action
very carefully irrespective of whether they are going to publish Repos
(RPs) as noted in the bulletin above. The Fed doing repos puts money
into the system and the Fed doing reverse repos takes money out of
the system. Of course as well this is the exact opposite of the collapse
in M3 premised with the oil bourse above.
* Further on the theme above a period of hyperinflation would occur
as the Fed tries to save us from a collapsing housing market and softer
consumer demand. The Fed adds more and more liquidity to the system
to stave off a sharp economic decline. By not publishing Repos (RPs)
as noticed in their bulletin above the Fed again is hiding what they
do on a day to day basis. This will make it difficult for both currency
traders and equity traders to know what the Fed is up to.
* The conclusion is that the Federal Reserve will be hiding a debasement
of the US$.
All of the above
are quite troubling. And that's not the words of any kook, but from
an experienced industry insider.
The U.S. has
certainly interfered in Iranian politics before, overthrowing an elected
government and installing a dictator, all in the name of oil. And
it certainly has been making lots of rumbling noises about removing
the government. From this week:
Bill Frist, the leader of the Republican majority in the US Senate,
has called for action against Iran before it is too late.
Of course most
of the saber-rattling is over Iran's nuclear program and the word
"bourse" is never mentioned. But the IAEA has consistently stated
that Iran is in full compliance with its regulations and the conditions
of the Nuclear Non-Proliferation Treaty. That doesn't negate Iran's
political alignment and support for terrorism, but their nuclear energy
program is hardly the threat it's made out to be.
Only time will
tell whether regime change is in the cards for Iran, especially at
the hands of the United States. But the Fed's quiet decision to no
longer print the M3 is definitely quite ominous.
Peace
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