Monday, November 19, 2007

The Dollar

OPEC oil ministers actually discussed whether to jettison the U.S. dollar as its exchange currency.

On Friday night, during what the participants thought were private talks, Venezuela's oil minister Venezuela Rafael Ramirez and his Iranian counterpart Gholamhossein Nozari, argued that pricing - and selling - oil using the crippled dollar was damaging the cartel.

They said Opec should formally express its concern about the weakness of the dollar when the cartel makes its official declaration at the close of the summit today. But the Saudis, the world's largest oil producers and de facto head of Opec, vetoed the proposal. Saud al-Faisal, the Saudi foreign minister, warned that even the mere mention to journalists of the fact that leaders were discussing the weak dollar would cause the US currency to plummet.

Unfortunately his words and those of everyone at the meeting were being broadcast via a live television feed to a group of astonished reporters. 'I couldn't believe it,' said one who was there. 'When I realised they didn't know they were being broadcast live, I frantically started taking notes.'

Opec only realised that the leaders' row was being broadcast to the world when the Reuters news agency put out a report of the argument.

The weakness of the dollar is one reason why oil prices are so high, as cartel members seek to compensate for their lower earnings. This means a further drop in the dollar is likely to be accompanied by a rise in oil prices.
President Bush is fiddling while the dollar burns.

Bush's ruinous economic policy - profligate spending combined with mindless tax cuts - are facilitating a genuine economic crisis. The dollar's weakness has even become the subject of political humor:

Ha, ha.

Except it's not funny.

The Fed has kept a lid on inflation, but the dollar's vulnerability is caused by debt -- the debt of the federal government and of American households. Year after year, foreigners have provided Americans with the savings that they refuse to generate themselves, and this stream of money has supported the U.S. currency. But if foreigners tire of handing over their savings, the unsupported dollar is almost bound to fall. That is what has happened recently.

You can hardly blame the foreigners. They sent their money to the United States because they thought the U.S. financial system was transparent and sound; the subprime mortgage mess has forced them to think differently. They sent their money to the United States because the greenback was expected to hold its value, but its purchasing power has fallen sharply against oil, metals and other commodities. Once a currency ceases to act as a store of value, its days as a reserve currency -- that is, a currency in which foreigners are happy to hold savings for the long term -- may be numbered.
And it was just a few days ago that Bush mocked democrats for acting like "teenagers with a new credit card."

It is time for someone to ask Bush to explain just what he means when he says his administration has a "strong-dollar policy."

No matter how many times US Treasury Secretary Henry Paulson or his predecessors have said the US is committed to a strong dollar policy, the foreign exchange markets have ignored them. Some are suggesting the Treasury should say it louder and more frequently and possibly even intervene by buying the dollar on foreign exchange markets.

But none of this will help because the value of the dollar is determined just like other commodity prices -- by supply and demand. When the price of pork bellies changes, everyone knows the reasons must be related to either supply or demand. But for some reason when it comes to the dollar, people seem to forget this fact.
I suspect that in Bush's mouth, the words "strong-dollar policy" have no more meaning than his insistence, contrary to all available evidence, that the United States has the best health-care system in the world. In other words, it is just empty rhetoric.

But if "strong-dollar policy" actually does mean something to Bush, something more than happy talk for the base, I would like to see it backed up with some action.