IMPEACH GEORGE BUSH!! The Bulldog Manifesto Venezuela Switches to Euros -- Ominous News for the American Economy - The Bulldog Manifesto

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Monday, October 10, 2005

Venezuela Switches to Euros -- Ominous News for the American Economy

The U.S. economy faces utter collapse if OPEC and other oil-producing countries were to begin pricing their oil in euros rather than dollars. When Iraq tried to switch to euros in 2000, they were attacked by the USA soon thereafter.

Recently, Business Week reported that oil producer, Venezuela, "has moved its central bank foreign reserves out of U.S. banks, liquidated its investments in U.S. Treasury securities and placed the funds in Europe."

The importance of this news should not be underestimated.

Dollar Hegemony
Generally speaking, international trade has become a process in which the U.S. produces dollars and the rest of the world produces goods and/or services that dollars can buy. Nations trade to capture needed dollars to service dollar-denominated foreign debts and to amass dollar reserves in order to sustain the exchange value of their domestic currencies. As it currently stands, if a country wants to prevent damage to its currency, that nation's central banks must acquire and hold dollar reserves in amounts corresponding to their own currencies in circulation. Fortunately for the U.S., this system (in place since WWII) creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold even more dollar reserves, making the dollar stronger still.

This phenomenon, known as "dollar hegemony," is created by the geopolitically constructed peculiarity that critical commodities, such as oil, are denominated in dollars. And because oil is priced in "dollars" for the most part, everyone accepts dollars as the currency of choice.

The strength of the dollar since 1945 is a result, for the most part, of the dollar being the international reserve currency for global oil transactions (i.e., "petro-dollar"). As a result of the dollar being the standard denomination for oil transactions, the U.S. prints hundreds of billions of these fiat petro-dollars, which are then used by nation states to purchase oil from the oil producing nations. These petro-dollars are subsequently recycled from the oil producing countries back into the U.S. via Treasury Bills or other dollar-denominated assets such as U.S. stocks, real estate, etc.

Because of this system, dollar reserves must be invested in U.S. assets which produces a capital accounts surplus for the U.S. economy. Luckily for the United States, the U.S. capital account surplus finances the U.S. trade deficit to a certain extent. [But if the capital account surplus should diminish (as countries shift to euros rather than dollars) and the U.S. trade deficit continues to grow even wider, the American economy will rupture quickly.]

Since the U.S. prints the petro-dollars, for all intents and purposes, the U.S. controls the flow of oil. When oil is denominated in dollars as the only fiat currency for trading in oil, an argument can be made that the U.S. essentially owns the world's oil for free.

So what happens if the oil producing nations decide to suddenly begin trading oil on the euro standard? Without being dramatic, the United States would go into economic ruin. Oil-consuming nations would be forced to flush dollars out of their central bank reserves and replace them with euros. The dollar would crash in value and the consequences would be similar to the types of currency collapses we have seen in Mexico, Argentina, etc. Foreign investments would pour out of the U.S. securities markets. Similar to the 1930's, the current account deficit would become unserviceable, the budget deficit would go into default, many banks would collapse overnight.

And that's just what would happen in this country. America's economic crash would result in the economic crash of many other nations. Most notably-- Japan.

We all know what happened to the last major oil producing country that shifted from dollars to euros. We also know what might happen to other major oil producing countries if they shift to euros.

As we have discussed at The Bulldog Manifesto (here and here), history is filled with examples where the United States has used military force to protect it's economic interests.

And now that Venezuela is shifting, what will happen to them?

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I guess we shouldn't have pissed Chavez off so much.

Nice work in putting this together - this is one of the may covert ways this country is vulnerable that most people do not realize.

Who knows, maybe we'll have to swith to the Euro as well.

Curious to see how this one plays out.

Read the comments after mine on the last post. As always, impressed by your subject matter and posts and I beg you not to let asshats make your kibble soggy :::scratch behind the ears:::

This sounds a little like a chapter in the Left Behind series.

Nicely put. The dollar is more vulnerable than people know. We have to bring out deficit spending under control and if we're going to piss off the oil producing nations like this, then we really ought to consider the price we will pay--the economy. Considering how many countries will flounder with us (as we consume so much) the world will be watching us for a very long time to come after such a thing happens...

Yeah, nice going Pat Robertson or was it James Dobson? I get my narrow minded bigots who-cannot-practice-what they-literally-preach confused.

Why don't we put Reverend Phelps in charge of the Department of Furrin' Oil. He's as qualified as Brownie and now (apparently) Harriet Miers.

At this point, it would probably be a good idea to start paying close attention to what the largest multi-national corporations are doing with their investment capital. More so than what any individual country might decide to do, the behavior of the multi-nationals is going to tell us (earlier) when it's time to panic.

In the 1980s, the major US auto manufacturers recognized that they were ill-suited to respond quickly to market changes brought about the popularity of smaller, more fuel efficient foreign vehicles. So in order to protect themselves, they hedged their bets by scaling down operations (Flint, MI anyone?) and simultaneously buying heavily into the stock of the same Japanese automakers who were spanking them in new car sales. It's a trend that's continued over time, to the point where buying an 'American' car is more an advertising ploy than an economic reality.

Venezuela's behavior is a concern, but one country's actions don't necessarily constitute a trend. It's possible, for example, that they're just sick of the failed drug policy we've been ramming down their throats at gunpoint since the Reagan days (or death threats from nutjob US televangelists) and want to make a statement.

Nations tend to respond more slowly than businesses to economic trends. I think that we would see countries shifting from the dollar to the euro if the economy were tanking, but more reactively than proactively. When corporations like Exxon and Wal-Mart start shifting greater and greater percentages of their balance sheets off-shore, then I'm going to do the same thing with my 401k.

Sounds to me like they are getting ready to default on their external debt and want to move their assets to a place where it is less likely to be seized by creditors.

Stagnant economies, lower interest rates (and hence lower returns on reserves held in Euros) and budget deficits in Europe are pretty bad. The Euro does not look like all that appealing an alternative to the US$.

Thanks for the info. It's a shame you can't find a simply stated discussion of economics in the mainstream media.

New blog launched to expose the disreputable and dishonest American Bulldog breeders and kennels.

If you have a "horror story" when dealing with an American Bull Dog breeder or kennel PLEASE share it with us at http://americanbulldogblog.blogspot.com/

By doing so you will be providing valuable information to potential puppy buyers and help them avoid similar situation.

I guess we shouldn't have pissed Chavez off so much.

Nice work in putting this together - this is one of the may covert ways this country is vulnerable that most people do not realize.

Who knows, maybe we'll have to swith to the Euro as well.

Curious to see how this one plays out.

Read the comments after mine on the last post. As always, impressed by your subject matter and posts and I beg you not to let asshats make your kibble soggy :::scratch behind the ears:::

This sounds a little like a chapter in the Left Behind series.

Nicely put. The dollar is more vulnerable than people know. We have to bring out deficit spending under control and if we're going to piss off the oil producing nations like this, then we really ought to consider the price we will pay--the economy. Considering how many countries will flounder with us (as we consume so much) the world will be watching us for a very long time to come after such a thing happens...

Yeah, nice going Pat Robertson or was it James Dobson? I get my narrow minded bigots who-cannot-practice-what they-literally-preach confused.

Why don't we put Reverend Phelps in charge of the Department of Furrin' Oil. He's as qualified as Brownie and now (apparently) Harriet Miers.

At this point, it would probably be a good idea to start paying close attention to what the largest multi-national corporations are doing with their investment capital. More so than what any individual country might decide to do, the behavior of the multi-nationals is going to tell us (earlier) when it's time to panic.

In the 1980s, the major US auto manufacturers recognized that they were ill-suited to respond quickly to market changes brought about the popularity of smaller, more fuel efficient foreign vehicles. So in order to protect themselves, they hedged their bets by scaling down operations (Flint, MI anyone?) and simultaneously buying heavily into the stock of the same Japanese automakers who were spanking them in new car sales. It's a trend that's continued over time, to the point where buying an 'American' car is more an advertising ploy than an economic reality.

Venezuela's behavior is a concern, but one country's actions don't necessarily constitute a trend. It's possible, for example, that they're just sick of the failed drug policy we've been ramming down their throats at gunpoint since the Reagan days (or death threats from nutjob US televangelists) and want to make a statement.

Nations tend to respond more slowly than businesses to economic trends. I think that we would see countries shifting from the dollar to the euro if the economy were tanking, but more reactively than proactively. When corporations like Exxon and Wal-Mart start shifting greater and greater percentages of their balance sheets off-shore, then I'm going to do the same thing with my 401k.

Sounds to me like they are getting ready to default on their external debt and want to move their assets to a place where it is less likely to be seized by creditors.

Stagnant economies, lower interest rates (and hence lower returns on reserves held in Euros) and budget deficits in Europe are pretty bad. The Euro does not look like all that appealing an alternative to the US$.

Thanks for the info. It's a shame you can't find a simply stated discussion of economics in the mainstream media.

New blog launched to expose the disreputable and dishonest American Bulldog breeders and kennels.

If you have a "horror story" when dealing with an American Bull Dog breeder or kennel PLEASE share it with us at http://americanbulldogblog.blogspot.com/

By doing so you will be providing valuable information to potential puppy buyers and help them avoid similar situation.

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