What would be the outcome if OPEC decided to discontinue the use of the U.S. dollar as it’s preferred currency?
I realize that a big part of the reason for the stateside rise in prices has to do with a currency that is declining in a value as a result of easy credit and excess flow of cash. The weak dollar, as I understand it has allowed many energy hungry countries to compete for these resources with more success than before thus increasing prices. Not to mention that OPEC when dealing with countries that have greater purchasing power and stronger currency as a result of the dollars slide are now paying more for services.
What would happen if OPEC completely dumps the Dollar and starts using another form of currency as the preferred currency for the petro industry? Do things really change that much, is it a death blow to the dollar and the United States petro purchasing power, or do things remain unchanged? Does this end the prices increases in Europe and solve everyone elses problems or do prices continue to increase until the dollar is worthless or is in stages of recovery?
Please forgive the elementary nature of this post, I have been doing my best to educate myself on these subjects while I slowly inch my way through school and the monetary exchange issue seems to complicate the issue.
This would greatly reduce the demand for US$. Ceteris paribus, this would cause massive inflation amongst the $ bloc countries (~33 atm). This would also probably have the secondary effect of causing the world’s central banks to reduce their $ reserve holdings in favor of other currencies (likely in favor of whatever currency accepted by OPEC, probably Euros, maybe Yen or Yuan). Ceteris paribus, this would cause even more massive inflation.
Eventually, there seems to be no alternative but a total $ meltdown. The US has been very clever since the 1936 Tri-Partite Agreement (later expanded in 1944 into the famous Bretton Woods Agreement) about situating the US$ as the world’s reserve currency. This allowed them to print a lot of extra money without it coming back (i.e. they were able to buy stuff for free). The problem now is that they did this for 7 decades and didn’t exactly restrain themselves… if all those created $ start to come back, there will be nothing the Fed can do to stop it (though they will try). Then things will get really ugly and there will have to be a massive dollar devaluation, which would save the government money but bankrupt the poor and working class who live paycheck to paycheck and have $ savings (the rich have assets). That’s what happened in the Weimar Republic after the Treaty of Versailles, it’s happening now in Zimbabwe… it’s definitely something we’ve seen plenty of times in history, just never to us, yet (except maybe during the Civil War).
They are doing so in small amounts. The Emerates, especially Dubai, and Iran are in a SLOW and under the radar process of getting rid of dollars and using different currencies. Dubai is using gold, (smartly) while Iran is asking for Euros.
In the case of Iran the answer to not switch is simple. Why switch to Euros when the Euro Central Bank will do exactly the same thing as the US Central Bank. That is create more currency to prop up bad investments made with newly created currency.
In the case of Dubai the issue is the vast amounts of dollars held by these nations. If they start selling dollars in any significant amounts then there will be a run of on the US Federal Reserve. China, Japan, Germany, OPEC, etc will see this signal and start dumping their assets. This will destroy trillions in savings in OPEC, European and Pacific Rim countries. The only thing holding this whole mess up is fear. Once someone does it then everybody does it.
The biggest threat that see amusingly is the US Federal Reserve itself. It has been inflating like crazy and is slowing down some but not near the amount necessary to correct situation. But with Bush and now McCainObamaClinton they might just break the bank?