Debunking the Dumping-the-Dollar Conspiracy

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations.

Both administrations are on record complaining about China's "manipulation" of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.

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GRANT

6:57 PM ET

October 7, 2009

I notice that the trustworthy

I notice that the trustworthy news sources kept links with large headline like "Dollar falls on oil plan report" without even a mention of 'fake' or 'unconfirmed'. There is a reason some people have more trust in Jon Stewart, he doesn't need to sensationalize things when the BBC does it for him.

JAMES BROWN

3:16 AM ET

October 8, 2009

I've noticed reading helps ...

Your POV might be more credible if you had bothered to notice it was the Independent newspaper that published the Robert Fisk piece and not the BBC, which simply reported the financial movements that appeared to have resulted from the story's publication.

As for the notion that the US would be essentially "unaffected" if the world's oil producing nations drop the dollar in what is a likely first step towards de-coupling from the dollar as "reserve currency" ... I guess you are following the old dodo proverb: "if the truth be buried in the sand, why not stick your head down there too ..."

8:02 AM ET

My point was that until many

My point was that until many hours after the story had begun to spread the major news sites kept reporting in headlines, summary, and majority of the text as though it were fact. It wasn't until the end of the story that they reported that Kuwait, Saudi Arabia, and Chinese bankers denied it. What do you think the average reader who just skims things will notice?

EJSPENCER

11:49 AM ET

strange logic

Mr. Baker contends that a high estimate is that 4.2 billion US dollars might be spent on buying oil from producers daily. He then compares this to 1 trillion US dollars which China holds as reserve. That's no comparison. The real question is at what rate does China buy US dollars for its reserve? The fact that China has 1 trillion US dollars is irrelevant to the actual demand for US dollars. Oil sales supposedly accounts for 4 billion US dollars in daily demand. I'm pretty sure that China does not buy 4 billion US dollars for its currency reserve on a daily basis. If it did, it would acquire more than 1 trillion dollars each year.

The bottom line is that, while there may indeed be nothing to fear as Mr. Baker suggests, it is not because China can reduce its holdings by more than is spent on oil on a daily basis. The demand for US dollars for the purchase of oil is more or less assured and continuous. Were China to reduce its holdings at a similar rate to the spending on oil it'd run out of dollars pretty quickly.

GOEDEL

7:51 PM ET

A dollar debacle would end US imperialism

One of the few ways in which long-standing autocracies are destroyed is through a sharp decline in the exchange value of their currencies. Though I am not an historian, I believe that the French Revolution occurred when the French peasants and workers could no longer afford bread ("Let them eat cake"!) The Bourbon king's treasury was empty and his ministries and agents unfunded. The Weimar Republic, for all its faults, lost credibility in 1923, from wild inflation and finally fell when inflation and unemployment returned after a mid 1920s pause in the crash of world stock markets.

A rejection of the US dollar in foreign exchange would be very punishing to the American middle-class, which at present is relatively complacent about the military extravagances of our government and ruling, corporate class. Loss of savings and pensions, sky-rocketing prices for food, gasoline, all these would finally make Americans realize how poorly they are governed and there would be considerable social unrest.

Of course, such a catastrophe could install a military dictatorship and harsh repressions, but one result would undoubtedly be the end of US bases around the world and invasions by us of foreign countries with consequent killing of large numbers of innocent civilians and some of our own poorer citizens.

EXOTTOYUHR

1:35 PM ET

October 12, 2009

Doubtful

Because that approach really worked for Weimar Germany, didn't it?

VIV GOV

8:01 AM ET

October 13, 2009

False Logic

I spend about $100 a day, does that mean that I need to only hold $100 cash?

Also the main reaon that a shift would be significant, is its implications for the dollar as The reserve currency. What would happen if the US government had to borrow in Euros? That is the real danger of the move.

Debunking the Dumping-the-Dollar Conspiracy

On Monday, the Independent reported that a number of countries are conspiring to dump the dollar as the primary oil trade currency, spelling disaster for the U.S. economy. But the United States wouldn't need to fear -- even if it were true.

BY DEAN BAKER | OCTOBER 7, 2009

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