Margaret Legum

"They will not be able to do that if we no longer have to buy our oil in dollars. Its value would fall as nations switch to other currencies to buy oil or to gold as a reliable store of value. The creation of dollars would not be available as a mechanism to cover the huge international debt. If that process began, there could be the kind of flight from the currency that has wrecked the economy of many nations within the past decade. Even more alarming are suggestions that to avoid this possibility the American government is planning to invade Iran. The fact that the invasion of Iraq was preceded by unwarranted accusations of weapons of mass destruction, and that Hussein had threatened to switch sales of oil from dollars to euros, gives credence to such fears. The fact that Iraq’s current chaos makes it a net importer of oil seems not to deflect American resolve."

"What are we to make of the growing chorus of fears about the possible collapse of the dollar? Is it a case of crying wolf again? Those fears link four elements: Iran’s stated intention soon to open its own electronic International Oil Bourse; its resolve to sell oil there in euros, not dollars; the expectation that the price of oil will rise to over $100 a barrel, triggering world recession; and the demand for gold, rather than dollars, as a store of value."

"What is the evidence for the possible imminence of this scenario? Associated Press on May 5 quoted top Wall Street analyst Bill O’Grady of A.G. Commodities: ‘If one day the world’s largest oil producers allowed, or worse demanded, euros for their barrels, it would be the financial equivalent of a nuclear strike."

"At the opening of the IMF meeting on April 21, Russia’s Finance Minister said his country ‘could not consider the dollar a reliable reserve currency because of its instability’. The same day the Swedish Riksbank halved its dollar holdings to buy euro."

"Gold is now at a 20-year high against the dollar, and the dollar at a one-year low against the euro. The Financial Times of May 16th, under the headline: “Fears for Dollar as Central Banks Sell US assets” reported that ‘central banks sold a net $14.4 billion during the month, the largest sale since August 1998."

"Since the US is deep in debt, nationally and internationally, the dollar’s value depends entirely on the fact that it is a reserve currency for other nations. We all have to keep reserves in dollars for two reasons. First, by an agreement made in the 1940’s, the oil producing countries of OPEC agreed to sell oil only in dollars. That meant everyone had to hold dollars if they wanted to buy oil, resulting in two-thirds of all central bank reserves being in dollars. That in turn means that the Americans have the privilege of producing the international currency. Creating money is nice work if you can get it. It is the equivalent of having a mint in your backyard. You can buy what you want with the new money, without having to supply the equivalent value of goods. America has been financing its annual deficit with the rest of the world – it borrows over $2 trillion a day - by simply making new money and spending it into circulation."

"At that IMF meeting the 2006 World Economic Outlook was launched, warning of a dollar collapse – due to global trade imbalances, spiraling US debt and the demise of the petro-dollar reserve standard. In the language beloved of obfuscating economists who hope thereby to soften the truth, it stated: ‘Global current account imbalances are likely to remain at elevated levels for longer than would otherwise have been the case, heightening the risk of sudden disorderly adjustment. Sudden disorderly adjustment’ is the current bankers’ euphemism for the consequences of a dollar collapse. Others, including Morgan Stanley economist Stephen Roach, as well as financiers Soros and Warren Buffet, refer to it as ‘economic Armageddon’. How close are we to that?"