Sunday, August 14, 2005

Iran's TOE To Compete With NYMEX and IPE

Next year Iran will start its oil trading market (TOE - Tehran Oil Exchange) where oil will be able to be bought using Euros in direct competition with New York's NYMEX and London's IPE markets where USD is required. This means less demand for US Dollars. That the price of USD in other government fiat tokens (or the USD priced in oil, gold, silver, etc. for that matter) will go down. This in turn puts more pressure on central banks to unload US dollar denominated reserve assets which puts further pressure for downward price movement of the USD. The TOE will be setting an example so that other Euro priced commodity trading facilities should spring up adding even more downward pressure on the price of the USD. And these are just new, in the near future, downward pressures on the USD.

Historically in a case like this, entities outside the country whose declining fiat tokens they are holding start sending those tokens back to the country of origin to buy tangible assets or businesses inside that country. In this case, since there are sooooo many USD outside the US, it could cause a hyper inflationary situation inside the US.

The US Treasury sometimes creates I.O.U.s and sends them to the Fed. The Fed puts these on its books as an asset and creates USD out of thin air and then sends the newly created USD back to the US Treasury so that the US government has more "money" to spend to buy votes and to spend to try to keep the masses complacent. This means that the Fed now has quite the inventory of US Treasury debt.

What the Fed can do is to start to sell its US Treasury debt to absorb the extra USD flooding back into the US. Of course it's going to have to offer higher and higher interest rates on this debt to be able to unload/sell it. Higher and higher interest rates is not good for the US economy. In fact it will be terrible. Plus, the Fed would then be in competition with the US Treasury.

A government and its central bank in competition with each other. I'd call that being between a rock and a hard place.

"A general dissolution of principles and manners will more surely overthrow the liberties of America than the whole force of the common enemy. While the people are virtuous they cannot be subdued; but when once they lose their virtue then will be ready to surrender their liberties to the first external or internal invader." -- Samuel Adams

"The economic errors of the 1960's, which gave rise to gold's explosion from 1970 to 1980, are kindergarten mistakes compared to what is going on today." - James Sinclair, Oct. 7, 2003

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