Dollar Hegemony

Monetary Hegemony or Dollar Hegemony is the term coined by Michael Hudson in his work Super Imperalism which was first published in 1972. Super Imperialism describes not only the asysemetrical relationship that the US dollar has to the global economy, but the strictures of this hegemonic edifice that support it, namely the IMF and the World Bank. The US dollar continues to underpin the world economy and is the currency in which international transactions are usually carried out. The international trade in oil, for example, is in U.S dollars.

Historically dollar dominance emerged in the Bretton Woods agreement after WWII. It set fixed exchange rates between gold and other currencies. But only the United States had large enough gold reserves to establish international currency.

During the 1970s, the price of gold went from $35 to $800 per ounce as a result of a perceived "dollar bankruptcy". During the Vietnam War, the US increased its deficit and printed more dollars which had the effect of undermining faith in its currency. Also, in 1971 Nixon canceled convertibility of dollars to gold. The dollar maintained its status due to: agreements with Saudi Arabia and OPEC to trade oil only in dollars, the largest stock market NYSE and many other commodities were being traded in dollars, and large credits for developing countries were also dollar denominated. Other countries were thus forced to maintain dollar reserves to buy commodities and maintain financial credibility (countries with small reserves compared to their debt are easy target for speculative attacks). The United States benefited from seigniorage with each created dollar.

The European Union's euro could be considered by some as an attempt to end the dominance of the dollar.

Source: Wikipedia

Petrodollar Warfare

William R. Clark with Jim Puplava of the Financial Sense Newshour

28 January 2006 Oil Politics
Petrodollar Warfare

The notion that Iraq was invaded to prevent the development of weapons of mass destruction, or to combat terrorism, has long been discredited. But a growing consensus believes that Iraq’s oil was surely a prime reason for US actions. However, author William Clark argues convincingly in Petrodollar Warfare that the rationale for intervening was not just for control of the oil fields, but also for control of the means by which oil is traded in global markets.

Petrodollar Warfare discusses the crucial shift in US monetary policy during the 1970s away from the gold standard to becoming the monopoly currency for worldwide oil sales, effectively enabling the US to dominate world trade. It then analyses global Peak Oil as an additional driver of US foreign policy and the parallel growth of political fundamentalism in the current US administration. Tracking the emergence of the euro as an important challenger to dollar supremacy, the book pinpoints Hussein’s November 2000 switch to selling oil for euros as the defining moment for Iraq and, perhaps - without an immediate change in governance - for the noble American experiment.

William R. Clark is manager of performance improvement at Johns Hopkins University School of Medicine. His research on oil depletion, oil currency issues and US geostrategy received a 2003 Project Censored Award and was published in Censored 2004.

Source: http://www.globalpublicmedia.com/interviews/646

Related links:
Jim Puplava's Financial Sense Newshour
Audio (length 48 min): download (.mp3), stream (.ram)
Wikipedia definition
Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse

The M3 and the US Dollar

M3 refers to the amount of cash in circulation, the amount in checking or demand deposit accounts plus savings accounts, money market accounts, CDs and foreign-currency holdings.

Source: Wikipedia


M3 is the broadest measure of money supply.

M0 refers to all currency that exists as actual bank notes and coins.
M1 refers to M0 + the amount in checking or demand-deposit accounts.
M2 refers to M1 + the amount in savings accounts, money market accounts and small Certificates of deposit (CDs below $100k).

M3 - M2 = institutional money funds and certain managed liabilities of depositories, namely large time deposits, repurchase agreements, and Eurodollars.
This represents much of the money supply held by large financial bodies and foreign institutions.

The United States Federal Reserve (the Fed) has announced that it will stop reporting the M3 money supply data of the US dollar, starting from March 23rd 2006. Bear in mind that the M3 has been recorded in the US since 1959. Back in those days, the M3 value was only slightly more than M2 (M2 as a % of M3 was less than 1%).

Release Date: November 10, 2005, revised March 9, 2006
Discontinuance of M3

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

Source: The Federal Reserve Board

To get a better picture of what the M3 represents, have a look at this chart. Click on M2 vs M3. The chart shows that M2 as a % of M3 fell from 68% in 2005 to 65.5% in 2006. 2.5% doesn't look like a lot, but consider the non-seasonally adjusted values taken from the federal reserve report.

January 2005
M1 = $1362.6 billion
M2 = $6415.8 billion
M3 = $9484.2 billion

M3-M2 = 3068.4 billion

January 2006
M1 = $1377.4 billion
M2 = $6712.5 billion
M3 = $10240.3 billion

M3-M2 = 3527.8 billion

In one year, M2 value increased by almost $300 billion, and M3 excluding M2 increased by more than $450 billion.

Consider 1996 values
M1 = $1129.4 billion
M2 = $3661.2 billion
M3 = $4676.3 billion

In 10 years, M3 has more than doubled in value. M3-M2 represents a larger % of money supply (alternatively, M2 as a % of M3 has fallen significantly from 78.2% to 65.5%).

When we consider these numbers, the decision for the US Federal Reserve to stop reporting these figures seems asinine. Or is it? This announcement was made without much fanfare, sparking speculation over the stability of the US dollar.

M3 is now over $10 trillion. Let's compare this to other economic figures.
The US GDP in 2005 was estimated to be $12.37 trillion.
The US national debt stands at an estimated $8.2 trillion.
The US current account deficit for 2005 was $804.9 billion, 6.4 per cent of GDP, a record high.
The US current account deficit for 2004 was $668.1 billion. This means that the deficit increased by over 20% in the last year.


Related links:
A Peak behind the Curtain
GoldisMoney Forum discussion
US 2005 GDP breakdown

The Eurodollar

What does it Mean?
U.S. dollar-denominated deposits at foreign banks or foreign branches of American banks. By locating outside of the United States, eurodollars escape regulation by the Federal Reserve Board.

Originally, dollar-denominated deposits not subject to U.S. banking regulations were held almost exclusively in Europe; hence the name eurodollars. These deposits are still mostly held in Europe, but they're also held in such countries as the Bahamas, Canada, the Cayman Islands, Hong Kong, Japan, the Netherlands Antilles, Panama, and Singapore. Regardless of where they are held, such deposits are referred to as eurodollars.

Since the eurodollar market is relatively free of regulation, banks in the eurodollar market can operate on narrower margins than banks in the United States. Thus, the eurodollar market has expanded largely as a means of avoiding the regulatory costs involved in dollar-denominated financial intermediation.

Source: Investopedia

The Petroeuro

A petroeuro is a petroleum trade valued on the euro as opposed to the US dollar (a petrodollar). Trading of any natural resource, including petroleum, is controlled through trading partnerships involving both exporters and importers of the resource, in a defined marketplace, and through a trade agreement. The major countries holding petroleum reserves since the decline of US production are dominated by OPEC, and hence, OPEC may choose dollars, euros, yen, or any currency providing perceived advantage, politically or economically. As of 2005, OPEC continues to trade in petrodollars, but some OPEC members (such as Iran and Venezuela) have been pushing for a switch to the euro.

In early 2006, apparently on March 20, 2006^[1], Iran is planning to open an International Oil Bourse (IOB, exchange), on the free trade zone on the island of Kish ^[2], for the express purpose of trading oil priced in other currencies, including Euros. This will establish a Euro based pricing mechanism, or 'oil marker' as it is called by traders. The three current oil markers are US dollar denominated, which include the West Texas Intermediate crude (WTI), North Sea Brent Crude, and the UAE Dubai Crude. In 2003, Iran started trading with its European and Asian partners using the Euro. The Iranian Oil Bourse, however, will also establish a fourth 'oil marker', dominated by the Euro.

Source: Wikipedia

What is a Petrodollar?

A petrodollar is a dollar earned by a country through the sale of oil. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973. Oweiss felt there was a need for a word to describe the situation which was occurring in the OPEC countries, where it was entirely the sale of crude oil which allowed these nations to prosper economically and to invest in the economies of the nations which purchased their oil.

In the West, the word has been used to reference the large financial leverage the OPEC countries held until the turn of the century, and has been seen by some Arab politicians as offensive because it stereotyped OPEC producers as crude nouveau-riche nations interested in purchasing political goodwill. Considerable concern was being expressed at the time, particularly by the American media, that the American economy was in danger of being held hostage by the interests of some OPEC countries.

More recently, speculation has arisen that OPEC may switch from the US dollar to the Euro, inaugurating the Petroeuro. So far, OPEC has resisted this move although some OPEC members (such as Iran and Venezuela) have been pushing for a switch to the Euro. During Iraq's Oil-for-Food Programme, Saddam Hussein did switch to the Euro and some commentators claim this switch was another factor contributing to the 2003 Invasion of Iraq. As noted by Cóilín Nunan, "A move away from the dollar towards the euro could have a disastrous effect on the US economy" because the US's negative balance of trade is largely offset by its role as a reserve currency. On the other hand, the demand for petrodollars is a significant factor in increasing the US' trade deficit in the first place, and it also increases inflation. Given the general tendency for crude oil prices to rise and become more volatile in recent years, it may even be argued that crude oil trading may, in the long term, a significant liability for the stability of the currency in which the trade is conducted.

Source: Wikipedia